Chapter 13 : Foreign Debt and Financial Crises
MULTIPLE CHOICE
1. The economic impact of debt flows is magnified by their effect on all of the following EXCEPT:
a.
macroeconomic stability.
c.
World Bank transparency.
b.
the exchange rate.
d.
government budgets.
2. From a national perspective, borrowing permits a country to invest more than it can save and:
a.
import more than it can export.
b.
engage in the pattern of “infant industry” development.
c.
export more than it imports.
d.
acquire more prestige in international bond markets.
3. Foreign borrowing is consistent with development when:
a.
the additional investment and imports are put to productive use.
b.
it increases total imports.
c.
it increases total savings.
d.
a country can afford the debt service payments.
4. At the simple level, a country’s debt sustainability depends on:
a.
its foreign exchange rate and openness to trade.
b.
how much it owes and its capacity to make the required payments.
c.
potential for facing adverse weather conditions.
d.
willingness to devaluate its currency.
5. The amount due for principal and interest payments in a given year is known as:
a.
total revenue.
c.
debt service.
b.
economic profit.
d.
redundancy.
6. Which of the following is NOT used as a debt sustainability indicator?
a.
NPV/GDP
b.
debt/exports
c.
short-term foreign debt/foreign exchange reserves
d.
number of illiquid borrowers
7. The debt crisis of the 1980s saw a return to this problem that had been common in the nineteenth
century:
a.
a military action against a neighboring country to stimulate the economy.
b.
sovereign defaults.
c.
leftist revolutions throughout the developing world.
d.
the return to Corn Laws.
8. From 1980–1982, private creditors provided more than $50 billion a year in new lending to developing
countries; by 1987, the net resource flow was:
a.
$1 billion.
c.
$125 million.
b.
$559 million.
d.
practically zero.
9. Although the debt crisis effectively ended in the early 1990s for most middle-income countries that
had borrowed heavily from commercial banks, it continued for many low-income countries, especially
those in:
a.
the Middle East.
c.
Latin America.
b.
East Asia.
d.
Africa.
10. Individual creditor governments provide debt rescheduling and debt reduction through an informal
group called the:
a.
G-7.
c.
Paris Club.
b.
United Nations.
d.
Club of Rome.
11. The argument for providing debt relief for the poorest countries relies on the idea:
a.
of debt overhang.
b.
that creditor governments and institutions are to blame.
c.
that much was lent to poorly governed regimes.
d.
all of the above.
12. The first step for a country to receive debt reduction in the HIPC initiative is to:
a.
write a poverty reduction strategy paper.
b.
establish a track record of good economic policies.
c.
carry out specific policies for three years.
d.
double its growth rate.
TOP: The Heavily Indebted Poor Country Initiative MSC: Factual
13. Common characteristics of countries caught in the Asian crises include which of the following?
a.
middle and upper-middle national incomes
b.
receipt of large flows of private international capital
c.
large government budget deficits
d.
all of the above
14. Assume that, as was the case in 1994, Mexican goods are 22 percent more expensive than U.S. goods.
If capital markets are fully liberalized and the Central Bank of Mexico is committed to a pegged
peso/dollar exchange rate, then:
a.
foreign investors are likely to perceive this as an overvaluation of the peso.
b.
there is likely to be a net outflow of short-term capital.
c.
the central bank likely will need to raise interest rates.
d.
all of the above.
15. Fixed exchange rates create problems because they:
a.
tend to encourage short-term capital inflows.
b.
tend to be undervalued.
c.
create instability among investors.
d.
all of the above.
TOP: Domestic Economic Weaknesses MSC: Conceptual
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. External transfer problem, internal transfer problem
ANS:
Answer will vary
2. Insolvent borrower, illiquid borrower
ANS:
Answer will vary
3. Short-term loans, lender exposure
ANS:
Answer will vary
4. Liquidity, solvency
ANS:
Answer will vary
5. Stabilization, structural adjustment
ANS:
Answer will vary
6. Rational panics, bank runs
ANS:
Answer will vary
7. Debt overhang, heavily indebted poor countries (HIPC)
ANS:
Answer will vary
8. Brady plan, Brady bonds
ANS:
Answer will vary
9. Decision point, completion point
ANS:
Answer will vary
10. Moral hazard, standstill
ANS:
Answer will vary
11. Odious debt, Spanish-American War
ANS:
Answer will vary
12. Default, debt restructuring
ANS:
Answer will vary