What were the contributing factors that led to Argentina's initial adoption of a currency board and then its subsequent failure?
What will be an ideal response?
The main event that led to its adoption was triple digit inflation that plagued the economy. Once Argentina adopted the currency board it limited the central bank's ability to expand the domestic money supply based on the dollar reserves the central bank held. The first three years of the currency board saw the rate of inflation fall dramatically. Ten years after its adoption the currency board failed and the Argentinean peso was allowed to float. While there is not a definitive reason(s) given for the failure, most economists agree on a few key reasons. These include the ability of the provincial governments to issue their own bonds in small denominations to meet their obligations this was analogous to printing currency. The fiscal authorities were also irresponsible since they let the growth rate of government spending exceed the growth rate of the economy. As a result, many lenders became weary of lending to the government. Finally, many economists question the choice of the peso dollar peg since the Argentinean economy is not that integrated with the U.S. economy and as the dollar appreciated in the 1990s it made the peso appreciate which hurt Argentinean exports.
You might also like to view...
An attempt by a central bank to alter the money supply by buying or selling domestic assets
A) will leave both domestic money supply and foreign reserves unchanged. B) will cause an offsetting change in aggregate demand. C) will lead to a rise in domestic employment and output. D) will lead to a decrease in domestic employment and output. E) will cause an offsetting change in foreign reserves and leave the domestic money supply unchanged.
Government consumption expenditures equal
A) government outlays minus transfer payments. B) government outlays minus net interest payments. C) government purchases minus government investment. D) the government primary deficit plus net interest payments.
If demand for a good is price elastic, then the price elasticity will be:
a. equal to one. b. equal to zero. c. greater than one. d. less than one. e. less than zero.
The principal-agent problem arises when
A. the principal and the agent have different objectives. B. the principal cannot enforce the contract with the agent or finds it too costly to monitor the agent. C. the principal cannot decide whether the firm should seek to maximize the expected future profits of the firm or maximize the price for which the firm can be sold. D. both a and b