Which of the following is an implication of a currency crisis?
A) It occurs due to a sharp appreciation in the value of a currency.
B) It forces authorities to block large volumes of international currency reserves.
C) A country in currency crisis will not be eligible for loans from the International Monetary Fund.
D) It results in the government sharply increasing interest rates to defend the prevailing exchange rate.
E) A country in currency crisis will face sharp decreases in stock and property prices.

Question

Quizplus · Accepted Answer

In a currency crisis, the value of a country's currency drops sharply, and to defend the exchange rate, the government often increases interest rates sharply. This has the potential to lead to an economic slowdown, as borrowing becomes more expensive for businesses and consumers. Option A is incorrect because a sharp appreciation of a currency would not trigger a currency crisis; rather, a sharp depreciation would. Option B is incorrect because blocking international currency reserves is not a necessary implication of a currency crisis. Option C is incorrect because a country in currency crisis may still be eligible for loans from the International Monetary Fund, although the terms of the loan may be more stringent. Option E is incorrect because while it is possible that a currency crisis could lead to decreases in stock and property prices, it is not a necessary implication.

Which of the Following Is an Implication of a Currency