Deck 14: Exchange Rate Crises

Question 1

According to the interest parity condition, the only way to keep exchange rates constant is for policy makers to:

A) adjust their economic policies to satisfy the interest parity condition, regardless of any other policy objectives they might have.
B) resolutely stick to their policies no matter what happens to interest rates, prices, or economic conditions elsewhere in the world.
C) intervene in the foreign exchange markets whenever the exchange rate begins to change.
D) ignore people's expectations and continue doing whatever they were doing.

Answer 1

adjust their economic policies to satisfy the interest parity condition, regardless of any other policy objectives they might have.

Question 2

According to the interest parity condition, in a freely-floating foreign exchange market a country's spot exchange rate may remain constant throughout time if:

A) economic growth is the same as in other countries.
B) expectations about future exchange rates are constant.
C) policy makers immediately adjust domestic policies when expectations change.
D) All of the above.
E) None of the above.

Answer 2

All of the above.

Question 3

Exchange rate intervention:

A) has no domestic effects; it only affects foreign economies.
B) does not change the money supply and is therefore cannot change exchange rates.
C) changes a country's money supply.
D) is carried out by the International Monetary Fund.

Answer 3

changes a country's money supply.

Question 4

Which of the following statements is true?

A) A country cannot consume more than it produces.
B) If a country cannot borrow additional money, it must default on its loans.
C) A contractionary monetary policy that slows domestic investment can actually make servicing foreign debt more difficult.
D) Changes in exchange rates affect international trade, but they have little effect on a country's ability to service foreign debt.

Question 5

The 1974 oil price increase differed from the 1979 oil price increase in that:

A) the 1974 price hike did not stick, but the 1979 hike was sustained for more than a decade.
B) the former was precipitated by political events, the latter was purely an economic phenomenon.
C) developed economies maintained much tighter monetary policies after 1979.
D) interest rates were much higher after 1974 than the nearzero rates after 1979.

Question 6

A country's debt burden can be measured by:

A) the ratio of debt to GNP.
B) interest payments as a percentage of GNP.
C) interest payments as a percentage of exports.
D) All of the above.
E) None of the above.

Question 7

The "three persons" in the three person game of debt resolution after the 1982 debt crisis were:

A) developing country governments, private banks, and developed country governments.
B) the International Monetary Fund, the World Bank, and the Washington Consensus.
C) the private banks in developed countries, the IMF, and the United States.
D) the World Trade Organization, the World Bank, and the International Monetary Fund.

Question 8

After the 1982 default on their foreign debts by over 40 developing countries:

A) the problem debtors were eventually able to use the secondary market to refinance their loans.
B) the creditors refused to accept writing off any debt, and ultimately debtors were forced to repay their entire debt.
C) the debtor nations suffered severe economic recessions that lasted for much of the 1980s and beyond.
D) All of the above.
E) None of the above.

Question 9

Governments can influence the exchange rate by:

A) directly purchasing or selling foreign exchange.
B) tightening or loosening of domestic monetary policy.
C) restricting international trade or investment.
D) All of the above.
E) None of the above.

Question 10

A thorough explanation of the 1982 debt crisis should include some reference to:

A) human nature, such as over-optimism and under-estimation of risk.
B) the globalization of finance, which permitted huge amounts of money to move between countries.
C) the trilemma.
D) All of the above.
E) None of the above.

Question 11

When international investment is not restricted, a commitment to fixing the exchange rate requires policy makers to:

A) choose between policies that address specific domestic economic goals over policies that focus on exchange rate expectations.
B) keep rates of return on assets from being lower than in other countries.
C) sacrifice domestic political interests if their desired economic policies could upset expectations about future exchange rates.
D) prohibit people from freely moving their wealth into and out of the country.

Question 12

In the 1990s:

A) there were financial crises in Mexico and East Asia.
B) there were financial crises in India, Pakistan, and Bangladesh.
C) the international capital markets functioned smoothly everywhere.
D) the United States suffered the only real financial crisis in 1991.

Question 13

When we compare a country's domestic expenditures and its net income, the term often used for the sum of domestic expenditures is:

A) gross expenditures.
B) absorption.
C) accumulation.
D) disbursement.

