Deck 12: International Financial Crises

Question 1

Exchange rates and banking systems are often the variables through which the contagion effects of a crisis are spread from one country to another.

Answer 1

True

Question 2

Small devaluations are usually sufficient to stem capital flight.

Answer 2

False

Question 3

A fixed exchange rate system crisis may be accompanied or followed by

A)unexpected gains of international reserves.
B)revaluation of a currency.
C)devaluation of a currency.
D)deflationary pressures within the country.

Answer 3

C

Question 4

When expansionary fiscal and monetary policies are joined with a ________ exchange rate system,the various components of economic policy often interact in ways that lead to a crisis followed by a steep recession.

A)fixed
B)floating
C)crawling peg
D)flexible

Question 5

Deficits financed by borrowed money lead to inflation,and in a fixed or crawling peg exchange rate system,this leads to the real exchange rate being undervalued.

Question 6

A flexible exchange rate system crisis involves

A)a revaluation of the currency.
B)a rapid and uncontrolled depreciation of the currency.
C)a decrease in the dollar value of the country's international debt.
D)a sure political collapse of the ruling government.

Question 7

Disintermediation is a problem associated with a banking crisis.

Question 8

The most common type of macroeconomic imbalance is overly expansionary fiscal policies that create large government budget deficits,often financed by a high growth rate of the money supply.

Question 9

Exchange rate crises are only associated with fixed exchange rate systems.

Question 10

An exchange rate crisis is caused by

A)a sudden and an unexpected collapse in the value of a nation's currency.
B)the inability of the IMF to predict the immediate collapse of the currency of a country.
C)the adoption of a flexible exchange rate system by a country or group of countries.
D)the adoption of a fixed exchange rate system by a country or group of countries.

Question 11

All of the following are possible outcomes of a financial crisis except

A)bank failings and disintermediation.
B)a recession.
C)an increase in domestic consumption.
D)depreciation or devaluation of a currency.

Question 12

An exchange rate crisis may lead to a banking crisis and disintermediation.

Question 13

Many developing countries make the government budget one of the primary tools of long-run industrial development,with the government owning and operating industries such as steel mills,airlines,and phone companies.

Question 14

A flexible exchange rate system guarantees a country will not experience an exchange rate crisis.

Question 15

All of the following are possible outcomes of a banking crisis except

A)depositors, but not banks, may lose all or a portion of their assets.
B)a recession due to decreases in consumption by households.
C)decreases in investment.
D)a contagion effect of the crisis from vulnerable banks to financial institutions on sound basis.

Question 16

Current research suggests that countries that adopt a pegged exchange rate may be more vulnerable to an exchange rate crisis.

Question 17

Which of the following does not occur in resolving a debt crisis?

A)Debts are restructured
B)Repayment periods are shortened
C)Interest rates are reduced
D)Some partial debt forgiveness

Question 18

Tax systems in developing countries tend to be efficient and reliable.

Question 19

Which of the following is NOT likely to occur when a bank fails?

A)Everyone that deposits money in the bank loses all or a portion of their money, unless the country has a functioning deposit insurance system.
B)The loss of savings (or the feared loss of savings)causes households to cut back on consumption, which spreads the recessionary effect wider through the country.
C)Unaffected banks may stop making loans as they take a cautious approach, slowing or stopping new investment.
D)Other banks make too many loans to make up for the loans not made by the failed bank, kicking off a cycle of stimulation and inflation.

Question 20

Unlike a banking crisis,an exchange rate crisis rarely results in a deep recession.

Question 21

A financial crisis brought on by macroeconomic imbalances

A)is usually inevitable given underlying conditions.
B)often happens to countries with strong international positions.
C)is often preceded by capital inflows and an increase in foreign liabilities.
D)is usually the result of fragility in the banking sector.

Question 22

Which of the following was NOT a cause or a characteristic of the 1994/95 Mexican peso crisis?

A)An overvalued exchange rate
B)An inflow of large foreign portfolio capital
C)The inability of the IMF, the world bank, and the NAFTA member countries (i.e., the United States and Canada)to predict the looming financial crisis
D)Shifts by the world capital markets toward more conservative and risk-averse investments because of interest and exchange rate movements around the world

Question 23

Financial crises due to weak financial sectors can often be avoided if international lenders respond appropriately.

Question 24

A debt crisis may lead to a banking crisis.

Question 25

All of the following are symptoms of definite and identifiable macroeconomic imbalances except

A)large budget deficits.
B)an overvalued currency.
C)a current account deficit.
D)the discovery of emerging markets by financial investors who want to diversify their portfolios.

Question 26

Consider the following two statements. I. The East Asian financial crisis was an example of macroeconomic imbalances.
II) The Latin American debt crisis was an example of macroeconomic imbalances.

A)Both statements are true.
B)I is true, and II is false.
C)I is false and II is true.
D)Both statements are false.

Question 27

Which of the following is NOT a characteristic of a financial crisis caused by macroeconomic imbalances?

A)Crises can be unpredictable.
B)Crises can be predictable.
C)Crises can by expansionary fiscal policies accompanied by high budget deficits.
D)Crises can be caused by budget surpluses.

