Skip to content

IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history

In July 1997 Thailand abandoned its peg of the baht to the US dollar, which triggered the Asian financial crisis. Which feature of the pre-crisis position made the peg especially vulnerable?

Thailand's peg was vulnerable because a large current account deficit was financed by short-term foreign-currency borrowing while reserves were limited. Once investors lost confidence, capital flowed out faster than reserves could cover, so the baht peg could not be defended and was abandoned in July 1997.

  1. AA large current account deficit financed by short-term foreign-currency borrowing, with limited foreign exchange reservesCorrect
  2. BA large fiscal surplus combined with falling domestic investment
  3. CA floating exchange rate that had appreciated steadily for a decade
  4. DExports growing faster than imports, producing a persistent trade surplus
  5. Tight capital controls that blocked most foreign borrowing by banks

Explanation

A fixed peg is defended with reserves. When a current account deficit is financed by short-term dollar debt, a loss of confidence leads to capital flight that reserves cannot cover, forcing devaluation. The other options describe conditions that would reduce, not raise, vulnerability, or were not features of Thailand's position.

Did you get it right without looking?

One question tells you little. A timed set on Recent macroeconomic history shows your real accuracy, how long you take and where you lose marks.

Practise Recent macroeconomic historyFree diagnostic mock

More Recent macroeconomic history questions