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Economic Development of Central America Econ. 4200 - Spring 2004 – Dr. Taylor - page 70 / 153

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$1,000

c6,000

at 6 colones = $1

Liabilities

Assets

- PPP exchange rate set

Carlos' Checking Account at Primero Commercial Bank

Checking deposits:

c6,000,000

Reserves: $1,000,000

Reserves:

c6,000,000,000

Reserves:

$1,000,000,000

Liabilities

Assets

Liabilities

Assets

Primero Commercial Bank

Central Bank

Dollarization example… in this example the purchasing power parity exchange rate is set at 6 colones to the dollar. It is determined that there are 6 billion colones in circulation. The Federal Reserve arranges to ship El Salvador $1 billion dollars in newly minted bills and coins. Carlos is informed of the new monetary system through the media and given so much time to exchange the colones in his pocket. He is also told that his bank account will be converted to dollars on a certain date at the 6 to 1 rate.

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