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:

Answer 1

Answer:

1. The government could not finance it's deficit budget.

2. The Dollar was stable and Through dollar adoption, interest rate would be lowered and investments would increase.

Explanation:

The colon was changed to dollars because El Salvador wanted a boost in it's economy through the US Dollar.

Printing money to finance deficit would no longer be done by the government and inflation would be brought under control. Because of the adoption El Salvador has no control over it's monetary policy.

the government would still be able to run deficits by printing money

with dollars, shocks caused by demand in the economy will be offset more effectively by using monetary policy.

By printing U.S. dollars, the government would still be able to finance deficits.

Answer 2

Answer:

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

Explanation:

The country of El Salvador abandoned it currency, therefore the country no longer has a national currency, this mean that, government cannot print it because it is using the currency of the U.S. There will be better control of deficits and reduction in inflation because they are forced by adoption of the U.S. Also, Sharing the same currency with U.S, this implies that they will share the same monetary policy with the United Sated of America.