The fundamental linkage between debt crises and monetary crises that can shift a manageable downturn into an unmanageable panic is referred to as a
A) lender of last resort.
B) crisis of confidence.
C) monetary stagnation.
D) currency devaluation.

Question

Quizplus · Accepted Answer

A crisis of confidence can occur when there is a loss of trust in the ability of borrowers to repay their debts, causing lenders to demand higher interest rates, which in turn can lead to a monetary crisis if there is a shortage of liquidity. This cycle can quickly spiral out of control, leading to a panic where people rush to withdraw their money from banks, exacerbating the problem. The other choices do not fully capture the fundamental linkage between debt and monetary crises.

The Fundamental Linkage Between Debt Crises and Monetary Crises That