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Chapter 12 : Financial Development and Inflation
MULTIPLE CHOICE
1. What, particularly in a developing country, is the most visible and vital component of the financial
system (as acceptor of deposits and grantor of shorter-term credit)?
a.
investment banking
c.
foreign investors
b.
commercial banking
d.
hedge funds
2. Which of the following is NOT one of the basic roles essential for the smooth functioning of the
financial system?
a.
a medium of exchange and store of value, called money
b.
a channel for mobilizing savings from numerous sources and channeling them to investors,
called financial intermediation
c.
a means of transferring and distributing risk across the economy
d.
an efficient and comprehensive tax system, allowing more revenue for domestic
governments
3. The narrowest measure in the money supply is represented by:
a.
M1.
c.
M3.
b.
M2.
d.
M4.
4. Which of the following is NOT a liquid financial asset?
a.
currency in circulation
c.
demand deposits
b.
time deposits
d.
foreign aid
5. Total liquid liabilities (M3), the broadest measure of money, is the sum of:
a.
currency in circulation outside banks plus demand deposits.
b.
currency in circulation outside banks plus demand deposits plus time and saving deposits.
c.
currency in circulation outside banks plus demand deposits plus time and saving deposits
plus income taxes.
d.
currency in circulation outside banks plus demand deposits plus time and savings deposits
plus liabilities of specialized institutions.
6. During the period beginning in the 1950s and continuing into the 1980s (and even beyond), Argentina,
Brazil, and Chile experienced:
a.
chronic inflation.
c.
runaway inflation.
b.
acute inflation.
d.
little to no inflation.
7. Why do developing countries have floating exchange rates?
a.
to insulate themselves from world inflation
b.
to stabilize government deficits
c.
to keep reserves low
d.
to keep their money value higher than the dollar
8. A floating exchange rate allows developing countries to:
a.
insulate themselves from world inflation.
b.
appreciate their currency against the dollar.
c.
isolate themselves from trade with developed nations.
d.
risk rapid financial destabilization.
9. Under a system of fixed exchange rates, a large increase in export revenues (without a corresponding
jump in imports) has what effect on the domestic money supply?
a.
The money supply will increase.
b.
The money supply will decline.
c.
The money supply will not be affected.
d.
The answer depends on whether the central bank has imposed credit controls on the
commercial banks.
10. What is achieved by having an upward adjustment in reserve requirements?
a.
The money multiplier is increased, lowering inflation.
b.
It reduces the stock of money that can be supported by a given amount of reserves.
c.
The money multiplier is decreased.
d.
Both b and c, which may help moderate inflation.
11. Which of the following is essential to a strategy of deep finance?
a.
avoiding a government budget deficit
b.
maintaining very high real interest rates
c.
avoiding strongly negative real interest rates
d.
all of the above
12. Policies for financial deepening seek to promote ________ in the real size of the financial system,
while shallow finance promotes ________ in the real size of the financial system.
a.
growth; reduction
c.
stability; measured growth
b.
reduction; growth
d.
deflation; retraction
13. If a country wants to enact policies for growth in the real size of the financial system, financial
deepening, it will require:
a.
a negative real interest rate.
c.
a positive real interest rate.
b.
a negative GDP.
d.
a decrease in inflation.
14. According to the box study “Does Micro Credit Reduce Poverty?,” what was the effect of opening
micro credit branches in randomly selected slum neighborhoods as compared to slums without these
additional branches?
a.
Slums with access to more mirco credit experienced a reduction in poverty within 18
months.
b.
Slums with access to Spandana loans opened 1.7% more businesses than those without
access.
c.
There was a significant increase in total consumption expenditures between treatment and
control areas.
d.
Spandana branches had an influx of borrowers, averaging a total of 70 percent of
households taking out loans.
SHORT ANSWER
IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in
pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two
terms and (2) the relationship between them.
1. Medium of exchange, M2
ANS:
Answer will vary
2. Commercial banks, financial intermediation
ANS:
Answer will vary
3. Hyperinflation, government budget deficit
ANS:
Answer will vary
4. Inflation tax, negative real rates
ANS:
Answer will vary
5. Shallow finance, informal credit market
ANS:
Answer will vary
6. Financial assets, nonfinancial assets
ANS:
Answer will vary
7. Real interest rate, deep finance
ANS:
Answer will vary
8. Interest elasticity of savings, interest elasticity of demand for liquid assets
ANS:
Answer will vary
9. Pegged exchange rate, floating exchange rate
ANS:
Answer will vary
10. Open-market operations, moral suasion
ANS:
Answer will vary
11. International reserves, value of imports
ANS:
Answer will vary
12. Domestic credit expansion, credit ceilings
ANS:
Answer will vary
13. Economic collapse, runaway inflation
ANS:
Answer will vary
14. Fiscal policy, stimulus package
ANS:
Answer will vary
15. Deep finance, positive real interest rates
ANS:
Answer will vary
