Final answer:
Option b is the correct answer.Dollarization occurs when a country adopts the U.S. dollar as its official currency, surrendering its own monetary policy. It can result in a loss of economic autonomy and ability to manage domestic economic issues. A central bank in a dollarized country has limited monetary policy capabilities and focuses mainly on regulatory functions.
Step-by-step explanation:
Dollarization is a process whereby a country that is not the United States decides to use the U.S. dollar as its official currency. The option that best defines dollarization is: A country adopts a foreign currency for all transactions, basically eliminating its own monetary policy. This entails a full adoption of the U.S. dollar for all economic activities, which then leads to the loss of the ability to conduct independent monetary policy. Countries like Ecuador, El Salvador, and Panama have implemented dollarization. A central bank in a dollarized country may have limited functions, such as regulating the banking sector, but it cannot control monetary policy through the tools of money supply and interest rates since these are governed by the foreign currency's home country's central bank.
One major disadvantage of dollarization is that a country loses control over its monetary policy, which can be crucial in responding to domestic economic crises. Without the ability to print money or change interest rates, a country might struggle more than necessary during economic downturns. A central bank's role in a dollarized economy largely becomes supervisory and regulatory rather than policy-oriented.