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Chapter 13: Q.1 (page 367)

What are the two basic causes of financial crises in emerging market economies?

Short Answer

Expert verified

Deteriorating bank balance sheets and massive fiscal imbalances.

Step by step solution

01

 Content Introduction

Financial crisis refers to the situation when the vlue of assets starts declining because of certain reasons. This further leads to panic in the public and a bank run, which worsens the situation.

02

Explanation

Financial liberalization is widely considered to have widely emerging economies' financial fragility, making them more prone to recurring financial and currency crises. Internal banking and related crises, as well as currency crises produced by more open capital accounts, are all linked to these.

When a government's expenditures (and consequently debt) exceed its long-term ability to generate money to repay the debt, it is said to be in debt. Differences in net fiscal benefits, which are a mix of taxes and government services, result from several types of fiscal imbalances.

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Most popular questions from this chapter

10. Why might emerging market economies want to implement financial liberalization and globalization gradually rather than all at once?

Why might financial liberalization and globalization lead to financial crises in emerging market economies?

How can emerging market economies avoid the problems of currency mismatch?

How did the financial crises in South Korea and Argentina affect aggregate demand, short-run aggregate supply, and output and inflation in these countries?

Why might severe fiscal imbalances lead to financial crises in emerging market economies?
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