4. The Evidence-Based Economics feature discusses how George Soros’s hedge fund made money by betting on the devaluation of the British pound. Interestingly, Soros also made money betting against the Thai baht. In 1997, the baht had been continually falling against the U.S.

dollar. The Bank of Thailand attempted to defend its overvalued exchange rate by pegging the baht to the U.S.

dollar at a rate of 25 bahts per dollar. Explain how each of the following factors made it difficult for the Thai authorities to continue to defend their exchange rate, leading eventually to a sharp devaluation of the baht.

a. The Thai government’s reserves of U.S. dollars fell to a 2-year low in 1997.

b. A very large quantity of corporate debt in Thailand was denominated in U.S. dollars. In other words, the corporations that held this debt needed to obtain dollars to pay their interest and principal as they came due.