Question

What are the three ingredients of a financial and banking​ crisis? The three ingredients of a financial and banking crisis include all of the following except​ _______.

A. a widespread fall in asset prices
B. a fall in the foreign exchange rate
C. a run on the bank
D. a large currency drain

Answer 1

Answer:

B. a fall in the foreign exchange rate  

Explanation:

A fall in foreign  exchange rate does not imply a financial or banking crisis but is rather caused by the following

1. When the global price of a country's major export falls which triggers a decline in her export revenues and consequently a decline in the demand for the currency of that country.

2. On the other hand, and in line with 1 above; a country's currency falls when the demand for imported products increases and is far more than exports which leads to a trade deficit.  

3. When the nation's current account of balance of payments is in deficit which results from a net outflow of currency.

4. Reduction in a country's central bank monetary policy interest rates, which will make investors to move their money and invest it elsewhere.

5. Increase in demand for foreign currency in the parallel market or as a result of speculation that exchange rate is likely to rise causing people to buy foreign currency with local currency and thereby weakening the local currency.