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38) List and explain 3 major channels through which developing countries have financed their external
deficits.
39) Economists Eichengreen and Hausmann coined the phrase original sin to describe developing
countries inability to borrow in their own currencies. Where do they believe that this inability comes
from? What are other beliefs on this topic?
40) What are the five major channels, which developing countries use to finance their external deficit?
41) What is Argentina's Convertibility Law of April 1991? Explain.
42) During 1991, Argentina's monetary law had a currency board. Explain and give an example.
22.4 East Asia: Success and Crisis
1) East Asia's crisis was relatively long lived because
A) East Asia's financial institutions had encouraged borrowing all together.
B) East Asia's financial institutions had encouraged heavy borrowing in local currency.
C) East Asia's financial institutions had extended low-interest loans.
D) East Asia's financial institutions had extended high-interest loans.
E) East Asia's financial institutions had encouraged heavy borrowing in dollars.
2) In the early 1960s South Korea was an extremely poor country. However, in 1963, the country began
a remarkable economic ascent. What was a direct cause of this?
A) a shift in strategy that emphasized exports rather than imports
B) an increase in wages
C) an increase in the labor force
D) an increase in the money supply
E) an emphasis on education, leading to a highly productive labor force
3) What weakness in the economic structures of Asian countries contributed to the severe financial crisis
that Asian economies experienced in 1997?
A) Productivity: It increased rapidly and the countries were victims of their own success
B) Banking regulation: Banks were excessively regulated, which reduced profits.
C) Legal Framework: The system dealt unsuccessfully with companies in financial trouble
D) Natural Resources: Countries' lack of natural resources and failure to explore developing industries
accumulated and led to the crisis.
E) High Taxes: High rates of taxation resulted in a reliance on imports.
4) What event started the Asian financial crisis in 1997?
A) Indonesia's inability to pay its debts
B) devaluation of Indonesia's currency
C) Thailand's inability to pay its debts
D) devaluation of Thailand's currency
E) devaluation of Malaysia's currency
5) The problem of moral hazard has lead
A) the governments of many developing countries to guarantee repayment of all loans.
B) to higher growth rates in Latin America.
C) to excessively speculative investment.
D) to both privilege and responsibility of creditors.
E) to stable investments with small and steady expected gains.
6) How would you define a currency board?
A) the process by which non-pegged interest rates are allowed to fluctuate
B) the stockpiling of international reserves by developing countries
C) using the dollar to carry out all domestic transactions, making the domestic currency a currency in
name alone
D) a constraint placed on monetary policy
E) The monetary bases is backed entirely by foreign currency and the central bank holds no domestic
assets.
7) If a developing country institutes a currency board, it relinquishes control over having
A) monetary policy autonomy.
B) exchange rate stability.
C) freedom of capital movement.
D) freedom of labor movement.
E) all of its funds.
8) A currency board can ________ a country's ability to act as a lender of last resort.
A) aggrandize
B) limit
C) enhance
D) offset
E) not affect
9) Explain why East Asian countries have done so well relative to South American countries.
10) Explain the reasons for the economic "miracle" of the East Asian countries between 1960 and 1997.
Is it only because of the common Asian practice of industrial policy and business-government
cooperation?
11) Based on the 1997 Crisis and your own experience, what are the main weaknesses of the East Asian
economies?
12) Describe the Asian financial crisis as it unfolds beginning with the devaluation of the Thai currency
in July 1997, followed by the Malaysian, Indonesian and South Korean crises. As part of your answer,
elaborate on the Malaysian response to the crisis versus its troubled neighbors responses.
13) Describe the crisis in Russia starting from 1989. Explain why?
37
14) Contrast the crisis in Poland and Russia. Explain why the Polish economy has done better?
15) Based on the case study, answer the following question: Can currency boards make fixed exchange
rates credible?
16) Based on the case study, answer the following question: Can currency boards make low-inflation
policies credible?
17) Compare currency board to conventional fixed exchange rate.
18) What do you think about dollarization?
19) Compare the macroeconomic performances in the 1990s of the following countries under the
following exchange-rate regimes: floating exchange rates, Mexico and Brazil; capital control, China and
Malaysia; and currency boards, Estonia and Hong Kong; dollarization, Argentina.
20) How was South Korea able to become one of the East Asian Economic Miracles?
21) Explain the following simple algebra of moral hazard. Suppose a real estate deal, which requires 100
million as investment today will yield 120 million with probability of 10 percent and will lose 20 million
with probability of 90 percent. Suppose that the interest rate is 5 percent per annum.
(a) Without government intervention, would anyone invest in this deal?
(b) Suppose that now the deal is backed by full government guarantee. What will be the outcome? Does
your answer depend on the attitude of the investor toward risk?
(c) Suppose that now government guarantying only 80 percent of the initial investment. What will be
the outcome? Does your answer depend on the attitude of the investor toward risk?
22.5 Lessons of Developing-Country Crises
1) Which of the following economic lessons should we take from developing country crises in Latin
America (and elsewhere)?
A) Only that it is important to choose the right exchange rate regime.
B) Only that banking is of central importance in any government.
C) The order in which reform measures are implemented are irrelevant.
D) It is important to choose the right exchange rate regime and banking is of central importance in any
government.
E) The order in which reform measures are implemented are irrelevant and banking is of central
importance in any government.
2) The term contagion refers to:
A) a government's complete control over it's banking system.
B) a drop in interest rates across industrialized countries.
C) the vulnerability of healthy economies to crises generated by events elsewhere.
D) a directed attack on one market by a foreign market.
E) a side effect of international trade.
3) What are the three main lessons on crisis learned from early developing countries in Latin America?
A) choosing the right exchange rate regime, the importance of contagion and the importance of the
banking system
B) choosing the right real rate, the importance of following exchange rates, and keeping prices high to
make the most profit
C) pegging exchange rates with Euros, keeping labor cost and wages low
D) maintaining money supply, avoiding tariffs, and increasing output
E) maintaining money supply, avoiding inflation, and increasing production
4) What are the main lessons economists learned from the developing country crisis?
5) What is the theory of Second Best?
6) "Developing countries should delay opening the capital account until the domestic financial system is
strong enough to withstand the sometimes violent ebb and flow of world capital." Discuss.
7) "Trade liberalization should precede capital account liberalization." Discuss.
8) What is the domino effect or contagion?
22.6 Reforming the World's Financial "Architecture"
1) Why is China's currency undervalued?
A) The Asian miracle is over.
B) They do not trade with the U.S.
C) They do not allow their currency to appreciate despite large external surpluses.
D) They are stockpiling international reserves to protect against the next East Asian crisis.
E) They are not aware of the real value of their currency.
2) Explain the basic macroeconomic policy trilemma for open economies.
3) Discuss the role of more "transparency" in reducing the risk of financial crisis.
22.7 Understanding Global Capital Flows and the Global Distribution of Income: Is
Geography Destiny?
1) Which theory perhaps best explains the wealth inequalities amongst nations?
A) geographical features
B) institutions of government
C) natural selection
D) factors outside of any human control
E) While some research argues for a certain position, it appears that given current research, A and B are
both plausible explanations.