Question 28

If the banking sector borrows internationally and lends locally,how does this intensify a financial crisis?

Question 29

The Mexican peso crisis of 1994 and 1995 was directly related to

A)a large capital account surplus.
B)a large capital account deficit.
C)an undervalued peso.
D)a large current account surplus.

Question 30

It is normal and typical in a debt crisis for debtors to completely repudiate all their debts.

Question 31

Although financial crises can be unpredictable,they are usually preceded by identifiable vulnerabilities.

Question 32

Which of the following is a true statement about crises caused by volatile capital flows?

A)Volatile capital flows rarely cause contagion effects.
B)Technological advances have increased the volatility of capital flows.
C)Exchange rates appreciate when there are capital outflows.
D)Budget deficits decrease when there are capital outflows.

Question 33

A large and growing current account deficit can be an indicator of a potential crisis.

Question 34

It should be possible to avoid intensifying crises when there are weak financial sectors if

A)banks pay closer attention to the maturity match between their debts and assets.
B)governments do not run budget deficits.
C)current account deficits are moderate.
D)banks do not lend to unworthy creditors.

Question 35

The 2007 subprime crisis spread easily because

A)the United States is an important economy.
B)banks in other countries had purchased assets that depended on the U.S. housing market.
C)there was speculation against the U.S. dollar.
D)the Fed failed to act at the right time.

Question 36

Describe the Mexican peso crisis in terms of the imbalances that caused it,the policies Mexico used to respond,and the lessons learned.

Question 37

Carefully explain two reasons why domestic crises can become international crises.

Question 38

A financial crisis brought on by volatile capital flows

A)is usually inevitable given underlying conditions.
B)does not happen to countries with strong international positions.
C)is often preceded by capital inflows and an increase in foreign liabilities.
D)is usually the result of high budget deficits.

Question 39

An austerity policy is

A)an increase in the money supply.
B)an expenditure reduction and expenditure switching policy.
C)an expansionary fiscal policy accompanied by decreases in taxes, increases in expenditures, or both.
D)an exchange rate switching policy from a fixed to a flexible exchange rate system.

Question 40

Sovereign default refers to

A)default due to excessive money supply growth.
B)default on private debt instruments.
C)default on government debt instruments.
D)bankruptcy of firms, resulting in equity losses.

Question 41

Which of the following may NOT help avoid a financial crisis?

A)Maintaining credible and sustainable fiscal policies
B)Regulation and supervision of the financial system
C)Immediately bailing out financial intermediaries and standing ready to bail out others in case a financial crisis occurs
D)Maintaining credible and sustainable monetary policies

Question 42

A temporary limitation on capital flows may help stop a financial crisis that has begun.

Question 43

The Basel Capital Accord does NOT include

A)requiring bank owners to invest into and have some capital ownership in the banks they own.
B)supervision of banks by an oversight board.
C)information disclosure designed to encourage market discipline.
D)denying access to foreign capital by a country that defaults on its international loans.

Question 44

All of the following statements are true about the real exchange rate, = ,except

A)a greater change in P (domestic price)compared to a change in P* (foreign price)necessitates a rise in the nominal rate, Rn, to keep the real rate unchanged.
B)a pegged exchange rate system requires tight control of the money supply.
C)there is a one-to-one correspondence between the real and nominal exchange rates.
D)an expansionary monetary policy raises the real exchange rate.

Question 45

Capital controls for banks

A)reduce the chance of bank failures.
B)have been demonstrated to be effective in preventing financial crises.
C)increase the problem of moral hazard.
D)increase the profitability of banks.

Question 46

Which of the following is NOT a true statement about capital controls?

A)Countries are more able to prevent capital inflows than they were in the 1970s.
B)Capital controls may reduce world welfare by preventing capital from moving to its most valuable use.
C)It is unclear whether it is best to limit capital inflows, capital outflows, or both.
D)Restricting the movement of capital cannot stop a crisis once it has begun.

Question 47

If a country has a collapsing currency due to large budget deficits financed by monetary expansion,the cure is to

A)default on sovereign debt and restructure the economy.
B)peg the currency to something different.
C)cut the deficit and raise interest rates.
D)increase the rate of inflation to reduce the real value of government debt.

Question 48

A crisis caused by sudden capital flight

A)is easy to resolve with capital controls.
B)might be lessened if investor confidence can be increased.
C)has a clear and unique equilibrium outcome.
D)can be corrected through currency devaluation.

Question 49

Crawling pegs

A)are anti-inflationary because they require monetary discipline.
B)are designed to stabilize real exchange rates when domestic inflation is less than inflation in other nations.
C)reduce a nation's vulnerability to financial crises.
D)lead to undervaluation of the domestic currency.

Question 50

In theory,the free movement of capital raises world welfare because

A)it reduces inflation in some countries.
B)it reduces the chance of financial crises.
C)it allows countries to invest more than they could with domestic savings alone.
D)it increases world income equality.

Question 51

Economists agree that the free movement of capital is desirable.

