Why Is It Difficult for a Government to Avoid a Currency

question 22

Multiple Choice

Why is it difficult for a government to avoid a currency crisis?

• A)Important companies that have borrowed in foreign currencies can be a powerful lobby in favor of abrupt devaluations of the currency in order to reduce their debts.
• B)Exporters clamor for the government to maintain overvalued exchange rates when the currency should be devalued.
• C)The common strategy of lowering interest rates to avoid a crisis worsens domestic economic conditions.
• D)In democracies,government officials have to worry about the votes of consumers who would be hurt by overvalued exchange rates.
• E)International investors are easily alarmed by any sign of instability and are quick to sell off currency.

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Definitions:

Trade Deficit

A situation where a country's imports exceed its exports during a specific period, leading to a negative balance of trade.

2008

A year marked by the global financial crisis, often associated with the fall of major banks and economic recession.

Trade Surplus

A situation where a country's exports exceed its imports, indicating a positive balance of trade.

GDP

Gross Domestic Product, a measure of the total economic output of a country, representing the total value of all goods and services produced over a specific time period.