After a speculative attack has been successful, and a country is forced to devalue its currency, it is common to see many local business firms driven to bankruptcy. This most commonly occurs because _____.
a. nobody ever wants to invest in a country that just suffered a devaluation
b. many local firms took foreign loans (denominated in, say, dollars), and they cannot repay them at the new exchange rate
c. the WTO forces troubled firms to show profits or make way for new, more efficient firms
d. local firms cannot compete with their foreign competitors at the new prices after the devaluation
e. many local firms do not know how to deal with the complicated financial operations involved in a speculative attack
Question 2
A tax equal to the external cost on firms that emit pollutants would:
a. provide firms with the incentive to increase the level of activity creating the pollution.
b. provide firms with the incentive to decrease the level of activity creating the pollution.
c. provide firms with little incentive to search for less environmentally damaging production methods.
d. not reduce pollution levels at all.
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