Describe the difficult choices in macroeconomic policy that Argentina faced in the late 1990s

Question

What will be an ideal response?

Answer 1

To address its macroeconomic problems in the early 1990s, Argentina fixed its currency to the U.S. dollar at a 1:1 rate and dramatically restricted the creation of new money. For every new Argentine peso put into circulation, the central bank was required to have a U.S. dollar to back it up and a currency board was created to oversee the system and enforce the rules. Later in the decade as Argentina faced recession, policy makers faced difficult choices. They could use expansionary macroeconomic policy to deal with the recession or they could maintain the peso's link to the dollar. They could devalue and increase the debt burden or they could maintain the exchange rate and watch the current account deficit grow and the economy shrink. They could cut spending to maintain fiscal soundness or increase spending to address the recession.