A ‘currency board’ is:

Question

BlackTom AI · Accepted Answer

Question: A ‘currency board’ is:

Option a: 'a currency with its exchange rate fixed by the board of directors of the central bank' This describes a central bank setting or commitment, but a currency board operates with a legal commitment that ties the domestic currency to a foreign anchor and does not vest the fixing of the rate in a central bank board's discretionary fixes. It is more about a statutory arrangement than a typical board-forced rate decision.

Option b: 'an arrangement that is based on an explicit legislative commitment to exchange the domestic currency for a specified foreign currency at a fixed exchange rate' This statement captures the core idea of a currency board: a stand-alone arrangement anchored by law that commits to exchanging domestic currency for a foreign currency at a fixed rate, thereby providing monetary discipline and credibility through the legal framework.

Option c: 'currency sold on an open outcry exchange' This describes a traditional spot or futures trading floor scenario, not a currency board mechanism. An open outcry market is about trading activity, not the formal legal-commitment structure of a currency board.

Option d: 'a floating exchange rate' This is the opposite of what a currency board entails. A currency board fixes the domestic exchange rate to a foreign anchor, rather than letting it float based on market forces.

In terms of conceptual clarity, Option b stands out because it emphasizes the legal commitment to convert at a fixed rate, which is the defining feature of a currency board. Options a and c mischaracterize who or what controls the rate (a central bank board vs. open-outcry trading), and option d contradicts the fixed-rate nature by describing a flexible, market-driven rate. The critical point is the explicit legislative commitment to fixed parity with a foreign currency, which aligns with the standard definition of a currency board.

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