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17) Explain the extensive economic role of government within a developing country.
22.3 Developing-Country Borrowing and Debt
1) In developing economies, national saving is often ________ relative to developed economies
A) high
B) the same
C) hard to tell
D) low
E) low for the very poor countries and high for the more developed
2) The Convertibility Law of April 1991 in Argentina
A) pegged the Argentinean currency to the US dollar at a ratio of one to one.
B) pegged the Argentinean currency to the US dollar at a ratio of one to two.
C) pegged the Argentinean currency to the US dollar at a ratio of one to 0.5.
D) represents an era of floating exchange rate in Argentina.
E) pegged the Argentinean currency to the British pound at a ratio of one to one.
3) The $50 billion emergency loan orchestrated by the U.S. Treasury and the IMF to Mexico in 1994
A) was a disastrous policy for Mexico.
B) avoided a disaster to the Mexican economy.
C) did not affect Mexico in the short run.
D) did not affect Mexico in the long run.
E) was ineffective both in the short and long runs.
4) Brazil's 1999 crisis was relatively short lived because
A) Brazil's financial institutions had avoided borrowing all together.
B) Brazil's financial institutions had avoided heavy borrowing in local currency.
C) Brazil's financial institutions had avoided heavy borrowing in dollars.
D) Brazil's financial institutions had extended low-interest loans.
E) Brazil's financial institutions had extended high-interest loans.
5) What does it mean for a loan to be in default?
A) when the borrower of the a loan fails to repay on schedule according to a loan contract, without the
agreement of the lender
B) when the borrower of a loan fails to repay on schedule according to a loan contract, with the
agreement of the lender
C) when the lender of a loan fails to supplies the full amount of a loan to the borrower
D) when the lender of a loan supplies the full amount of a loan to a borrower without any promise of
being repaid
E) when the lender of a loan fails to offer the promised sum
6) A trend that has been reinforced by many developing countries is privatization. Privatization refers to:
A) purchasing large companies and turning them into state-owned enterprises.
B) investing government money in large, privately-owned companies.
C) exchanging bonds for shares in state-owned enterprises.
D) selling large state-owned enterprises to private owners in the financial sector.
E) selling large state-owned enterprises to private owners in key areas such as electricity,
telecommunications, or petroleum.
7) A considerable advantage that richer countries have over poorer ones is exemplified by the fact that:
A) richer countries do not have to denominate their foreign debts in their own currencies.
B) richer countries have the ability to denominate their foreign debts in foreign currencies.
C) when demand falls for a poorer country's goods, this leads to a significant wealth transfer from
foreigners to the poorer country, a kind of international insurance payment.
D) richer countries have the ability to denominate their foreign debts in their own currencies.
E) richer countries can extract trade advantages by using military power.
8) In 1981-1983, the world economy suffered a steep recession. Naturally, the fall in industrial countries'
aggregate demand had a direct negative impact on the developing countries. What other mechanism was
an even more important contributor to this event?
A) the immediate steep inflation that followed the recession.
B) the dollar's sharp depreciation in the foreign exchange market
C) the increase in primary commodity prices, increasing terms of trade in many poor countries
D) the collapse in primary commodity prices and the immediate, large rise in the interest burden that
debtors had to pay
E) the influx of defaulting credit
9) With which country did the Debt Crisis of the early 1980s begin?
A) France
B) Mexico
C) Argentina
D) Japan
E) Germany
10) In 1991, Argentina established a radical institutional reform after experiencing a decade marked by
financial instability. This program was called the new Convertibility Law. What did this law do?
A) made Argentina's currency fully convertible into Eurocurrency at a fixed rate
B) required that the monetary base be backed completely by U.S. dollars
C) placed limits on exports of commodities
D) made Argentina's currency fully convertible into U.S. dollars at a fixed rate and required that the
monetary base be backed completely by gold or foreign currency.
E) restricted risky international trade activity.
11) In the instances where a loan has been issued under certain terms and has to be repaid, what happens
when the borrower does not uphold these stipulations?
A) call
B) option
C) payment
D) default
E) fraud
12) There are many ways developing countries finance their external deficits except
A) bank finance.
B) portfolio investment in ownership of firms.
C) bond finance.
D) official lending.
