Answer: currency board system.

## Explanation A **currency board system** is an exchange rate regime where: 1. There is an explicit legislative commitment to exchange domestic currency for a specified foreign currency (the anchor currency) at a fixed exchange rate 2. The domestic currency is fully backed by foreign reserves 3. The monetary authority's ability to issue domestic currency is strictly limited by the amount of foreign reserves held **Why other options are incorrect:** - **A. Monetary union**: This involves multiple countries sharing a common currency (like the Eurozone) or having permanently fixed exchange rates between their currencies, but it doesn't necessarily involve an explicit legislative commitment to exchange domestic currency for a foreign currency at a fixed rate. - **B. Fixed parity system**: While this involves fixing the exchange rate to another currency, it doesn't necessarily involve the explicit legislative commitment and full foreign reserve backing that characterizes a currency board system. Fixed parity systems can have more flexibility in monetary policy. **Key characteristics of a currency board:** - Fixed exchange rate with full convertibility - Automatic currency issuance based on foreign reserves - No independent monetary policy - Self-correcting balance of payments mechanism Examples of currency board systems include Hong Kong (pegged to the US dollar) and Bulgaria (pegged to the Euro).

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