[Solved] Consider the following Statements: Tight monetary Policy of US federal Reserve Could lead to capital flight. Capital flight may Increase the Interest Cost of firms with exiting External Commercial Borrowings (ECBs) Devaluation of Domestic currency Decreases the Currency risk associated with ECBs. Which of the statements given above is/are correct?

Q61) 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 exiting External Commercial Borrowings (ECBs)
3. Devaluation of Domestic currency Decreases the Currency risk associated with ECBs.

Which of the statements given above is/are correct?

1. 1 and 2 Only
2. 2 and 3 Only
3. 1 and 3 Only
4. 1,2 and 3

Answer: 1

• In the field of economics, capital flight is a phenomena characterised by significant withdrawals of capital and/or assets from a nation as a result of certain circumstances, with detrimental economic repercussions for that nation.
• In this setting, Capital Flight will be induced due to the tight monetary policy of the US federal reserve.
• Capital flight occurs when foreign investors flee emerging nations like India in search of safer, more stable returns in the US as a result of higher interest rates there.
• Since capital flight would result in a decline in the value of the currency and supply-side constraints for borrowers, it is possible that enterprises with current external commercial borrowing (ECB) will see an increase in their interest costs.
• Devaluation of domestic currency will inadvertently increase the currency risk associated with ECBs and will result in higher interest costs for borrowers.