When carry trade speculation grows to high levels, it can affect the economy. How?
A) It is a stabilizing factor.
B) It can be a destabilizing factor, causing large swings in exchange rates.
C) It creates large differentials in income distribution in emerging markets.
D) Inflation is always a problem when carry trade activity increases.

Question

Quizplus · Accepted Answer

Carry trade speculation can lead to large swings in exchange rates, which can destabilize the economy. When investors borrow in low interest rate currencies and invest in high interest rate currencies, it can cause an influx of capital and drive up the value of the high interest rate currency. However, if there is a sudden change in market sentiment or economic conditions, investors may quickly sell off their investments, causing a rapid depreciation in the currency. This can have negative impacts on international trade and investment, as well as inflation and interest rates within the country.

When Carry Trade Speculation Grows to High Levels, It Can