A balance of payments crisis is best described as
A) a sharp change in interest rates sparked by a change in expectations about the level of imports.
B) a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate.
C) a sharp change in interest rates sparked by a change in expectations about the level of exports.
D) a sharp change in foreign reserves sparked by a change in expectations about the level of imports.
E) a sharp change in foreign reserves sparked by a change in expectations about domestic production.

Question

Quizplus · Accepted Answer

A balance of payments crisis occurs when a country's demand for foreign currency exceeds its supply, leading to a depletion of foreign reserves. This is typically sparked by a sudden change in expectations about the future exchange rate, causing an increased demand for foreign currency and a decrease in confidence in the domestic currency. This can lead to a currency devaluation or even a currency collapse, as seen in numerous historical examples like the 1997 Asian Financial Crisis.

A Balance of Payments Crisis Is Best Described as