Developing countries have been able to reduce the effect of depreciation on the value of their debt by:
A) issuing debt in U.S. dollars.
B) issuing debt in domestic currency.
C) appreciating their currency.
D) using expansionary fiscal policy.

Question

Quizplus · Accepted Answer

Issuing debt in domestic currency allows developing countries to avoid the negative impact of currency depreciation on the value of their debt. If debt is issued in a foreign currency, the depreciation of the domestic currency will result in an increase in the debt burden, as more domestic currency will be required to pay off the same amount of foreign currency debt. By issuing debt in domestic currency, the developing country is able to use monetary policy to control inflation and prevent excessive currency depreciation, thus reducing the impact on the value of their debt.

Developing Countries Have Been Able to Reduce the Effect of Depreciation