A Danger to the Peg Is a Situation in Which

Multiple Choice

A danger to the peg is a situation in which the central bank lends to insolvent private financial institutions to bail them out of crises. Why might this cause a problem?

A) The private financial institutions are often corrupt and should not be bailed out.
B) Foreign investors are helped and domestic investors harmed.
C) It requires a drawdown of foreign reserves to maintain the peg, lowering the backing ratio.
D) The central bank is assuming more than its share of political power, which can cause problems down the road.