A speculative attack on a currency occurs when:
A) a central bank switches from a floating to a fixed exchange rate.
B) investors' perceptions change, making a fixed exchange rate untenable.
C) a country accepts dollarization.
D) a central bank adopts a currency board to back the domestic currency with a foreign currency.

Question

Quizplus · Accepted Answer

A speculative attack on a currency occurs when investors' perception changes, causing them to fear a potential devaluation or depreciation of the currency. This can lead to a massive sell-off of the currency, causing its value to plummet. The other choices do not necessarily involve a speculative attack. A switch from a floating to a fixed exchange rate (A) or the adoption of dollarization (C) provide greater stability for the currency, while a currency board (D) involves a fixed exchange rate backed by a foreign currency, which can deter speculative attacks.

A Speculative Attack on a Currency Occurs When