4) Brazil’s 1999 crisis was relatively short lived because
A) Brazil’s financial institutions had avoided borrowing all together.
B) Brazil’s financial institutions had avoided heavy borrowing in local currency.
C) Brazil’s financial institutions had avoided heavy borrowing in dollars.
D) Brazil’s financial institutions had extended low-interest loans.
E) Brazil’s financial institutions had extended high-interest loans.
5) What does it mean for a loan to be in default?
A) when the borrower of the a loan fails to repay on schedule according to a loan contract,
without the agreement of the lender
B) when the borrower of a loan fails to repay on schedule according to a loan contract, with the
agreement of the lender
C) when the lender of a loan fails to supply the full amount of a loan to the borrower
D) when the lender of a loan supplies the full amount of a loan to a borrower without any
promise of being repaid
E) when the lender of a loan fails to offer the promised sum
6) A trend that has been reinforced by many developing countries is privatization. Privatization
refers to
A) purchasing large companies and turning them into state-owned enterprises.
B) investing government money in large, privately-owned companies.
C) exchanging bonds for shares in state-owned enterprises.
D) selling large state-owned enterprises to private owners in the financial sector.
E) selling large state-owned enterprises to private owners in key areas such as electricity,
telecommunications, or petroleum.
7) A considerable advantage that richer countries have over poorer ones is exemplified by the
fact that
A) richer countries do not have to denominate their foreign debts in their own currencies.
B) richer countries have the ability to denominate their foreign debts in foreign currencies.
C) when demand falls for a poorer country’s goods, this leads to a significant wealth transfer
from foreigners to the poorer country, a kind of international insurance payment.
D) richer countries have the ability to denominate their foreign debts in their own currencies.
E) richer countries can extract trade advantages by using military power.
8) In 1981-1983, the world economy suffered a steep recession. Naturally, the fall in industrial
countries’ aggregate demand had a direct negative impact on the developing countries. What
other mechanism was an even more important contributor to this event?
A) the immediate steep inflation that followed the recession
B) the dollar’s sharp depreciation in the foreign exchange market
C) the increase in primary commodity prices, increasing terms of trade in many poor countries
D) the collapse in primary commodity prices and the immediate, large rise in the interest burden
that debtors had to pay
E) the influx of defaulting credit
9) With which country did the Debt Crisis of the early 1980s begin?
A) France
B) Mexico
C) Argentina
D) Japan
E) Germany
10) In 1991, Argentina established a radical institutional reform after experiencing a decade
marked by financial instability. This program was called the new Convertibility Law. What did
this law do?
A) made Argentina’s currency fully convertible into Eurocurrency at a fixed rate
B) required that the monetary base be backed completely by U.S. dollars
C) placed limits on exports of commodities
D) made Argentina’s currency fully convertible into U.S. dollars at a fixed rate and required that
the monetary base be backed completely by gold or foreign currency
E) restricted risky international trade activity
11) In the instances where a loan has been issued under certain terms and has to be repaid, what
happens when the borrower does not uphold these stipulations?
A) call
B) option
C) payment
D) default
E) fraud
12) There are many ways developing countries finance their external deficits EXCEPT
A) bank finance.
B) portfolio investment in ownership of firms.
C) bond finance.
D) official lending.
E) foreign exchange rates.
13) During the time period of 1981-1983 what dramatic world issue happened?
A) political instability, insecure property rights
B) stock market crashed
C) world wide hyperinflation
D) the collapse of the U.S. mortgages market
E) A world economic recession caused developing countries to not be able to make payments on
foreign loans, in turn causing a universal default.
14) The term Original Sin by two economists Barry Eichengreen and Ricardo Hausmann is used
to describe what?
A) low-income economy
B) developing countries’ inability to borrow in their own currencies
C) a sin that is part of the Ten Commandments
D) borrows not able to receive loans
E) not diversifying economies portfolios
15) How would you define exchange control?
A) The government allocates foreign exchange through decree rather than through the market.
B) a country NOT pegging its exchange rate
C) a country pegging its exchange rate
D) a country buying up excess current account so that CA=0
E) a country restricting all foreign exchange
16) As of 2013, how large is the debt of developing countries to the rest of the world?
A) $350 million
B) $350 billion
C) $7 trillion
D) $35 trillion
E) $3.5 trillion
17) Which of the following is a reason that developing countries are running large surpluses?
A) They are required to do so by IMF.
B) They have defaulted on international loans.
C) They have pegged exchange rates and thus the growth of exports must drive surplus up.
