A balance of payments crises under fixed exchange rates occurs when
A)a country runs out of foreign reserves.
B)a country is in a liquidity trap.
C)exports and imports expand beyond some point.
D)marginal returns on foreign exchange investments approach zero.
E)forward currency markets undergo high volatility.

Question

Quizplus · Accepted Answer

A balance of payments crises occurs when a country runs out of foreign reserves, which can happen under fixed exchange rates. In such a system, a country promises to maintain the exchange rate at a certain level, and if there is a persistent imbalance between exports and imports, the country may have to use its foreign reserves to support its currency. If foreign reserves become depleted, the country may not be able to maintain the exchange rate, leading to a currency devaluation or a crisis.

A Balance of Payments Crises Under Fixed Exchange Rates Occurs