Unformatted text preview: inflation leads to deep recession. c. Know the dangers of having a currency that is unstable. (exchange rate fluctuations and having a lender of last resort) Extremely important to have stable currency. If the domestic currency is not stable, then look to a foreign currency. Makes economy extremely vulnerable to shifts in exchange rates (if state sets a peg then borrowers are gambling that peg will endure, devaluation creates huge problem). Government can’t act as a lender of last resort. d. What is Hobson’s Choice and why is it so important for a developing country facing a currency crisis? Raised interest rates- support currency, but undermine corporate solvency and worsens the crisis. Do not raise interest rates- currency might collapse, and wipe out companies and banks with large net liabilities in foreign currency. It’s also a problem if your government is holding debt in other currencies....
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- Spring '09