After a speculative attack has been successful, and a country is forced to devalue its currency, it is common to see many local business firms driven to bankruptcy. This most commonly occurs because _____.
A) nobody ever wants to invest in a country that just suffered a devaluation
B) many local firms took foreign loans (denominated in, say, dollars), and they cannot repay them at the new exchange rate
C) the WTO forces troubled firms to show profits or make way for new, more efficient firms
D) local firms cannot compete with their foreign competitors at the new prices after the devaluation
E) many local firms do not know how to deal with the complicated financial operations involved in a speculative attack

Question

Quizplus · Accepted Answer

Local firms in a country that has suffered a successful speculative attack may have taken out foreign loans denominated in a foreign currency. When the currency is devalued, they will no longer be able to repay those loans at the new exchange rate, leading to bankruptcy.

After a Speculative Attack Has Been Successful, and a Country