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Chapter 18: Crises and Responses
MULTIPLE CHOICE
1. The Mexican crisis of 1994-1995 was an example of:
a. Balance of payments and currency crisis.
b. Hyperinflation.
c. Domestic debt crisis.
d. Banking crisis.
2. The Zimbabwe crisis of 1998-2009 was an example of:
a. Balance of payments and currency crisis.
b. Hyperinflation.
c. Domestic debt crisis.
d. Banking crisis.
3. Which of the following is not considered to be a contributing factor to contagion?
a. Sudden stops of capital flows.
b. Surprise announcement to financial markets.
c. Trade liberalization.
d. Highly-leveraged financial institutions.
4. Which of the following is not an element of “old fashioned” balance of payments crises?
a. An overvalued exchange rate.
b. A large current account deficit.
c. Capital flight.
d. Domestic financial regulation.
5. A country has a fixed exchange rate and runs a very large trade deficit. Investors with
both this country’s assets and U.S.-dollar-denominated assets in their portfolios begin to
expect a devaluation of the country’s currency. What will they do?
a. Adjust their portfolios by buying additional amounts of the country’s assets.
b. Adjust by selling this country’s assets.
c. Keep their existing portfolio balances.
d. Adjust by selling dollar-denominated assets.
6. What will happen to the value of a country’s currency if investors begin to sell its assets?
a. It will rise.
b. It will fall.
c. It will remain the same.
d. Cannot predict.
7. When a country with a fixed exchange rate has an overvalued currency, which of the
following generally does not occur?
a. Official reserves begin to fall.
b. Capital flight occurs.
c. Portfolio investment in the country increases.
d. The government devalues or floats the currency.
8. What did not happen in the Thai financial crisis of 1997-1998?
a. The exchange rate dropped sharply in value after the government floated the bhat.
b. The exchange rate stabilized after the government devalued the bhat.
c. Banks borrowed short-term dollars and lent them in bhats to risky projects.
d. Prices of financial assets dropped.
9. Which of the following was not a cause of the Thai financial crisis?
a. High fiscal deficit.
b. High trade deficit.
c. Weak banking sector.
d. Collapse of equity prices.
10. Which of the following was not a policy condition imposed by the IMF during the Asian
crisis?
a. Fiscal austerity.
b. Structural reforms.
c. Tight monetary policy.
d. Lower interest rates.
11. Which of the following was a negative effect of the IMF fiscal austerity remedy to the
Asia crisis?
a. It reduced the budget deficit.
b. It improved the countries’ economic fundamentals and therefore attracted foreign
savings.
c. It hurt the real economy by forcing cuts in social programs.
d. None of the above.
12. How can the adoption of capital controls reduce financial panics?
a. By reducing excessive borrowing of short-term capital.
b. By stimulating increased portfolio investment.
c. By discouraging foreign direct investment.
d. None of the above.
13. What was the origin of the global crisis of 2007 to 2009?
a. Over-borrowing by Latin American countries.
b. Financial deregulation in Asia.
c. The introduction of the euro in Europe.
d. Losses in housing mortgages in the United States.
TRUE/FALSE
1. Asset price deflation refers to sovereign debt default on obligations for foreign creditors.
2. Banking crises refers to bank runs and/or the merger, closure or government takeover of
banking institutions.
3. Systemic risk refers to the containment of contagion in two or three countries.
4. High-tech crises are limited to balance of payments difficulties.
5. The Asian crisis was an example of a high-tech crisis.
6. A country can seek help from the IMF if it has a balance of payments crisis caused by the
capital account no longer being able to support the current account deficit.
7. Excessive central government deficits were a central cause of the Asian financial crisis.
8. Capital controls should be limited to long-term portfolio investment and foreign direct
investment.
SHORT ANSWER
1. What are some of the danger signs that indicate a country could be vulnerable to an old-
fashioned balance of payments and currency crisis?
2. What is the relationship between asset price bubbles and crises in the form of asset price
deflation?
3. Why is it risky to finance a current account deficit with a capital account surplus that
consists mainly of short-term foreign savings inflows?
4. Why do currencies of countries affected by crises often depreciate farther than is
considered to be warranted?
5. How does a high-tech crisis differ from an old-fashioned crisis?
6. How did the IMF respond to the Asian crisis of 1997?
7. Why did the Asian financial crisis spread to so many highly-regarded countries in the
region?
8. What were the causes of the 2007-2009 global financial crisis?
9. What has been the posture of the IMF towards capital controls?
