Explain the 1992 crisis that led to the breakdown of the European Union's Exchange Rate Mechanism. What disadvantages of exchange-rate targeting were exhibited during this crisis?
What will be an ideal response?
The 1992 crisis began with Germany raising interest rates in 1990 to stem inflationary pressures from reunification. This demand shock was immediately transmitted to the other nations in the exchange-rate mechanism. Thus, these countries did not have independent monetary policies and were subject to shocks from the anchor country. This gave rise to the second problem. Speculators bet that these other countries would not want the increased unemployment resulting from the tight monetary policy. Betting that their commitment was weak, speculators bet against these currencies, and a number were forced to devalue or drop out of the ERM. The disadvantages illustrated by this are the lack of independent policy subjecting member nations to shocks from the anchor nation, and the possibility of speculative attacks when commitment is felt to be weak.
You might also like to view...
The above figure shows the market for steel ingots. What is the change in externality cost if the market switches from competitive equilibrium to social optimum?
A) a + b B) b + c C) c D) a + b + c
The rate of product transformation refers to
a. how a consumer can trade one good for another while still maximizing his or her utility. b. how a firm can substitute one input for another and still maintain the same production level. c. how production of one good can be substituted for another while still using a fixed supply of inputs efficiently. d. how quickly a firm can produce a final good while starting with only natural resources.
Reciprocity between two countries implies that
a. neither will trade with the other b. trade flows freely across the two countries' borders c. trade can only be beneficial to one of the countries d. each agree not to trade with any other countries e. you do unto others as they do unto you
Why does a small difference in the economic growth rate lead to big differences over time?
What will be an ideal response?