Question 52

Explain how the global financial crisis of 2007-2009 was the result of macroeconomic imbalances.

Question 53

It is relatively easy to prescribe a cure for financial crises that result from inconsistent macroeconomic policies.

Question 54

The main policy advice given by the IMF to East Asian countries facing the financial crises of 1997/1998 was

A)raising their domestic interest rates to stabilize the collapsing currencies.
B)using their monetary and fiscal policies alone.
C)use capital controls.
D)adopting a flexible exchange rate system.

Question 55

Which one of the following countries refused to accept the IMF conditions during the East Asian financial crisis?

A)South Korea
B)Malaysia
C)Thailand
D)Singapore

Question 56

Austerity programs involving budget cuts and higher interest rates may not be politically feasible.

Question 57

With crises caused by macroeconomic imbalances,

A)it is usually difficult to avoid a recession.
B)austerity programs are not needed.
C)expansionary policies can be used to correct the crisis.
D)the money supply should be increased.

Question 58

Which of the following was NOT one of the causes of the Asian financial crises of 1997 and 1998?

A)A current account deficit and financial account surpluses
B)The use of exports as an engine of economic growth by the countries involved
C)China's 1994 devaluation of its fixed exchange rate
D)The appreciation of the U.S. dollar and depreciation of the Japanese yen

Question 59

All of the following involve a moral hazard problem except

A)an individual driving carelessly after buying a comprehensive insurance policy for a Ford Pinto.
B)the IMF bailing Mexico out of a financial crisis, with promises to do the same for other nations that might face financial problems.
C)the requirement of banking institutions that owners invest a substantial portion of their own capital in their bank.
D)membership in FDIC (Federal Deposit Insurance Corporation)by your local bank.

Question 60

How does a weak financial sector intensify the problems created by volatile capital flows?

Question 61

What are the costs of capital mobility?

Question 62

IMF conditionality may include

A)changes in the fiscal and monetary policies of the country facing the financial crisis.
B)changes in the exchange rate policies.
C)regulating and restructuring the financial sector of the economy of the country in crisis.
D)political regime change.

Question 63

Financial capital is highly volatile,and technological advances have reinforced this volatility.

Question 64

International financial flows have changed in meaningful ways,and these changes were brought to the attention of policy makers by the Asian financial crisis.Describe three changes.

Question 65

What agreement has been reached to reduce the moral hazard problem and what does it require?

Question 66

An issue that proposals for international reform agree on is that

A)the IMF should intervene more in financial crises.
B)there must be a lender of last resort.
C)IMF quotas are currently set at an appropriate level.
D)the Basel capital requirements for banks should be increased.

Question 67

Implementing short-term capital controls during the Asian crisis caused Malaysia to recover more slowly than other countries.

Question 68

The international institution that serves as a lender of last resort is called the

A)IBRD.
B)WTO.
C)IMF.
D)World Bank.

Question 69

With regard to the IMF,"mission creep" means that

A)the IMF was making loans to nonmember countries.
B)the IMF had expanded its lending to an inappropriate level.
C)the IMF had taken on extended responsibilities that it should be authorized to perform.
D)the IMF had taken on responsibilities for which it was not suited.

Question 70

Explain the pros and cons of a crawling peg.

Question 71

Which of the following is NOT a true statement about IMF lending?

A)The IMF can usually determine the difference between national crises and those likely to cause system-wide problems.
B)Limits on borrowing have not kept up with the growth of national economies.
C)The IMF does not have the funds to provide the support that a large economy might need.
D)Proposals for lending expansion suggest greater IMF intervention if it can stop crises faster.

Question 72

If governments promise to bail out the financial system in the event of a crisis,this creates a moral hazard problem.Describe this problem.

Question 73

IMF quotas

A)depend on the size of an economy and its strength.
B)strictly limit the amount that a country can borrow.
C)should be increased.
D)are equal to the amount that a country can borrow from the IMF.

Question 74

What are the benefits of capital mobility?

Question 75

All of the following issues have been discussed as options for reforming the international financial architecture except

A)how high an interest rate the lender of last resort should charge when it makes loans.
B)the length of the payback period.
C)the size of the loans.
D)if the lender of last resort (i.e., the IMF)should consult and collaborate with other international institutions such as the United Nations and the WTO.

Question 76

Describe the background factors that contributed to the Asian financial crisis.

Question 77

Which of the following is a macroeconomic factor that contributed to the financial crisis in 2007?

A)Global saving and investment imbalances
B)Financial market innovation
C)Deeper levels of integration across financial markets
D)Challenges and failures in financial regulation

Question 78

How did the vulnerabilities in Asian economies lead to the Asian financial crisis of 1997-1998.

Question 79

A lender of last resort

A)makes loans when no one else will.
B)makes loans without regard for risk.
C)is a firm that is forced to make loans for its own survival.
D)makes loans to all who require them.

Question 80

When a country borrows from the IMF

A)it receives all the funds from the loan at once.
B)it receives funds in tranches, each dependent on the completion of reform targets.
C)it is free of conditions.
D)it can be any amount that the country requests.