Emerging markets and developing economies may have to raise domestic rates of interest suddenly if:
A) the supply of money unexpectedly drops.
B) the IMF calls in loans with no warning.
C) the risk premium for its currency rises dramatically.
D) domestic investors wish to repatriate their profits earned overseas.

Question

Quizplus · Accepted Answer

When the risk premium for a country's currency rises dramatically, it means that investors perceive the country as being riskier and demand higher returns to hold its currency. This can lead to a sudden outflow of foreign capital, putting pressure on the currency and leading to inflation. To combat this, the central bank may need to raise interest rates in order to make the country's assets more attractive to foreign investors and stabilize the currency.

Emerging Markets and Developing Economies May Have to Raise Domestic