Question 14

If a country "absorbs" 102 percent of its national product, then it:

A) must have a trade surplus.
B) must be a net lender to the rest of the world.
C) must have a trade deficit.
D) probably has a financial account deficit.

Question 15

The Asian crisis in the 1990s is often blamed on:

A) anti-trade policies of many East Asian countries.
B) policies that inhibited economic growth.
C) fixed exchange rates and fragile banking systems with weak balance sheets containing many non-performing investments.
D) excessively large government budget deficits.

Question 16

Contributing to Asia's 1997 financial crash was:

A) heavy borrowing overseas in dollars by banks and firms whose earnings were in local currency.
B) the weak balance sheets of many Asian banks whose customers were often not solvent either.
C) the fact that in Thailand, Malaysia, and Indonesia foreign loans were sometimes used to finance real estate speculation.
D) All of the above.
E) None of the above.

Question 17

International financial history after the 1982 debt crisis is characterized by:

A) increasing flows of foreign capital from developing countries to developed countries.
B) China becoming the biggest borrower of capital from the developed countries.
C) the Brady Plan's complete success in preventing more financial crises and defaults.
D) All of the above.
E) None of the above.

Question 18

International financial history after the 1982 debt crisis is characterized by:

A) investments increasingly flowing from developing countries to developed countries.
B) the accumulation of large foreign exchange reserves by developing countries.
C) large trade deficits by some of the largest developed countries.
D) All of the above.
E) None of the above.

Question 19

Which of the following were among the reasons for the Mexican peso crisis of 1994?

A) Trade liberalization required by the North American Free Trade Agreement.
B) Rising government budget deficits caused by pre-election spending by the PRI, the ruling party of Mexico.
C) Pegging the peso to the dollar.
D) Disregard for exchange rate risk.
E) All of the above.
F) None of the above.

Question 20

Capital flight refers to:

A) moving money into a country because of an expected devaluation of its currency.
B) the response time of international banks to investment opportunities.
C) the flow of transfers in the balance of payments.
D) aggressive movement of funds among banks to capture funds and attract customers for loans.
E) None of the above.

Question 21

The Mexican and Asian debt crises were different in which of the following ways?

A) Asian countries had much more foreign debt than Mexico.
B) Mexico was inward oriented but Asian countries had greatly expanded foreign trade.
C) Mexico was characterized by crony capitalism, but Asian countries were not.
D) All of the above.
E) None of the above.

Question 22

Which of the following were among the reasons for the Asian crisis of 1997?

A) Appreciation of the U.S. dollar relative to Japanese and European currencies.
B) China's 1994 depreciation of its currency.
C) Over-valuation of the East Asian (Indonesia, Korea, Malaysia, the Philippines, and Thailand) currencies.
D) Crony capitalism.
E) All of the above.
F) None of the above.

Question 23

Crony capitalism is:

A) a form of communism.
B) not a factor in financial crises.
C) more common in dictatorships as opposed to democracies.
D) effectively a form of discrimination in the financial sector.

Question 24

A chaebol is:

A) a large Korean industrial conglomerate.
B) a select group of government policy makers and regulators.
C) an internal watch-dog agency for private banking for the purpose of maintaining competitiveness in the financial markets.
D) None of the above.

Question 25

A currency board:

A) has the power to establish monetary policy and determine exchange rates.
B) is an agency of a country's central bank.
C) has been used to establish credibility in the financial markets after long periods of inflation.
D) gives a country more independence in both monetary and fiscal policy.

Question 26

Which of the following did not occur during the 2001 Argentinian debt crisis?

A) After several weeks of massive withdrawals of pesos from banks in order to exchange them for dollars, the Argentine government froze all bank accounts.
B) The government resigned.
C) The holders of most of the government debt did not agree to accept the government's offer of about 30 cents on the dollar and lengthened terms of repayment.
D) The Argentinean government printed money so banks could continue to make loans.

Question 27

"Original sin" in international finance refers to:

A) the disadvantage that the United States faces when it borrows from foreigners.
B) the fact that some countries can borrow in terms of their own currency when they borrow overseas.
C) the fact that developing countries can seldom borrow in terms of their own currency.
D) foreign borrowing is considered immoral by some cultures and therefore is a sin.