D) They have a strong desire to accumulate international reserves to protect against a sudden
stop of capital inflows.
E) They don’t know how to manage their surpluses.
18) Which Latin American country defaulted on loans in 2005 and paid off their creditors at only
1/3 value?
A) Argentina
B) Brazil
C) Chile
D) Colombia
E) Mexico
19) When a government defaults on its obligations, the event is called a
A) sovereign default.
B) magisterial default.
C) private default.
D) sudden stop default.
E) national default.
20) The following are all the forms of debt finance.
A) bond, bank, and official finance
B) bond and bank finance
C) bond, bank, and portfolio finance
D) foreign direct and portfolio investment
E) direct investment, stock, and dividends
21) Why may equity finance be preferred to debt finance for developing countries?
A) A fall in domestic income automatically reduces the earnings of foreign shareholders without
violating any loan agreement.
B) There are laws insuring against any default with equity finance.
C) The risk is shared between debtor and creditor with debt finance.
D) The tax structure leaves equity finance unconstrained.
E) Repayments are unaffected by falls in real income.
22) Since foreign credit dries up in crises when it is most needed, developing countries can
protect themselves from default by
A) cutting off imports of goods.
B) allowing the exchange rate to float.
C) using equity finance only.
D) accumulating high levels of international reserves.
E) avoiding the international capital market.
23) What factors lie behind capital inflows to the developing world?
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24) Describe alternative forms of capital inflow to finance external deficits and explain why
these methods were used in different times?
25) Explain why the distinction between debt and equity finance is useful in analyzing the
response of developing countries to unforeseen events such as recession or terms of trade
change?
26) Explain why despite enormous natural resources, much of Latin America’s population
remains in poverty and the region has been repeatedly experiencing financial crises.
27) Explain why an exchange rate-based stabilization plan may result in a real appreciation?
28) Write an essay on the importance of a sound banking system in developing countries.
29) Explain why Argentina, one of the world’s richest countries at the start of the twentieth
century, has become progressively poorer relative to the industrial countries. [An alternative
question: What explains Argentina’s regress from riches to rags?]
30) The 1980s are considered as the “lost decade” of Latin American growth. Explain why?
31) Evaluate the Argentinean Convertibility Law of April, 1991.
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32) Explain how Brazil was able to reduce the rate of inflation from 2,669 percent in 1994 to less
than 10 percent in 1997?
33) Some economists claim that the Chilean experience during the 1990s was much more
successful than its Latin American neighbors. Evaluate the Chilean policies during that decade.
34) The main reason for the crisis in Argentina in 2001 and 2002, has to do with exchange rate
policy, i.e., the continued peg of the exchange rate to the dollar. Discuss.
35) Should the IMF be abolished? Discuss.
36) “Sharp contractions in a country’s output and employment invariably result from a crisis in
which the country suddenly loses access to all foreign sources of funds.” Explain how the current
account identity necessitates these contractions.
37) List and explain 3 major channels through which developing countries have financed their
external deficits.
38) Economists Eichengreen and Hausmann coined the phrase original sin to describe
developing countries inability to borrow in their own currencies. Where do they believe that this
inability comes from? What are other beliefs on this topic?
39) What are the five major channels, which developing countries use to finance their external
deficit?
40) What is Argentina’s Convertibility Law of April 1991? Explain.
41) During 1991, Argentina’s monetary law had a currency board. Explain and give an example.
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22.4 East Asia: Success and Crisis
1) East Asia’s crisis was relatively long lived because
A) East Asia’s financial institutions had encouraged borrowing all together.
B) East Asia’s financial institutions had encouraged heavy borrowing in local currency.
C) East Asia’s financial institutions had extended low-interest loans.
D) East Asia’s financial institutions had extended high-interest loans.
E) East Asia’s financial institutions had encouraged heavy borrowing in dollars.
2) In the early 1960s South Korea was an extremely poor country. However, in 1963, the country
began a remarkable economic ascent. What was a direct cause of this?
A) a shift in strategy that emphasized exports rather than imports
B) an increase in wages
C) an increase in the labor force
D) an increase in the money supply
E) an emphasis on education, leading to a highly productive labor force
3) What weakness in the economic structures of Asian countries contributed to the severe
financial crisis that Asian economies experienced in 1997?
A) Productivity: It increased rapidly and the countries were victims of their own success.
B) Banking regulation: Banks were excessively regulated, which reduced profits.
C) Legal Framework: The system dealt unsuccessfully with companies in financial trouble.
D) Natural Resources: Countries’ lack of natural resources and failure to explore developing
industries accumulated and led to the crisis.
