80) One drawback of the currency board system is
A) the ease with which governments can set and manipulate interest rates acts as a limitation.
B) higher domestic inflation rates compared to the inflation rate in the country to which the
currency is pegged can make the currency noncompetitive.
C) the currency board can issue additional domestic notes and coins even when there are no
foreign exchange reserves to back it.
D) the system is a true fixed exchange rate regime, because the domestic currency is fixed against
other currencies.
E) the system lacks commitment to convert domestic currency on demand into another currency.
81) Why were Great Britain and the United States able to finance their deficits by borrowing
private money since the early 1970s?
A) rapid development of global capital markets
B) shortage of International Monetary Fund grants available for disbursal
C) high interest rate charged by the International Monetary Fund
D) establishment of currency boards in these countries
E) decline of the Bretton Woods system
82) One implication of a currency crisis is that
A) it occurs due to a sharp appreciation in the value of a currency.
B) it forces authorities to block large volumes of international currency reserves.
C) a country in currency crisis is not eligible for loans from the International Monetary Fund.
D) it results in the government sharply increasing interest rates to defend the prevailing exchange
rate.
E) a country in currency crisis faces sharp decreases in stock and property prices.
83) What is a result of a banking crisis?
A) It leads to individuals and companies withdrawing their deposits from banks.
B) It results in a sharp appreciation in the value of the currency.
C) It creates an uptick in domestic borrowing.
D) It leads to price deflation.
E) It results in low government deficits.
84) Most of the International Monetary Fund’s loan activities since the mid-1970s have been
targeted toward developing nations typically because
A) developed nations are not willing to enact certain macroeconomic policies in return for money.
B) developing nations are more than twice as likely to experience financial crises as developed
nations.
C) it does not have enough funds to lend to large and developed countries.
D) only developing nations are allowed to be its beneficiaries.
E) of relatively slow economic growth in the developed countries of Europe.
85) According to the agreement reached between the International Monetary Fund and the South
Korean government in 1997, in return for funding, the South Koreans were required to
A) adopt communist ideologies.
B) reduce their imports by enforcing restrictive import licensing.
C) open their economy to greater foreign competition.
D) oppose the ideologies of the World Trade Organization.
E) engage in competitive currency devaluation.
86) All International Monetary Fund (IMF) loan packages come with conditions attached which
limits
A) trade liberalization.
B) elimination of restrictive import licensing.
C) excessive government spending and debt.
D) privatization of state-owned assets.
E) deregulation of the economy to increase competition.
87) In the context of the 1997 Asian crisis, how did the International Monetary Fund’s
“one-size-fits-all” approach to macroeconomic policy affect South Korea?
A) It led to a decrease in the interest rates of short-term loans.
B) It made it difficult for companies to service their excessive short-term debt obligations.
C) It decreased the probability of widespread corporate defaults.
D) South Korea failed to recover from its financial crises.
E) South Korea was forced to increase restrictions on foreign direct investment.
88) All the major appliance manufacturers within a country realize the industry is in trouble. They
decide to cut off ties with all foreign imports and focus only on domestic suppliers as a way to cut
costs. They agree that if this doesn’t work out, it really doesn’t matter because the government will
bail out the industry. This is an example of
A) systemic risk.
B) a moral hazard.
C) an ethical dilemma.
D) tragedy of the commons.
E) risk compensation.
89) During the 1990s, some Western banks were far too willing to lend large amounts to
companies that were already overleveraged. The banks knew the government would save them if
these loans were foreclosed. What type of activity does this represent?
A) cognitive dissonance
B) conflict of interest
C) systemic risk
D) moral hazard
E) tragedy of the commons
90) The International Monetary Fund has been criticized for
A) its lack of a “one-size-fits-all” approach to macroeconomic policy.
B) encouraging moral hazard among banks.
C) its lack of power and authority.
D) using external experts to gain knowledge about a country.
E) keeping its operations open to outside scrutiny.
91) According to the critics of the International Monetary Fund (IMF), how should moral hazards
exhibited by banks be resolved?
A) The IMF should use a “one-size-fits-all” approach to macroeconomic policy.
B) The IMF should establish a mechanism for accountability.
C) The IMF should free all banks from the obligation of financial reporting.
D) The banks should be forced to pay the price for their rash lending policies.
E) The IMF should bail out the banks whose loans gave rise to financial crises.
92) According to the noted economist Jeffrey Sachs, the International Monetary Fund should
A) not be accountable to anyone as it is a powerful institution.
B) bail out banks that have rash lending policies.
C) have a “one-size-fits-all” approach to macroeconomic policy.
D) keep its operations open to greater outside scrutiny.
E) lend only to countries with safe credit ratings.
93) Which institution helped contain the global financial crisis of 2008–2009 by rescuing Iceland,
Ireland, Greece, and Latvia?
A) GATT
B) United Nations
C) World Bank
D) IMF
E) WTO
94) Which situation poses the greatest problem for international businesses in the long run?
A) using exchange rate instruments like the forward market and swaps
B) volatility of the global exchange rate regime
C) anti-inflationary monetary policies
D) maintaining strategic flexibility by dispersing production to different locations
E) a policy of reduction in government spending
95) How does increased foreign exchange risk affect business?
A) This creates more opportunities for a business.
B) This has no effect on a business.
C) This has a negative effect on a business.
D) This makes it easier for a business to obtain customers.
E) This lowers the cost of doing business.
96) SportLife Drinks, a multinational soft drink brand, has been facing huge economic losses due
to unpredictable exchange rate movements. In order to gain considerable immunity against such
currency fluctuations, SportLife Drinks should
A) pursue strategies that increase its economic exposure.
B) avoid using instruments like forward market and swaps.
C) disperse production to different locations around the globe.
D) avoid contracting out manufacturing.
E) restrict its low-value-added manufacturing to one location.
97) It is most appropriate for a firm to contract out manufacturing when
A) individual manufacturers have few firm-specific skills that contribute to the value of their
product.
B) the value of the host country currency is expected to appreciate.
C) supplier switching costs are correspondingly high.
D) firm-specific technology and expertise add significant value to the product.
E) the currency used for pricing a product is anticipated to stay weak in the long run.