Which of the following is a feature of the 'Second-Generation' models of currency crises?
A. Crises never involve multiple equilibria
B. Crises are caused only by inconsistent fiscal policy
C. Only current-account deficits matter
D. Crises can be self-fulfilling and depend on the government’s trade-off between the benefits of maintaining the peg and the costs of doing so
Answer: Option D
Solution (By JKSSB Mock Tests)
Second-generation models emphasise that the decision to abandon a peg depends on policy trade-offs; expectations of devaluation can themselves raise the cost of defending the peg, generating self-fulfilling crises and multiple equilibria.
Explanation:
Dumping is the practice of selling a product in a foreign market at a price lower than the domestic price or below the cost of production, often considered an unfair trade practice.
Explanation:
Deposit insurance can create moral hazard by reducing depositors’ incentive to monitor banks and by encouraging banks to take greater risks because the downside is partly borne by the insurer.
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