Question

On January 1, 2001, El Salvador "dollarized" its economy. The U.S. dollar circulated throughout the country along with the Salvadoran colon for the first year. By the end of 2002, the official currency circulating in the economy was the U.S. dollar. El Salvador abandoned its own currency and adopted the currency of the United States because:a. the government would no longer be able to finance deficits by printing money, and inflation would be under control.

b. the government would still be able to run deficits by printing money.
c. with dollars, monetary policy would be more effective at offsetting demand shocks in the economy.
d. the government would still be able to finance deficits by printing U.S. dollars, and inflation would be under control.

Answer 1

Answer: the government would no longer be able to finance deficits by printing money, and inflation would be under control.

El Salvador adopted the dollar because it's revenue could no longer service the budget. The adoption of the dollar will put a control to inflation since the dollar is the currency it uses to trade in the foreign market.