Final answer:
A dollarized economy limits a government's ability to control its currency and monetary policy, as it forfeits traditional tools such as setting interest rates and managing the money supply (Option c).
Step-by-step explanation:
Having a dollarized economy has a significant impact on a government's ability to control its currency and conduct monetary policy. When a country adopts another nation's currency, such as the U.S. dollar, as its own, it essentially surrenders its ability to influence monetary conditions within its borders through traditional means such as setting interest rates or altering the money supply.
Therefore, the correct answer to how a dollarized economy affects a government's ability to control its currency and conduct monetary policy is c) It limits the government's control over the currency. In a dollarized economy, the government cannot use monetary policy to address domestic economic issues like inflation or recession because it does not control the currency.
Additionally, it cannot directly adjust interest rates or influence the money supply since these are determined by the policy of the country that issues the dollarized currency. The key tools of monetary policy that a central bank would typically have at its disposal are significantly restricted. Hence, c is the correct option.