Explain the 1992 Crisis That Led to the Breakdown of the European

question 29

Essay

Explain the 1992 crisis that led to the breakdown of the European Union's Exchange Rate Mechanism. What disadvantages of exchange-rate targeting were exhibited during this crisis?

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Definitions:

Disposable Income

Economic reserves left for households after income tax deductions, meant for spending and saving.

Consumption

The process by which goods and services are used by households, contributing to the overall demand in an economy.

Induced Consumption

Induced consumption is the portion of consumer spending that varies with income levels, suggesting that as people earn more, they tend to spend more.

Disposable Income

Household fiscal resources for saving and spending following the deduction of income taxes.