A Danger to the Peg Is a Situation in Which

question 135

Multiple Choice

A danger to the peg is a situation in which the central bank lends to insolvent private financial institutions to bail them out of crises. Why might this cause a problem?

• A) The private financial institutions are often corrupt and should not be bailed out.
• B) Foreign investors are helped and domestic investors harmed.
• C) It requires a drawdown of foreign reserves to maintain the peg, lowering the backing ratio.
• D) The central bank is assuming more than its share of political power, which can cause problems down the road.