Why might a default crisis be associated with an exchange rate crisis?
A) A large depreciation causes a sudden decrease in the local currency value of international debts denominated in other currencies.
B) A government is unable to pay principal or interest on debt owed to banks.
C) A large depreciation causes a sudden increase in the local currency value of international debts denominated in other currencies.
D) Banks close or declare bankruptcy.

Question

Quizplus · Accepted Answer

A large depreciation in the local currency increases the local currency value of international debts denominated in other currencies, making it more difficult for a country to service its foreign debt. This can lead to a default crisis if the country cannot meet its debt obligations, which is often associated with an exchange rate crisis due to the depreciation.

Why Might a Default Crisis Be Associated with an Exchange