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Chapter 18 Policies and Prospects for Global Economic Growth 977
33) Explain the meaning of the term dead capital
,
and discuss why its existence retards economic
growth.
34) Define what dead capital is and why economists are concerned with its existence.
35) How have government inefficiencies contributed to the creation of dead capital in the world s
developing nations?
18.3 Private International Financial Flows as a Source of Global Growth
1) Foreign direct investment is defined as
A) the acquisition of more than 10 percent of the shares of ownership in a company in another
nation.
B) funds allocated into a foreign stock market that represent an ownership share of firms less
than 5 percent.
C) purchasing both capital equipment and government bonds abroad.
D) purchasing government bonds.
2) The acquisition of more than 10 percent of the shares of ownership in a company in another
nation is called
A) portfolio investment. B) gross private international investment.
C) foreign direct investment. D) majority investment.
3) An example of foreign direct investment is the
A) domestic acquisition of less than 10 percent of a foreign company.
B) foreign purchase of more than 10 percent of stock in a domestic company.
C) purchase of livestock from abroad.
D) sale of insurance in a foreign nation.
4) Most international investment finance today comes from
A) portfolio and foreign direct investment. B) the sale of antiques.
C) government financing. D) tax collections.
5) Portfolio investment means buying
A) less than 10 percent ownership in a foreign company.
B) more than 50 percent ownership in a foreign company.
C) a life insurance policy when traveling abroad.
D) livestock.
6) The three sources of private direct investment in developing nations are
A)
b
ank loans, government loans, and Eurobond issues.
B)
b
ank loans, portfolio investments, and foreign direct investments.
C) portfolio loans, IMF loans, and government loans.
D) foreign direct investment, government loans, and Eurobond issues.
7) Which of the following is NOT one of the three primary sources of private investment funds
flowing into developing nations?
A) Bank loans B) Foreign direct investment
C) World Bank and IMF loans D) Portfolio investment
8) The primary motivation for private foreign investment in developing nations is
A) to improve the standard of living for workers.
B) to do research in countries with fewer social regulations.
C) to eradicate poverty.
D) the potential for high rates of return.
9) The World Bank has extended a loan to Country X to build a new toll road and counts on the
repayment of the loan from the collected tolls. After the funds have been transferred to the
country, the government decides to spend the money to build a new presidential palace. This is
an example of
A) hostile selection. B) adverse selection.
C) moral hazard. D) government risk.
10) An international financial crisis is most often caused by
A) a nation s central bank lowering domestic interest rates.
B) a government refusing to pay its dues to the United Nations.
C) foreign investments and loans being withdrawn from a nation.
D) a drop in the value of the U.S. dollar.
11) Which of the following is NOT a method for promoting global economic growth?
A) Reliance on private markets to direct capital goods toward their best use.
B) Count on the world s governments to develop policies that promote economic growth in
developing nations.
C) Encourage population growth so that developing nations labor supply increases.
D) Market based approach.
12) All of the following are sources of funding for capital goods in developing countries EXCEPT
A) loans from banks. B) foreign direct investment.
C) taxation. D) portfolio investment.
13) Portfolio investment is defined as
A) the purchase of less than 40 percent of the shares of ownership in a company in another
country.
B) the acquisition of more than 40 percent of the shares of ownership in a company in another
country.
C) the diversification of purchasing shares in many companies in one country so that risk is
kept to a minimum.
D) none of the above
14) Foreign direct investment is
A) the purchase of less than 10 percent of the shares of ownership in a company in another
country.
B) the acquisition of more than 10 percent of the shares of ownership in a company in another
country.
C) the diversification of purchasing shares in many companies in one country so that risk is
kept to a minimum.
D) the diversification of purchasing shares in many companies in different countries so that
risk is kept to a minimum.
15) The acquisition of more than 10 percent of the shares of ownership in a company in another
country is known as
A) net exports. B) net national investment.
C) portfolio investment D) none of the above
16) The purchase of less than 10 percent of the shares of ownership in a company in another country
is known as
A) a hostile takeover.
B) an ineffective method for encouraging economic growth.
C) foreign direct investment.
D) portfolio investment.
17) Why are international investors who have invested in developing nations favoring foreign
direct investment and portfolio investment over loans?
A) The process of making loans is usually more difficult for investors to do than foreign direct
and portfolio investment.
B) The interest rate charged on the loans is usually lower than what can be earned in the U.S.
C) It is illegal for banks to make loans to foreign firms.
D) Investors have an aversion to owning dead capital and want to make sure that the
resources they own do not become dead capital.
18) When investment occurs in developing nations
A) investors hope to gain significant returns on their investment and residents gain higher
rates of economic growth.
B) higher rates of economic growth are usually not achieved.
C) significant levels of pollution usually occur.
D) government politicians usually benefit from the illegal payments made to secure the
investment.
19) Adverse selection is a barrier to financing global growth because
A) firms sometimes have trouble determining whether they need funds or not.
B) if investors have trouble identifying high risk firms they may be unwilling to lend funds
to creditworthy firms.
C) there is the possibility that the funds are used for riskier behavior than the lender agreed
to.
