When a country suffers from a speculative attack:
A) the supply of available currency increases.
B) the equilibrium exchange rate falls.
C) the government must spend its reserves to defend the fixed exchange rate.
D) All of these are true.

Question

Quizplus · Accepted Answer

When a country suffers from a speculative attack, all of the mentioned outcomes typically occur: the supply of available currency increases as speculators sell off the currency, the equilibrium exchange rate falls due to the increased supply and decreased demand for the currency, and the government must spend its reserves to defend the fixed exchange rate, trying to maintain its value against the speculative pressures.

When a Country Suffers from a Speculative Attack