2023 · Q53
Consider the following statements:
Statement IA very strong US Dollar squeezes global credit.
Statement IIMany countries and companies outside America borrow in Dollars.
Which of the following is correct in respect of the above statements ?
Indian EconomyInflation and external sector
- ABoth statement I and statement II are correct and statement II is the correct explanation for statement I
- BBoth statement I and statement II are correct and statement II is not the correct explanation for statement I
- CStatement I is correct but statement II is incorrect
- DStatement I is incorrect but statement II is correct
Explanation
Both statements are correct: a strong US dollar does squeeze global credit (the BIS documents this financial channel), and many non-US countries and companies borrow in dollars. Statement II is the correct explanation of statement I, because dollar-denominated debt becomes harder to service and roll over when the dollar strengthens, tightening credit conditions worldwide. Hence (a).