7) The Basel Capital Accord does NOT include
A) requiring bank owners to invest into and have some capital ownership in the banks they own.
B) supervision of banks by an oversight board.
C) information disclosure designed to encourage market discipline.
D) denying access to foreign capital by a country that defaults on its international loans.
8) Capital controls for banks
A) reduce the chance of bank failures.
B) have been demonstrated to be effective in preventing financial crises.
C) increase the problem of moral hazard.
D) increase the profitability of banks.
9) Crawling pegs
A) are anti-inflationary because they require monetary discipline.
B) are designed to stabilize real exchange rates when domestic inflation is less than inflation in
other nations.
C) reduce a nation’s vulnerability to financial crises.
D) lead to undervaluation of the domestic currency.
10) In theory, the free movement of capital raises world welfare because
A) it reduces inflation in some countries.
B) it reduces the chance of financial crises.
C) it allows countries to invest more than they could with domestic savings alone.
D) it increases world income equality.
11) Which of the following is NOT a true statement about capital controls?
A) Countries are more able to prevent capital inflows than they were in the 1970s.
B) Capital controls may reduce world welfare by preventing capital from moving to its most
valuable use.
C) It is unclear whether it is best to limit capital inflows, capital outflows, or both.
D) Restricting the movement of capital cannot stop a crisis once it has begun.
12) If a country has a collapsing currency due to large budget deficits financed by monetary
expansion, the cure is to
A) default on sovereign debt and restructure the economy.
B) peg the currency to something different.
C) cut the deficit and raise interest rates.
D) increase the rate of inflation to reduce the real value of government debt.
13) A crisis caused by sudden capital flight
A) is easy to resolve with capital controls.
B) might be lessened if investor confidence can be increased.
C) has a clear and unique equilibrium outcome.
D) can be corrected through currency devaluation.
14) With crises caused by macroeconomic imbalances,
A) it is usually difficult to avoid a recession.
B) austerity programs are not needed.
C) expansionary policies can be used to correct the crisis.
D) the money supply should be increased.
15) It is relatively easy to prescribe a cure for financial crises that result from inconsistent
macroeconomic policies.
16) Austerity programs involving budget cuts and higher interest rates may not be politically
feasible.
17) Economists agree that the free movement of capital is desirable.
18) A temporary limitation on capital flows may help stop a financial crisis that has begun.
19) Implementing short-term capital controls during the Asian crisis caused Malaysia to recover
more slowly than other countries.
20) Financial capital is highly volatile, and technological advances have reinforced this volatility.
21) What agreement has been reached to reduce the moral hazard problem and what does it
require?
22) What are the costs of capital mobility?
23) What are the benefits of capital mobility?
24) International financial flows have changed in meaningful ways, and these changes were
brought to the attention of policy makers by the Asian financial crisis. Describe three changes.
25) If governments promise to bail out the financial system in the event of a crisis, this creates a
moral hazard problem. Describe this problem.
26) Describe the background factors that contributed to the Asian financial crisis.
27) How did the vulnerabilities in Asian economies lead to the Asian financial crisis of 1997-
1998.
28) Explain the pros and cons of a crawling peg.
12.5 Reform of the International Financial Architecture
1) The international institution that serves as a lender of last resort is called the
A) IBRD.
B) WTO.
C) IMF.
D) World Bank.
2) A lender of last resort
A) makes loans when no one else will.
B) makes loans without regard for risk.
C) is a firm that is forced to make loans for its own survival.
D) makes loans to all who require them.
3) All of the following issues have been discussed as options for reforming the international
financial architecture EXCEPT
A) how high an interest rate the lender of last resort should charge when it makes loans.
B) the length of the payback period.
C) the size of the loans.
D) if the lender of last resort (i.e., the IMF) should consult and collaborate with other
international institutions such as the United Nations and the WTO.
4) IMF conditionality may include
A) changes in the fiscal and monetary policies of the country facing the financial crisis.
B) changes in the exchange rate policies.
C) regulating and restructuring the financial sector of the economy of the country in crisis.
D) political regime change.
5) Which of the following is a macroeconomic factor that contributed to the financial crisis in
2007?
A) Global saving and investment imbalances
B) Financial market innovation
C) Deeper levels of integration across financial markets
D) Challenges and failures in financial regulation
6) An issue that proposals for international reform agree on is that
A) the IMF should intervene more in financial crises.
B) there must be a lender of last resort.
C) IMF quotas are currently set at an appropriate level.
D) the Basel capital requirements for banks should be increased.
7) IMF quotas
A) depend on the size of an economy and its strength.
B) strictly limit the amount that a country can borrow.
C) should be increased.
D) are equal to the amount that a country can borrow from the IMF.
8) Which of the following is NOT a true statement about IMF lending?
A) The IMF can usually determine the difference between national crises and those likely to
cause system-wide problems.
B) Limits on borrowing have not kept up with the growth of national economies.
C) The IMF does not have the funds to provide the support that a large economy might need.
D) Proposals for lending expansion suggest greater IMF intervention if it can stop crises faster.
9) When a country borrows from the IMF
A) it receives all the funds from the loan at once.
B) it receives funds in tranches, each dependent on the completion of reform targets.
C) it is free of conditions.
D) it can be any amount that the country requests.
10) With regard to the IMF, “mission creep” means that
A) the IMF was making loans to nonmember countries.
B) the IMF had expanded its lending to an inappropriate level.
C) the IMF had taken on extended responsibilities that it should be authorized to perform.
D) the IMF had taken on responsibilities for which it was not suited.
11) The financial crisis that started in 2007 was unusual because it started in an advanced
economy, the United States.
12) The two main types of economies generating current account surpluses from 2000 to 2007
were Asian exporters and oil producers.
13) Some countries have borrowed as much as 500 percent of their IMF quotas.
14) One criticism of IMF conditionality is that it is not sufficiently contractionary.
15) Before the 1970s, IMF conditionality focused primarily on correcting the immediate source
of the problem.
16) How were macroeconomic balances different in the period from 2000 to 2007 from past
financial crises?
17) How did the global supply of savings impact the formation of the housing bubble?
18) What three critical factors or preconditions turned a national, U.S. problem into a global
financial crisis in 2007? Be sure to address the role securitization played and how it affected
regulators.
19) Explain how IMF conditionality has changed over time.
20) Explain the meaning of IMF conditionality and why it has been criticized.