The degree of danger of breaking the peg focuses on:
A) how problematic defaults are for the domestic banking system.
B) the volatility of interest rates.
C) the ratio of domestic bonds to foreign currency reserves in backing the domestic money supply.
D) how difficult it is for the nation to maintain a current account surplus.

Question

Quizplus · Accepted Answer

Breaking the peg can lead to a depletion of foreign currency reserves, which could put pressure on the ratio of domestic bonds to foreign currency reserves in backing the domestic money supply. If this ratio becomes too high, it could signal to investors that there is a higher risk of default, which would make it difficult for the country to borrow in the future. This could also lead to a devaluation of the currency, which would have negative effects on the domestic economy. Therefore, the degree of danger of breaking the peg is closely tied to this ratio.

The Degree of Danger of Breaking the Peg Focuses On