Capital flight
A) increases reserves.
B) is never associated with the expectation of devaluation.
C) may undo expected devaluation.
D) reduces losses during a devaluation scare.
E) decreases reserves and may induce devaluation.

Question

Quizplus · Accepted Answer

Capital flight decreases reserves and may induce devaluation. When investors rapidly withdraw their investment from a country, there is a reduction in the country's foreign exchange reserves, leading to a decrease in the value of the country's currency. This reduction in the value of the currency may further encourage investors to withdraw their capital, causing a vicious circle that could lead to a devaluation of the currency.

Capital Flight