Suppose that a country has a mixture of individuals and companies that are in each of the following situations:
Group I. These have borrowed in domestic currency to finance assets whose values are also in domestic currency.
Group II. These have borrowed in foreign currency to finance assets valued in domestic currency.
Group III. These have borrowed in domestic currency to finance assets valued in foreign currency.
Group IV. These have borrowed in foreign currency to finance assets valued in (the same) foreign currency. Which of these groups see the domestic-currency value of their wealth fall when the country devalues? (Assume in each case that the initial value of the assets is at least as great as what was borrowed.)
a. I only.
b. II only.
c. III only.
d. IV only.
e. II and IV only