Whenever a nation has substantial external debts and assets denominated in foreign currency:
A) it is easier to manage, since changes in value are often offsetting.
B) there can be large and destabilizing wealth effects.
C) its interest payments on the debt will be matched by interest earnings on the assets.
D) the risk of default becomes very large.

Question

Quizplus · Accepted Answer

When a nation has substantial external debts and assets denominated in foreign currency, changes in exchange rates can have significant wealth effects, leading to large and potentially destabilizing shifts in the country's economic situation. This can be especially problematic if the debt is denominated in a stronger currency than the country's own, as the debt becomes more expensive to service as the country's currency weakens.

Whenever a Nation Has Substantial External Debts and Assets Denominated