Deck 21: International Lending and Financial Crises

Question 1

Beginning in about 1990, lending to and investing in developing countries began to increase. One explanation for this is that:

A)interest rates in the United States began to rise.
B)the governments in the developing countries began to encourage import-substituting manufacturing.
C)changes in IMF policies toward exchange rate risk.
D)deregulation and privatization in the developing countries opened up profitable new investment opportunities.

Answer 1

D

Question 2

From the early 1980s through today, the largest net borrower in the world has been:

A)the United States.
B)the United Arab Emirates.
C)China.
D)Japan.

Answer 2

A

Question 3

If international financial transactions are prohibited:

A)lenders in the richer countries will probably earn high rates of return.
B)borrowers in poorer countries will probably pay low interest rates.
C)lenders in the richer countries will probably earn low rates of return.
D)exchange rates cannot remain fixed.

Answer 3

C

Question 4

The Brady Plan helped to end:

A)the 1997 currency crisis.
B)the 1982 debt crisis.
C)the 1991 global recession.
D)the European debt crisis.

Question 5

Official lending and investing are usually done by:

A)multinational enterprises.
B)private individuals when purchasing government bonds.
C)governments or multilateral institutions.
D)commercial banks.

Question 6

The 1982 debt crisis was caused in part by:

A)falling world interest rates.
B)a rapid increase in cheap imports from developing countries.
C)falling developing country exports and high real interest rates.
D)rising commodity prices.

Question 7

Which of the following is a major benefit of international lending?

A)It allows improvements in the current account balances of the borrowing nations.
B)It requires reducing restrictive trade practices in the lending and the borrowing countries.
C)It allows countries to reduce taxes in the domestic market.
D)It allows lenders and investors to diversify their investments more broadly.

Question 8

The large net international lender since 1980 has been:

A)the United States.
B)the United Kingdom.
C)Russia.
D)Japan.

Question 9

From pre-World War II years to the early 1980s, which of the following countries was the principal lender in the world?

A)The United States
B)The United Kingdom
C)Germany
D)Japan

Question 10

Which of the following contributed to the Asian Crisis?

A)The strong capital inflows from the industrialized countries mainly provided financing for large fiscal deficits in the South East Asian countries.
B)The currencies of most of the Asian countries were substantially undervalued.
C)The Hong Kong dollar was allowed to depreciate.
D)The local borrowers in the Asian countries scrambled to sell local currency to establish hedges against exchange rate risks.

Question 11

Since 2000 developing countries received large net capital inflows in the form of:

A)foreign direct investments.
B)short-term lending.
C)official loans from foreign governments and the IMF.
D)debt service.

Question 12

Which of the following crises involved the use of "tesobonos"?

A)The 1982 debt crisis
B)The Asian currency crisis in 1997
C)The 2007 global financial crisis
D)The Mexican crisis in 1994

Question 13

_____ refers to purchasing shares in a foreign enterprise largely owned and controlled by the investor.

A)Official capital flows
B)Direct investment
C)Short-term lending
D)Portfolio investment

Question 14

Which of the following resulted in a surge in international lending to developing countries in the mid-1970s to early 1980s?

A)Oil-exporting countries had a low short-run propensity to save out of their extra income.
B)The real interest rates in the industrial countries were significantly high.
C)The governments of the developing countries encouraged foreign direct investment (FDI) and foreign institutional investments (FII).
D)Lending to developing countries gained momentum through "herding" behavior.

Question 15

International financial freedom:

A)maximizes world product.
B)hurts poor countries.
C)hurts wealthy countries.
D)helps all citizens in both poor and wealthy countries.

Question 16

Borrowers in wealthy countries that have few domestic investment opportunities would gain if:

A)all restrictions on capital flows between nations were removed.
B)capital flows between nations are prohibited.
C)factor-price-equalization takes place.
D)governments allowed free markets to determine interest rates.

Question 17

In August 1982, which of the following countries declared that it was unable to service its foreign debt and thereby triggered a long-lasting crisis in international lending?

A)The United Kingdom
B)The United States
C)Thailand
D)Mexico

Question 18

By restricting foreign lending, a country with sufficient market power can:

A)increase world production.
B)lower world interest rates.
C)bid up the rate that domestic lenders get after taxes.
D)bid up the rate that foreign borrowers have to pay.

Question 19

The 1997 Asian crisis first struck in:

A)Thailand.
B)Hong Kong.
C)Singapore.
D)South Korea.

Question 20

Assume that investment opportunities are less in high-wealth countries and more in low-wealth countries. Now, if all barriers to international financial transactions are removed, borrowers in _____ countries lose and lenders in _____ countries gain.

A)high-wealth; low-wealth
B)low-wealth; high-wealth
C)high-wealth; high-wealth
D)low-wealth; low-wealth

Question 21

Which is NOT a potential cost faced by nations that choose against repaying their debts?

A)A loss of future creditworthiness
B)A loss of foreign assets
C)Moral hazard
D)Domestic recession

Question 22

One of the usual policy changes included in an IMF prescription is:

A)temporary cartels in domestic product markets.
B)changes in fiscal policy to reduce the government budget deficit.
C)increased barriers to imports.
D)decreased regulation of public sector enterprises.

Question 23

Which of the following is NOT associated with debt restructuring?

A)Capital controls
B)Debt rescheduling
C)Debt reduction
D)Collective action clauses

Question 24

Which of the following can be a possible effect on a borrowing nation if the real interest rate on the loans rises?

A)The fixed costs of nonrepayment can increase
B)There will be a higher incentive to default
C)a default imposes a smaller penalty on the borrower
D)A default imposes a bigger penalty on the borrower

Question 25

Which of the following explains the spread of financial crises from one country to another?

