Balance of payments crises under fixed exchange rates occur because of
A) government policies that are inconsistent with fixed exchange rates.
B) punitive currency wars.
C) global inflation and trade imbalances due to war.
D) excessive exports and imports that overload the global system.
E) monotonic expansion in global currency volume.

Question

Quizplus · Accepted Answer

Balance of payments crises under fixed exchange rates occur because government policies may be inconsistent with maintaining a fixed exchange rate. For example, if a country has an expansionary monetary policy that causes inflation, this will lead to an outflow of capital and a decrease in demand for the country's currency, putting pressure on the fixed exchange rate. Similarly, if a country's fiscal policy creates large budget deficits, this can also cause a loss of confidence in the currency and put pressure on the fixed exchange rate.

Balance of Payments Crises Under Fixed Exchange Rates Occur Because