Author Question: Please describe in detail a self-fulfilling currency crisis. What will be an ideal ... (Read 15 times)

student77 · **on:** Jun 30, 2018

Please describe in detail a self-fulfilling currency crisis.

What will be an ideal response?

Question 2

Eurodollars are mainly traded in Europe.

Indicate whether the statement is true or false

jointhecircus · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Consider an economy in which domestic commercial banks' liabilities are mainly short-term deposits, and in which many of the banks' loans to businesses are likely to go unpaid in the event of a recession. If the market suspects there will be devaluation, interest rates will rise, banks' borrowing costs go up, and a banks' assets have lower value if a recession hits. To prevent financial collapse, the central bank will lend money to banks and no longer be able to keep the exchange rate from rising. Thus, the emergence of devaluation expectations eventually leads to a devaluation of currency (self-fulfilling).

Answer to Question 2

FALSE