Question

east asia's crisis was relatively long lived because a. east asia's financial institutions had encouraged borrowing all together. b. east asia's financial institutions had encouraged heavy borrowing in local currency. c. east asia's financial institutions had extended low-interest loans. d. east asia's financial institutions had extended high-interest loans. e. east asia's financial institutions had encouraged heavy borrowing in dollars.

Answer 1

East Asia's crisis was prolonged because financial institutions encouraged borrowing in dollars, leading to a mismatch when currencies crashed, resulting in bank bankruptcies and a deep recession.

Step-by-step explanation:

East Asia's crisis was relatively long-lived due to financial institutions encouraging heavy borrowing, not in local currency, but in dollars. The surge in bank lending was coupled with inadequate screening of borrowers, leading to substantial amounts of bad loans. As foreign investors withdrew funds, fearing losses, the value of these countries' currencies crashed significantly. This resulted in a mismatch in the banking sector, as the banks were unable to repay the borrowed U.S. dollars given the devaluation of their currencies. Consequently, the banking sector faced bankruptcy, which led to a collapse in credit availability and lending, triggering a sharp downturn in aggregate demand and plunging the region into a deep recession.