E) foreign exchange rates.
13) During the time period of 1981-1983 what dramatic world issue happened?
A) political instability, insecure property rights
B) stock market crashed
C) world wide hyperinflation
D) the collapse of the U.S. mortgages market
E) A world economic recession caused developing countries to not be able to make payments on foreign
loans, in turn causing a universal default.
14) The term Original Sin by two economists Barry Eichengreen and Ricardo Hausmann is used to
describe what?
A) low-income economy
B) developing countries' inability to borrow in their own currencies
C) a sin that is part of the Ten Commandments.
D) borrows not able to receive loans
E) not diversifying economies portfolios
15) How would you define exchange control?
A) The government allocates foreign exchange through decree rather than through the market.
B) a country NOT pegging its exchange rate
C) a country pegging its exchange rate
D) a country buying up excess current account so that CA=0
E) a country restricting all foreign exchange
16) As of 2010, how large is the debt of developing countries to the rest of the world?
A) $350 million
B) $350 billion
C) $5 trillion
D) $35 trillion
E) $3.5 trillion
17) Which of the following is a reason that developing countries are running large surpluses?
A) They are required to do so by IMF.
B) They have defaulted on international loans.
C) They have pegged exchange rates and thus the growth of exports must drive surplus up.
D) They have a strong desire to accumulate international reserves to protect against a sudden stop of
capital inflows.
E) They don't know how to manage their surpluses.
18) Which Latin American country defaulted on loans in 2005 and paid off their creditors at only 1/3
value?
A) Argentina
B) Brazil
C) Chile
D) Colombia
E) Mexico
19) When a government defaults on its obligations, the event is called a
A) sovereign default.
B) magisterial default.
C) private default.
D) sudden stop default.
E) national default.
20) The following are all the forms of debt finance:
A) bond, bank, and official finance.
B) bond and bank finance.
C) bond, bank, and portfolio finance.
D) foreign direct and portfolio investment.
E) direct investment, stock, and dividends
21) Why may equity finance be preferred to debt finance for developing countries?
A) A fall in domestic income automatically reduces the earnings of foreign shareholders without
violating any loan agreement.
B) There are laws insuring against any default with equity finance.
C) The risk is shared between debtor and creditor with debt finance.
D) The tax structure leaves equity finance unconstrained.
E) Repayments are unaffected by falls in real income.
22) Since foreign credit dries up in crises when it is most needed, developing countries can protect
themselves from default by
A) cutting off imports of goods.
B) allowing the exchange rate to float.
C) using equity finance only.
D) accumulating high levels of international reserves.
E) avoiding the international capital market.
23) What factors lie behind capital inflows to the developing world?
24) Describe alternative forms of capital inflow to finance external deficits and explain why these
methods were used in different times?
25) Explain why the distinction between debt and equity finance is useful in analyzing the response of
developing countries to unforeseen events such as recession or terms of trade change?
26) Explain why despite enormous natural resources, much of Latin America's population remains in
poverty and the region has been repeatedly experiencing financial crises.
27) Explain why a exchange rate-based stabilization plan may result in a real appreciation?
28) Write an essay on the importance of a sound banking system in developing countries.
29) Explain why Argentina, one of the world's richest countries at the start of the twentieth century, has
become progressively poorer relative to the industrial countries. [An alternative question: What explains
Argentina's regress from riches to rags?]
30) The 1980s are considered as the "lost decade" of Latin American growth. Explain why?
31) Evaluate the Argentinean Convertibility Law of April, 1991.
32) Explain how Brazil was able to reduce the rate of inflation from 2,669 percent in 1994 to less than
10 percent in 1997?
33) Some economists claim that the Chilean experience during the 1990s was much more successful
than its Latin American neighbors. Evaluate the Chilean policies during that decade.
34) The main reason for the crisis in Argentina in 2001 and 2002, as to do with exchange rate policy,
i.e., the continued peg of the exchange rate to the dollar. Discuss.
35) Should the IMF be abolished? Discuss.
36) What do you think about international "Chapter 11"?
37) "Sharp contractions in a country's output and employment invariably result from a crisis in which
the country suddenly loses access to all foreign sources of funds." Explain how the current account
identity necessitates these contractions.
