In 2001, the government of Argentina faced large expenditures and tax revenues w

Question

In 2001, the government of Argentina faced large expenditures and tax revenues were low due

to a recession, so Argentina was running a deficit. Printing money to pay for the deficit was not possible since Argentina had a currency board, which fixes the amount of cash which can be printed. Further, the government could not borrow abroad to finance the deficit. Foreign

investors refused to lend because they feared Argentina would default. Therefore, the

government forced local banks to make loans to the government. The government lowered the required reserve ratio, took the existing bank reserves, and gave the banks I.O.U.

Explanation / Answer

1. The people's money had truly paid the deficit. They may have borrowed it from the banks but the banks were merely holding it for the people who had deposited it there, so in reality its citizen were the ones who lost most of the money not the banks.

b. In that case they should have never deposited their money into those banks are perhaps transferred them to an off shore account or perhaps convert them to a different currency which would be in their hands physically and not in their banks. They could have also purchased commodities such as gold which is quite common in times of economic turmoil.

c.

1. It would become disproportionately high. For example it could such as 100 currencies for each deposit or perhaps even higher just to name an example.

2. It would become astronomically low as everyone has retracted their funds from bring taken. Thus the money supply would suffer greatly.

3. The price level would sky rocket as well since the money is no longer worth as much due to their deficit which reduces the overall value of their currency. This would cause many problems such as a loaf of bread potentially costing in the hundreds for a very extreme case.

Hope this helps, good luck.

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