A)Global contagion
B)Moral hazard
C)Butterfly trade
D)The Doppler effect

Question 26

The currency depreciations and the recessions during the Asian crisis did lead to improvement in the Asian countries' current account balances, largely through:

A)increases in exports.
B)decreases in capital outflows.
C)decreases in imports.
D)increases in the rate of inflation in these countries.

Question 27

Which of the following countries was refused a second installment of its loan from the IMF in late 1990s for not meeting the conditions for fiscal reform as determined by the IMF?

A)The United States
B)Thailand
C)Mexico
D)Russia

Question 28

Which of the following is a plausible effect of a rescue package provided to a country?

A)It can stimulate the outflow of capital from the country.
B)The rescue package can limit any contagion effects.
C)It immediately restarts new private foreign lending to the country.
D)It can help avoid the problem of moral hazard.

Question 29

A moral hazard arises when:

A)risk averse individuals do not purchase insurance.
B)high risk individuals are unable to find insurance.
C)insurers are unable to fully pay legitimate claims.
D)insurance leads the insured to be less careful.

Question 30

Most long term external debt of developing countries is:

A)private debt owed by individual citizens.
B)rescheduled debt.
C)debt overhang.
D)sovereign debt.

Question 31

Which of the following identifies a major force that can intensify an international financial crisis?

A)A persistent negative output gap
B)Current account convertibility
C)Dispute settlement procedures at the IMF
D)Global contagion

Question 32

Which of the following countries reported an inflation rate of over 2,000 percent per year during the late 1980s?

A)Mexico
B)Russia
C)Turkey
D)Argentina

Question 33

The low-rate loans that are to be repaid within 10 years seem to be a form of _____ as they shift the IMF to a role as a development organization.

A)stand-by arrangements
B)mission creep
C)moral hazard
D)tequila effect

Question 34

Which of the following arises when the knowledge that IMF rescue packages are possible leads lenders to be less careful about their international lending practices?

A)Global contagion
B)Moral hazard
C)Debt overhang
D)Debt restructuring

Question 35

The amount by which debt obligations exceed the present value of the payments that will be made to service the debts is called:

A)sovereign debt.
B)debt swap.
C)debt overhang.
D)debt restructuring.

Question 36

Capital outflow from a country during a financial crisis will:

A)put pressure on local financial institutions.
B)result in an appreciation of the domestic currency.
C)lower domestic interest rates.
D)lower foreign stock prices.

Question 37

Standard loans of the IMF to assist a country to address its balance of payment problems are called:

A)stand-by arrangements.
B)extended funds.
C)supplemental reserves.
D)compensatory financing measures.

Question 38

Which of the following is a controversial proposal for reducing the frequency of financial crises?

A)Countries should pursue sound macroeconomic policies.
B)Countries should improve the quality and timeliness of the data they report on their international reserves and debt.
C)Developing countries should increase the use of controls or impediments to capital inflows.
D)Countries should strive for better supervision and regulation of their banks.

Question 39

Which of the following measures to resolve financial crises involves loan commitments to assist a country in getting through a crisis?

A)Debt repudiation
B)Loan amortization
C)A rescue package
D)Debt restructuring

Question 40

The global financial and economic crisis that began to develop in 2007:

A)arose in industrial countries.
B)arose in developing countries.
C)was worse than the Great Depression of the 1930's.
D)was the result of a prolonged period of declining wolrd production.

Question 41

What are the five major forces that can lead to financial crises? Explain each of these forces in depth.

Question 42

Small open economies are probably more vulnerable to contagion than large and relatively closed economies.

Question 43

Since the 1980s, the United States has been the dominant net lender in the world.

Question 44

Explain how the debt crisis of 1982 began and ended. What precipitated the crisis? What brought about an end to the crisis?

Question 45

Discuss the motivations, beyond the temporary loss of access to future loans, that sovereign governments have to avoid defaulting on international debt.

Question 46

Explain how the Asian crisis of 1997 began and ended. What precipitated the crisis? What brought about an end to the crisis?

Question 47

Just before the Asian crisis, Thailand had large current account deficits.

Question 48

Standard loans of the IMF, known as stand-by arrangements, are normally to be repaid in ten years.

Question 49

During the crises of the 1990s, restructuring of bank debt was difficult as the number of debtor and creditor countries was significantly large.

Question 50

In a typical domestic lending boom, almost all of the amount borrowed is dedicated toward investments to bring about substantial future gains.

Question 51

As the financial crisis of 2007 began, the key issue was limited access to funding for banks and other financial institutions.

Question 52

The marginal productivity of capital increases with greater capital inflows into the borrowing country.

Question 53

Explain how the Russian crisis of 1998 began. What precipitated the crisis?

Question 54

A prominent feature of the IMF conditionality programs is nationalization of key industries.

Question 55

Consider a situation where there is well-behaved international lending between two countries: Atlantica and Pacifica. Assume that Pacifica is wealthier than Atlantica. Illustrate this situation using a graph that relies upon the marginal-product of capital curves to show the possible investments in each country according to the returns the investments produce. Use the graph to explain the gains to each country from international lending.

Question 56

One reason why the currency-board experience of Argentina failed is because of the weakening of the dollar against other currencies.

Question 57

Discuss IMF loans as important parts of international efforts to address financial crises. Why have these loans been controversial?

Question 58

Explain four reform measures that have been suggested to reduce the possibility and frequency of international financial crises.

Question 59

Adding foreign financial assets to investment portfolios raises the riskiness of the entire portfolio of investments.

Question 60

Prior to mid-1980s, almost all loans extended by IMF were repaid on time.