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Lebanon traditionally runs a current account deficit. After Lebanon's 15-year civil war ended in the 1990s, the country decided to tie its currency to the
Lebanon traditionally runs a current account deficit. After Lebanon's 15-year civil war ended in the 1990s, the country decided to tie its currency to the U.S. dollar, rather than allowing global financial markets to determine its value. Lebanon's central bank promised that 1,507 Lebanese lira would be worth exactly $1 and that Lebanese banks would always exchange one for the other. To support this FX regime, Lebanese banks were required to hold significant USD reserves. However, following the outbreak of war in Syria and increased Middle East tensions, US investors stopped investing in the country.What is the name of the FX regime that Lebanon adopted? (2 marks) Under this FX regime, who, or what, is responsible for managing the balance of payments for Lebanon? (2 marks) Which account of the Lebanese balance of payments would US pension fund investments in Lebanon be accounted? (2 marks) When US investors, and other investors from rich nations, stopped investing in Lebanon, what tools were available to the Lebanese government to manage their currency? (2 marks) Theoretically, if external investors started withdrawing their money out of Lebanon, what would happen to interest rates? (2 marks) If this change in interest rates was sustained, what
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