Explain using a model of exchange rate determination how speculative attacks occur and trigger a currency crisis and then illustrate using the interest parity condition why high interest rates were required to defend the value of local currency in the Asian financial crisis.

A speculative attack on a fixed exchange rate is likely to occur when:Group of answer choicesa devaluation is expectedthe government imposes capital controlsa revaluation is expectedthe exchange rate is undervalued

Chapter 14 showed how the exchange rate between currencies depends ontwo factors, the interest that can be earned on deposits of those currenciesand the expected future exchange rate. To understand fully thedetermination of exchange rates, however, we have to learn how interest ratesthemselves are determined and how expectations of future exchange rates areformed. In this and the next two chapters we examine these topics by building aneconomic model that links exchange rates, interest rates, and other importantmacroeconomic variables such as the inflation rate and output.The first step in building the model is to explain the effects of a country’smoney supply and of the demand for its money on its interest rate and exchangerate. Because exchange rates are the relative prices of national monies, factorsthat affect a country’s money supply or demand are among the most powerfuldeterminants of its currency’s exchange rate against foreign currencies. It istherefore natural to begin a deeper study of exchange rate determination with adiscussion of money supply and money demand.Monetary developments influence the exchange rate by changing both inter-est rates and people’s expectations about future exchange rates. Expectationsabout future exchange rates are closely connected with expectations about thefuture money prices of countries’ products; these price movements, in turn,depend on changes in money supply and demand. In examining monetaryinfluences on the exchange rate, we therefore look at how monetary factorsinfluence output prices along with interest rates. Expectations of future ex-change rates depend on many factors other than money, however, and thesenonmonetary factors are taken up in the next chapter.Once the theories and determinants of money supply and demand are laidout, we use them to examine how equilibrium interest rates are determined bythe equality of money supply and money demand. Then we combine our modelof interest rate determination with the interest parity condition to study theeffects of monetary shifts on the exchange rate, given the prices of goods andservices, the level of output, and market expectations about the future. Finally,we take a first look at the long-term effects of monetary changes on outputprices and expected future exchange rates.

Usually, a country experiences ________ if it is hit by a currency crisis.Group of answer choicesrising official FX reservesrising real wageseconomic boomhigh inflation

Which of the following was not a factor leading to the Asian financial crisis?  Rapid capital market liberalization and rigid exchange rate systems   IMF prescribing highly contractionary policies   Cheaper offshore borrowings with currency mistmatches   Large capital inflows but insufficient accumulation of foreign currency reserves   Moral hazard with borrowing and lending

International Traders gets attracted by ________ in an economya.increased interest ratesb.Political Crisisc.unemploymentd.inflation