n Answers to Textbook Problems
1. The amount of seigniorage governments collect does not grow monotonically with the rate of monetary
expansion. The real revenue from seigniorage equals the money growth rate times the real balances
held by the public. But higher monetary growth leads to higher expected future inflation and (through
2. As discussed in the answer to Problem 1, the real revenue from seigniorage equals the money growth
3. Although Brazil’s inflation rate averaged 147 percent between 1980 and 1985, its seigniorage revenues,
as a percentage of output, were less than half the seigniorage revenues of Sierra Leone, which had an
4. Under interest parity, the nominal interest rate of the country with the crawling peg will exceed the
foreign interest rate by 10 percent since expected currency depreciation (equal to 10 percent) must
5. Capital flight exacerbates debt problems because the government is left holding a greater external
debt itself but may be unable to identify and tax the people who bought the central bank reserves that
6. There may have been less lending available to private firms than to state-owned firms if lenders felt
that state guarantees ensured repayment by state-owned firms. (In some cases, such as that of Chile,
7. By making the economy more open to trade and to trade disruption, liberalization is likely to enhance
a developing country’s ability to borrow abroad. In effect, the penalty for default is increased. In addition,
of course, a higher export level reassures prospective lenders about the country’s ability to service its
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley
Chapter 22 Developing Countries: Growth, Crisis, and Reform 126
8. Cutting investment today will lead to a loss of output tomorrow, so this may be a very short sighted
9. If Argentina dollarizes its economy, it will buy dollars from the United States with goods, services, and
assets. This is, in essence, giving the U.S. Federal Reserve assets for green paper to use as domestic
10. No. Looking simply at countries that are currently industrialized and finding convergence is not a
valid way to test convergence. Countries that are currently well off may have started from a variety
11. The moral hazard comes from the fact that borrowers may borrow in a foreign currency, assuming the
government will keep its promise to hold the exchange rate constant. Rather than hedging against the
risk of exchange rate volatility, these borrowers assume the government will prevent the risk from
12. Liability dollarization means that not only do participants in global financial markets face exchange
rate risk, but many citizens simply participating in local markets face these risks. This means that a
depreciation can have far more widespread effects throughout the economy. If mortgages are in U.S.
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley