Which of the following is a characteristic of the 'First-Generation' models of currency crises?
A. Only banking-sector problems matter
B. Crises result from inconsistent fundamentals, typically persistent fiscal deficits financed by money creation under a fixed exchange rate
C. Crises never involve reserve losses
D. Crises are purely self-fulfilling without any fundamental weakness
Answer: Option B
Solution (By JKSSB Mock Tests)
First-generation models (Krugman, Flood-Garber) show that a steadily deteriorating fiscal position financed by credit expansion leads to a speculative attack that exhausts reserves and forces the abandonment of the fixed exchange rate.
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