One of the Problems Associated with Currency Boards Is That

question 102

Multiple Choice

One of the problems associated with currency boards is that if local inflation rates remain higher than the inflation rate in the country to which the currency is pegged than ______.

• A) the country's currency can come under attack by speculators
• B) the country's interest rates can only be set with the agreement of the country to which the currency is pegged
• C) the country's monetary demand may increase faster than monetary supply
• D) the country's trade surplus may increase causing trading partners to apply tariffs and other trade barriers
• E) the country's currency may become over valued and reduce the country's international competitiveness

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Definitions:

Lender's Risk

The risk faced by a lender that the borrower may not repay a loan either in part or in full.

Asset Substitution

A financial strategy where a firm replaces less risky assets with more risky investments, potentially increasing shareholders' wealth but also the risk to lenders.

Debt Covenant

Agreements between a borrower and lender stating specific limitations or conditions about the borrower's actions.

Borrowing Costs

Expenses incurred by an entity for borrowing funds, including interest, amortization of discounts or premiums on debt, and other related costs.