Read the text carefully and answer the questions:
The causes of the Asian Financial Crisis are complicated and disputable. A major cause is considered to be the collapse of the hot money bubble. During the late 1980s and early 1990s, many Southeast Asian Countries, including Thailand, Singapore, Malaysia, Indonesia, and South Korea, achieved massive economic growth of an 8% to 12% increase in their Gross Domestic Product (GDP). The achievement was known as the "Asian Economic Miracle". However, a significant risk was embedded in the achievement.
The economic development in the Countries mentioned above was mainly boosted by export growth and foreign investment. Therefore, high-interest rates and fixed currency exchange rates (pegged to the U.S. dollar) were implemented to attract hot money. Also, the exchange rate was pegged at a rate favorable to exporters. However, both the capital market and corporates were left exposed to foreign exchange risk due to the fixed currency exchange rate policy.
In the mid-1990s, following the recovery of the U.S. from a recession, the Federal Reserve raised the interest rate against inflation. The higher interest rate attracted hot money to flow into the U.S. market, leading to an appreciation of the U.S. dollar.
The currencies pegged to the U.S. dollar also appreciated, and thus hurt export growth, with a shock in both export and foreign investment, asset prices, which were leveraged by large amounts of credits, began to collapse. The panicked foreign investors began to withdraw. This translated into increased demand for US dollars. Further, there was no perceptible increase in the supply of dollars as wary investors shied away from investing in these economies. With demand being greater than supply, the US dollar appreciated with the domestic currency depreciating. The depreciation of the local currencies fuelled more investments being pulled out of these economies thus resulting in a crisis.
Thus Thai Government first ran out of foreign currency to support its exchange rate, forcing it to float the baht. The value of the baht thus collapsed immediately afterward. The same also happened to the rest of the Asian Countries soon after.
The likely reason for investors from Western Countries pulling out their investments from these nations was:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → The returns on their investments were falling as the currencies of their own countries were appreciating
Foreign investors count their returns in their own currency. As the US dollar rose against the Asian currencies, the money earned in Asia was worth fewer dollars.
Option (1) The returns on their investments were falling as the currencies of their own countries were depreciating — Incorrect. If the investors’ own currency fell, money earned in Asia would convert into more of it, so returns would rise. The passage also says the US dollar appreciated.
Option (2) The returns on their investments were falling as the currencies of their own countries were appreciating — Correct. A stronger home currency means lower returns after conversion, so investors pulled out.
Option (3) The returns on their investments were expected to rise in the near future — Incorrect. Investors stay when they expect higher returns. Here asset prices were collapsing and investors were in panic.
Option (4) They wanted to take their investments back to their own respective nations. — Incorrect. This only says what the investors did. It gives no reason for doing it.