A Banking Crisis Often Threatens a Fixed Exchange Rate (Or

question 26

Multiple Choice

A banking crisis often threatens a fixed exchange rate (or peg) . Why?

• A) Banks have to provide funds to maintain the fixed exchange rate.
• B) The central bank may have to bail out insolvent banks by inflating the currency, which could cause a loss of reserves.
• C) The central bank has to close relationships with foreign banks, and there is no way to implement the fixed exchange rate system.
• D) The banking crisis means that domestic banks hold onto foreign currency reserves rather than exchanging them with the central bank.

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Definitions:

Milton Friedman

An American economist and a key figure in the Chicago School of Economics, known for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy.

John Maynard Keynes

A British economist whose theories on the causes of prolonged unemployment and recommendations for government intervention in economies to stimulate demand and growth form the basis of Keynesian economics.

Adam Smith

An 18th-century Scottish economist and philosopher, best known for his works "The Wealth of Nations," which lays the foundations of classical economics.

Karl Marx

A 19th-century philosopher, economist, and political theorist known for his critical theories about capitalism and his influence on the development of socialist economic and political theory.