D) of the differences between financing using loans, portfolio investment and foreign direct
investment.
20) Moral hazard is a barrier to financing global growth because
A) firms sometimes have trouble determining whether they need funds or not.
B) if investors have trouble identifying high risk firms they may be unwilling to give money
to creditworthy firms.
C) there is the possibility that the funds are used for riskier behavior than the lender agreed
to.
D) of the differences between financing using loans, portfolio investment and foreign direct
investment.
21) An international financial crisis is
A) when at least one developing country defaults on its loans.
B) when a major bank defaults.
C) when a world leader is deposed from office.
D) the rapid withdrawal of foreign investments and loans from a nation.
22) A rapid withdrawal of foreign investments and loans from a nation is
A) dead capital. B) an international financial crisis.
C) foreign direct capital. D) portfolio investment.
23) When an international financial crisis occurs
A) financial lenders protect their investments by pouring money into the ailing country.
B) investors sell off bonds and restrict loans as a mechanism to help the country recover.
C) financial flows can slow to a trickle, influencing economic growth.
D) there are no serious financial effects that last more than a few months.
24) International investors are more likely to invest in countries
A) where it is relatively easier to establish property rights to capital goods.
B) where there is a significant amount of dead capital.
C) which have a high amount of government inefficiency.
D) where there are barriers to the ownership of capital goods.
25) Foreign direct investment refers to
A) the acquisition of more than 10 percent of the shares of ownership in a company in another
nation.
B) the acquisition of less than 10 percent of the shares of ownership in a company in another
nation.
C) the granting of a loan to a company located in a foreign country.
D) a direct monetary grant to a foreign company or government.
26) Foreign direct investment implies that the investor obtains more than a ________ share in a
foreign company s ownership.
A) 30 percent B) 40 percent
C) 50 percent D) none of the above
27) The purchase of less than 10 percent of the shares of ownership in a foreign company is referred
to as a
A) portfolio investment. B) foreign direct investment.
C) foreign indirect investment. D) negligible investment.
28) Portfolio investment means the
A) purchase of less than 20 percent of the shares of ownership in a company in another
country.
B) purchase of less than 50 percent of the shares of ownership in a company in another
country.
C) purchase of less than 80 percent of the shares of ownership in a company in another
country.
D) purchase of less than 10 percent of the shares of ownership in a company in another
country.
29) The acquisition of more than 10 percent of the outstanding shares in a company in another
country is
A) foreign direct investment. B) foreign direct acquisition.
C) portfolio investment. D) portfolio acquisition.
30) For foreign direct investment to occur, the purchase has to be more than
A) 2 percent but less than 5 percent of shares in a business located abroad.
B) 5 percent but less than 10 percent of shares in a business located abroad.
C) 8 percent but less than 10 percent of shares in a business located abroad.
D) 10 percent of shares in a business located abroad.
31) If you invest in a foreign company by buying 8 percent of its shares of stock, you have engaged
in
A) portfolio investment. B) moral hazard.
C) foreign direct investment. D) adverse selection.
32) If you invest in a foreign company by buying 28 percent of its shares of stock, you have engaged
in
A) portfolio investment. B) moral hazard.
C) foreign direct investment. D) adverse selection.
33) Portfolio investment and foreign direct investment are methods through which
A) ownership in assets are acquired in countries other than one s home country.
B) U.S. residents invest funds in companies that export goods.
C) U.S. residents invest funds in companies that import goods.
D) short term investments are converted to long term ones.
34) The possibility for recipients of funds in foreign countries to engage in riskier behavior after
receiving financing is called
A) inequitable financing. B) moral hazard.
C) adverse selection. D) asymmetric information.
35) The adverse selection problem in international investment means
A) that those seeking funds for the riskiest projects are those most actively seeking the funds.
B) that the recipients of the funds may use the funds for other than the approved projects.
C) that government officials may demand higher than the usual amount of bribes.
D) those in the highest levels of government are the most dishonest.
36) An example of the moral hazard problem in international investment would be that
A) those seeking funds for the riskiest projects are amongst those most actively seeking the
funds.
B) the recipients of the funds may use the funds for riskier projects than the approved project.
C) government officials may demand higher than the usual amount of bribes.
D) those seeking the funds are dishonest.
37) The purchase of more than ten percent of the shares of a foreign company is known as a(n)
A) foreign direct investment.
B) International Monetary Fund (IMF) investment.
C) portfolio investment.
D) World Bank investment.
38) Investors are often willing to take the risks associated with investing in capital goods in
developing nations because developing nations
A) always insure the investments.
B) insure a small return on investment.
C) get the International Monetary Fund (IMF) to back investments through a series of loan
guarantees.
D) have a large portion of the world s unutilized or underutilized resources and hence profit
potential.
39) When lenders are unable to get good information about the worthiness of a project the lender
has the problem of
A) adverse selection. B) adverse hazard.
C) moral hazard. D) moral selection.
40) The potential for recipients of a loan to engage in riskier behavior after receiving the financing is
called
A) adverse selection. B) moral hazard.
C) moral selection. D) adverse hazard.
41) If high level of corruption in a country deters foreign investment in worthy projects, this is
known as
A) portfolio investment. B) moral hazard.
