https://web.archive.org/web/19991018220901/http:/www.abc.net.au/money/vault/extr
ID: 1117941 • Letter: H
Question
https://web.archive.org/web/19991018220901/http:/www.abc.net.au/money/vault/extras/extra5.htmc) Friedman states: “The reason they do it through a currency board instead of through direct dollarization is very clear. In the first place, it enables them to get what economists call 'seigniorage.' When the Federal Reserve Board issues dollars, essentially it’s borrowing money at a zero interest rate. People who hold those dollars are, in effect, lending resources to the US government and therefore the US government is benefiting by the interest that could be earned on those funds. That's what's called ‘seigniorage,’ in fact, it's called 'seigniorage' because it refers to the benefit the seignior or the lord got from issuing money or from stamping his picture on coins.” Explain more clearly how seigniorage and zero-interest “borrowing” works, and why it can be achieved via currency board, and not via dollarization. Your explanation should be as simple as possible, yet clear and correct. [Maximum 5 reasonably concise sentences are allowed in your answer https://web.archive.org/web/19991018220901/http:/www.abc.net.au/money/vault/extras/extra5.htm
c) Friedman states: “The reason they do it through a currency board instead of through direct dollarization is very clear. In the first place, it enables them to get what economists call 'seigniorage.' When the Federal Reserve Board issues dollars, essentially it’s borrowing money at a zero interest rate. People who hold those dollars are, in effect, lending resources to the US government and therefore the US government is benefiting by the interest that could be earned on those funds. That's what's called ‘seigniorage,’ in fact, it's called 'seigniorage' because it refers to the benefit the seignior or the lord got from issuing money or from stamping his picture on coins.” Explain more clearly how seigniorage and zero-interest “borrowing” works, and why it can be achieved via currency board, and not via dollarization. Your explanation should be as simple as possible, yet clear and correct. [Maximum 5 reasonably concise sentences are allowed in your answer
c) Friedman states: “The reason they do it through a currency board instead of through direct dollarization is very clear. In the first place, it enables them to get what economists call 'seigniorage.' When the Federal Reserve Board issues dollars, essentially it’s borrowing money at a zero interest rate. People who hold those dollars are, in effect, lending resources to the US government and therefore the US government is benefiting by the interest that could be earned on those funds. That's what's called ‘seigniorage,’ in fact, it's called 'seigniorage' because it refers to the benefit the seignior or the lord got from issuing money or from stamping his picture on coins.” Explain more clearly how seigniorage and zero-interest “borrowing” works, and why it can be achieved via currency board, and not via dollarization. Your explanation should be as simple as possible, yet clear and correct. [Maximum 5 reasonably concise sentences are allowed in your answer c) Friedman states: “The reason they do it through a currency board instead of through direct dollarization is very clear. In the first place, it enables them to get what economists call 'seigniorage.' When the Federal Reserve Board issues dollars, essentially it’s borrowing money at a zero interest rate. People who hold those dollars are, in effect, lending resources to the US government and therefore the US government is benefiting by the interest that could be earned on those funds. That's what's called ‘seigniorage,’ in fact, it's called 'seigniorage' because it refers to the benefit the seignior or the lord got from issuing money or from stamping his picture on coins.” Explain more clearly how seigniorage and zero-interest “borrowing” works, and why it can be achieved via currency board, and not via dollarization. Your explanation should be as simple as possible, yet clear and correct. [Maximum 5 reasonably concise sentences are allowed in your answer
Explanation / Answer
Explain more clearly how seigniorage and zero-interest “borrowing” works, and why it can be achieved via currency board, and not via dollarization.
When dollar is printed , the Government is the borrower and the public, who hold dollars, are the lenders. The Government does not pay interest on the dollars printed, so it is a zero-interest loan. A currency board is essential because if Hong Kong were to use U.S. dollar without printing its own currency. In this case, if 7.8 Hong Kong dollars equals one U.S. dollar, a currency board will hold one dollar for every 7.8 Hong Kong dollars in use and invest the U.S. dollars held in Government bonds and securities and earn interest.
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