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:

Healthy

A state of complete physical, mental, and social well-being and not merely the absence of disease or infirmity.

Discrepant

Markedly differing or inconsistent, often used in describing contrasting opinions, results, or phenomena.

Psychology

The analysis of the cognitive functions of the human brain and their effect on behavior in distinct scenarios.

Freud

An Austrian neurologist best known for founding the psychoanalytic method of psychology, focusing on unconscious motives and conflicts.