C) foreign direct investment. D) adverse selection.
42) When a foreign company engages in riskier behavior after it has received international
investment funds, it is known as
A) portfolio investment. B) moral hazard.
C) foreign direct investment. D) adverse selection.
43) If there is a major problem in a country that leads to the rapid withdrawal of foreign investment,
this is known as
A) moral hazard. B) adverse selection crisis.
C) portfolio investment crisis. D) international financial crisis.
44) Recently the largest form of international investment funds for developing countries has been
A)
b
ank loans. B) portfolio investments.
C) foreign direct investments. D) World Bank loans.
45) Two types of asymmetric information that create problems for international investment are
A) adverse hazard and moral selection. B) adverse hazard and moral hazard.
C) adverse selection and moral hazard. D) adverse selection and moral selection.
46) The rapid withdrawal of foreign investment funds from a nation creates
A) an international financial crisis. B) an international funding crisis.
C) an international fiscal crisis. D) an international fiduciary crisis.
47) Adverse selection and moral hazard problems arise when there is
A) complete information B) asymmetric information.
C) too much information. D) symmetric information.
48) To the extent that there are concerns about moral hazard and adverse selection in a country,
A) economic growth will be hindered.
B) there will be more portfolio investment.
C) there will be more foreign direct investment.
D) it will be easier to arrange financing for new development projects.
49) An international financial crisis can be precipitated when
A) the rate of money supply growth is not the same in all nations.
B) many international investors look at the behavior of a few large investors to determine
when funds should be withdrawn from a particular country.
C) newly acquired political freedom in a country leads some interest groups to form a
coalition limiting competition.
D) there is an increase in portfolio investment.
50) A country experiencing an international financial crisis will likely
A) see an increase in portfolio investment.
B) see an increase in foreign direct investment.
C) encounter difficulty in sustaining its economic growth rate.
D)
b
e able to maintain growth and prosperity in its domestic economy, but its export sector
will suffer.
51) All of the following are barriers to international investment EXCEPT
A) symmetric information. B) adverse selection.
C) incomplete information. D) moral hazard.
52) The following are obstacles to international investment EXCEPT
A) population growth. B) asymmetric information.
C) adverse selection. D) moral hazard.
53) Discuss the rationales for foreign financing of investment in developing actions and explain
how developing countries benefit from international capital investment.
54) What are the sources of private investments in foreign nations?
990 Miller Economics Today, 16th Edition
18.4 International Institutions and Policies for Global Growth
1) Which of the following is true about the World Bank?
A) It is a multinational agency that specializes in development loans.
B) It is a U.S. agency that specializes in development loans.
C) It is a U.N. sponsored agency that specializes in development loans.
D) It is made up of all central banks in the world.
2) The multinational agency that specializes in making loans to developing nations in an effort to
promote long term development and growth is the
A) International Monetary Fund. B) World Trade Organization.
C) United Nations Development Program. D) World Bank.
3) Approximately what percentage of the World Bank s loans go to developing nations in the East
Asia/Pacific and South Asia regions combined?
A) 10% B) 40% C) 70% D) 100%
4) The World Bank makes loans primarily to
A) nations without free markets, such as North Korea.
B) developing nations.
C) the United States.
D) highly developed nations.
5) The multinational organization that aims to promote world economic growth by fostering
financial stability is the
A) International Monetary Fund. B) World Trade Organization.
C) United Nations. D) World Bank.
6) A nation s account with the IMF is called its
A) deposit surplus. B) current account.
C) quota subscription. D) capital account.
7) The World Bank was formed in
A) 1930. B) 1960. C) 1945. D) 1918.
8) The World Bank is
A) made up of the central banks of the leading industrial nations of the world.
B) made up of five separate institutions.
C) the Bank of the United Nations.
D) the European Union.
9) The International Monetary Fund (IMF) is an international organization designed to
A) promote world economic growth by means of greater financial stability.
B) promote world economic growth via loans to developed nations.
C) circulate a single currency worldwide.
D) act as the world s central bank.
10) The international unit of accounting used by the International Monetary Fund (IMF) is called
A) the Eurodollar. B) the IMF dollar.
C) the quota subscription. D) special drawing rights.
11) The largest quota subscriber of the International Monetary Fund (IMF) is
A)
J
apan. B) Germany.
C) the United States. D) China.
12) The International Monetary Fund (IMF) was created to achieve each of the following goals
EXCEPT
A) to supervise exchange rate practices of member countries.
B) to help finance economic development in poor countries.
C) to encourage convertibility of member countries currencies.
D) to lend funds to countries having difficulties meeting their international payment
obligations.
13) Which of the following statements about the International Monetary Fund (IMF) is TRUE?
A) The IMF was created to finance long term economic development projects in poor
countries.
B) The IMF was created to reduce tariff barriers between nations.
C) The IMF functions as a central bank that conducts monetary policy for the world economy.
D) The IMF obtains funds from quota subscriptions charged to member countries.
14) Each nation s International Monetary Fund (IMF) quota subscription is based on
A) its national income. B) its share in world trade.
C) its public debt. D) its trade surplus.
