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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

This chapter has explained that “one of the most economically destructive effects of exchange rate fluctuations can happen through the banking system, if banks borrow from abroad to lend domestically. Why is this less likely to be a problem for the U.S. banking system?

To determine

Effects of exchange rate fluctuations on U.S. banking system.

Explanation

The banking system can create a hazardous impact on the economy of a country. Banks borrow foreign currency and lend it in domestic currency. During the process of borrowing and lending foreign currency, the fluctuation in the exchange rate plays a major role. Depreciation of domestic currency leads debts to grow larger and sometimes substantial fall in currency’s value results in the failure of the banking system. Further, this banking failure results in a recession and a decline in aggregate demand...

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