Consider the following statements: 1. Tight monetary policy of US Federal Reserve could lead to capital flight. 2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs). 3. Devaluation of domestic currency decreases the currency risk associated with ECBS. Which of the statements given above are correct?
Question:
Consider the following statements: 1. Tight monetary policy of US Federal Reserve could lead to capital flight. 2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs). 3. Devaluation of domestic currency decreases the currency risk associated with ECBS. Which of the statements given above are correct?
Consider the following statements: 1. Tight monetary policy of US Federal Reserve could lead to capital flight. 2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs). 3. Devaluation of domestic currency decreases the currency risk associated with ECBS. Which of the statements given above are correct?
Options
Answer: 1 and 2 only
Explanation:
A tight Fed policy attracts capital to the US, causing capital flight from emerging markets. This increases the burden of ECBs as interest and repayments rise. Devaluation increases, not decreases, currency risk.
Explanation:
A tight Fed policy attracts capital to the US, causing capital flight from emerging markets. This increases the burden of ECBs as interest and repayments rise. Devaluation increases, not decreases, currency risk.
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