How would you define a currency board?

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BlackTom AI · Accepted Answer

To start, let's parse what a currency board is generally understood to be in monetary economics. A currency board is a type of monetary authority with strict rules about currency issuance and reserves, typically tying the domestic currency to a foreign anchor.
Option 1: 'the stockpiling of international reserves by developing countries' — This describes reserve accumulation generally and does not capture the defining mechanism of a currency board, which is not merely about reserves but about a fixed exchange-rate regime and the currency issuance rule connected to foreign reserves. Therefore this is not an accurate definition of a currency board.
Option 2: 'The monetary base is backed entirely by foreign currency and the central bank holds no domestic assets.' — This aligns with the classic description of a currency board: the domestic currency is fully backed by foreign reserves, and the central bank (or currency board) commits to exchanging domestic currency for foreign currency at a fixed rate, often with no discretion to create additional money beyond these reserves. The phrase 'no domestic assets' emphasizes the lack of discretionary asset holdings that could support monetary expansion, which is central to the currency board concept.
Option 3: 'the process by which non-pegged interest rates are allowed to fluctuate' — This describes more general monetary policy under flexible exchange rates and does not reflect the fixed-rate, rules-based nature of a currency board, which aims to eliminate autonomous monetary policy by pegging to foreign currency.
Option 4: 'a constraint placed on monetary policy' — While a currency board does impose constraints on monetary policy, this description is too vague and broad. It does not specify the core mechanism—namely the currency issuance backed by foreign reserves and the fixed exchange-rate commitment—which is essential to a currency board.
In sum, the options contrast the distinctive mechanism (fully reserve-backed issuance with a fixed rate) against more general or misaligned notions of reserves, discretionary policy, or vague constraints, helping to distinguish the precise definition from common but incorrect interpretations.

2025SM-ECON-442-801 Quiz 6

How would you define a currency board?

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2025SM-ECON-442-801 Quiz 6

How would you define a currency board?

View Explanation

Log in for full answers

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