Severe fiscal imbalances can directly trigger a currency crisis since ________.
A)the government may stop printing money
B)the government may have to cut back on spending
C)the currency must surely increase in value
D)investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency

Question

Quizplus · Accepted Answer

Severe fiscal imbalances, such as a high level of indebtedness, may lead investors to fear that the government will default on its obligations. This can cause them to sell the domestic currency, triggering a depreciation of the currency and potentially leading to a currency crisis. Option A is unlikely as printing money can lead to inflation, which will only exacerbate the problem. Option B may help to address the fiscal imbalance but may not necessarily prevent a currency crisis. Option C is not necessarily true and would depend on other factors such as the level of inflation, interest rates, and trade balances.

Severe Fiscal Imbalances Can Directly Trigger a Currency Crisis Since