Which type of economy involves legal and documented transactions?

The correct answer is the formal economy, which encompasses all legal and documented transactions within a society. This includes activities that are regulated by government authorities and are compliant with laws and regulations. In a formal economy, businesses register with appropriate agencies, employees receive proper contracts, and taxes are paid to the government, ensuring a clear record of economic activity.

By contrast, the other types of economies mentioned operate outside the confines of such regulations. The shadow economy refers to unregulated activities that may not necessarily be illegal but are not officially recorded. The underground economy includes illegal transactions and activities, such as the selling of stolen goods or unlicensed services. The informal economy generally involves cash-based transactions that evade taxation and regulation, such as street vendors or casual labor. These do not provide the same level of documentation or legal recognition, distinguishing them from the formal economy.