The recognition that _____ plays a profound role in many developing nations has led to more attention to this factor when choosing an exchange rate regime.
A) poverty
B) illiteracy
C) currency mismatch due to liability dollarization
D) government corruption

Question

Quizplus · Accepted Answer

Currency mismatch due to liability dollarization refers to a situation where a significant portion of the liabilities of the private sector, including households, firms, and banks, are denominated in foreign currency, while their assets are mainly held in local currency. In such a scenario, a sudden devaluation of the local currency could lead to a significant increase in the burden of debt, potentially leading to defaults, financial instability, and economic crisis. Developing countries are more likely to be affected by currency mismatch due to liability dollarization, and therefore, it is a crucial factor to consider when choosing an exchange rate regime.

The Recognition That _____ Plays a Profound Role in Many