E) High Taxes: High rates of taxation resulted in a reliance on imports.
4) What event started the Asian financial crisis in 1997?
A) Indonesia’s inability to pay its debts
B) devaluation of Indonesia’s currency
C) Thailand’s inability to pay its debts
D) devaluation of Thailand’s currency
E) devaluation of Malaysia’s currency
5) The problem of moral hazard has led
A) the governments of many developing countries to guarantee repayment of all loans.
B) to higher growth rates in Latin America.
C) to excessively speculative investment.
D) to both privilege and responsibility of creditors.
E) to stable investments with small and steady expected gains.
6) How would you define a currency board?
A) the process by which non-pegged interest rates are allowed to fluctuate
B) the stockpiling of international reserves by developing countries
C) using the dollar to carry out all domestic transactions, making the domestic currency a
currency in name alone
D) a constraint placed on monetary policy
E) The monetary base is backed entirely by foreign currency and the central bank holds no
domestic assets.
7) If a developing country institutes a currency board, it relinquishes control over having
A) monetary policy autonomy.
B) exchange rate stability.
C) freedom of capital movement.
D) freedom of labor movement.
E) all of its funds.
8) A currency board can ________ a country’s ability to act as a lender of last resort.
A) aggrandize
B) limit
C) enhance
D) offset
E) not affect
9) Explain why East Asian countries have done so well relative to South American countries.
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10) Explain the reasons for the economic “miracle” of the East Asian countries between 1960
and 1997. Is it only because of the common Asian practice of industrial policy and business–
government cooperation?
11) Based on the 1997 Crisis and your own experience, what are the main weaknesses of the East
Asian economies?
12) Describe the Asian financial crisis as it unfolds beginning with the devaluation of the Thai
currency in July 1997, followed by the Malaysian, Indonesian and South Korean crises. As part
of your answer, elaborate on the Malaysian response to the crisis versus its troubled neighbors’
responses.
13) Does it appear that currency boards make fixed exchange rates credible?
14) Does it appear that currency boards make low–inflation policies credible?
15) Compare currency board to conventional fixed exchange rate.
16) What do you think about dollarization?
17) Compare the macroeconomic performances in the 1990s of the following countries under the
following exchange-rate regimes: floating exchange rates, Mexico and Brazil; capital control,
China and Malaysia; and currency boards, Estonia and Hong Kong; dollarization, Argentina.
18) How was South Korea able to become one of the East Asian Economic Miracles?
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22.5 Lessons of Developing-Country Crises
1) Which of the following economic lessons should we take from developing country crises in
Latin America (and elsewhere)?
A) only that it is important to choose the right exchange rate regime
B) only that banking is of central importance in any government
C) the order in which reform measures are implemented are irrelevant
D) It is important to choose the right exchange rate regime and banking is of central importance
in any government.
E) The order in which reform measures are implemented are irrelevant and banking is of central
importance in any government.
2) The term contagion refers to
A) a government’s complete control over it’s banking system.
B) a drop in interest rates across industrialized countries.
C) the vulnerability of healthy economies to crises generated by events elsewhere.
D) a directed attack on one market by a foreign market.
E) a side effect of international trade.
3) What are the three main lessons on crisis learned from early developing countries in Latin
America?
A) choosing the right exchange rate regime, the importance of contagion and the importance of
the banking system
B) choosing the right real rate, the importance of following exchange rates, and keeping prices
high to make the most profit
C) pegging exchange rates with Euros, keeping labor cost and wages low
D) maintaining money supply, avoiding tariffs, and increasing output
E) maintaining money supply, avoiding inflation, and increasing production
4) What are the main lessons economists learned from the developing country crisis?
5) What is the theory of Second Best?
6) “Developing countries should delay opening the capital account until the domestic financial
system is strong enough to withstand the sometimes violent ebb and flow of world capital.”
Discuss.
7) “Trade liberalization should precede capital account liberalization.” Discuss.
8) What is the domino effect or contagion?
1) Why is China’s currency undervalued?
A) The Asian miracle is over.
B) They do not trade with the U.S.
C) They do not allow their currency to appreciate despite large external surpluses.
D) They are stockpiling international reserves to protect against the next East Asian crisis.
E) They are not aware of the real value of their currency.
2) Explain the basic macroeconomic policy trilemma for open economies.
3) Discuss the role of more “transparency” in reducing the risk of financial crisis.
1) Which theory best explains the wealth inequalities amongst nations?
A) weather
B) government institutions
C) natural selection
D) factors outside of any human control
E) levels of corruption