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Some critics of the adoption of fixed exchange rates by emergingmarket economies argue that they...

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Economics

Some critics of the adoption of fixed exchange rates by emergingmarket economies argue that they create a kind of moral hazard. Doyou agree? (Hint: Might borrowers behave differently if they knewexchange rates were changeable from day to day?) A. No. The moralhazard comes from the fact that the borrowers in a foreign currencyengage in risky projects. B. No. The moral hazrd does not come fromthe fact that borrowers may borrow in a foreign eurrency with afixed exhange rate. C. Yes. A fixed exchange rate system would haveencouraged the borrowers to take riskier projects. D. Yes. Flexibleexchange rates would have forced the borrowers to hedge against therisk of exchange rate volatility.

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