An important factor in the choice of an exchange rate regime in low-income nations is:
A) the credentials of the finance minister.
B) the extent of liability dollarization, which can cause contractions when the home currency depreciates.
C) how dependent the nation is on imports, which must be financed by external borrowing.
D) the price level and how it affects the interest rate level in the nation.

Question

Quizplus · Accepted Answer

Liability dollarization can cause significant economic contractions when the home currency depreciates, making it an important factor to consider when choosing an exchange rate regime in low-income nations. Factors such as the credentials of the finance minister, the nation's dependence on imports, and the price level's effect on interest rates are also important but less crucial in the decision-making process.

An Important Factor in the Choice of an Exchange Rate