The Economist observed the following: In Argentina, many loans were taken out in US dollars” this...

The Economist observed the following: In Argentina, many loans were taken out in US dollars” this had catastrophic consequences for borrowers once the peg collapsed.” What does it mean that Argentina’s “peg collapsed”? Why was the end of the peg (fixed exchange rate regime) catastrophic for borrowers in Argentina who had taken loans in US dollars?

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Expert Solution

Answer:- Peg means a fixed exchange rate of a currency that the country fixed agaung any specific international currency.
Collapsing of peg means the situation when the country feels the imports to be too expensive.
In Argentina, when the demand for US dollars increased, then the demand for their domestic currency decreased. This caused the fall in the exchange rate if Argentina's currency with respect to US dollars, due to the market forces. This whole process is referred to as 'Argentina's peg collapsed'.

This collapsing of peg is catastrophic for borrowers in Argentina because:-
Due to the increase in demand for US dollars and decrease in demand for the domestic currency, the exchange rate has steeply risen and now, the imports are too expensive for Argentina because now they have to pay a large amount as the exchange rate has risen . Now the borrowers have to pay large quantities of Argentina's currency in order to repay the loans. Hence, it is catastrophic for borrowers in

Rahul Sunny answered 5 months ago

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