Deck 13: Balance of Payments, Developing-Country Debt, and the Macroeconomic Stabilization Controversy  

Question 1

Consider the following hypothetical data for a developing country.

Does this country have a debt crisis? What additional pieces of quantitative or qualitative evidence?(if any) would help you to decide?

Answer 1

Various answers are plausible and this will depend on lecture coverage. Close attention to investment growth should be found in students' answers.

Question 2

About how much debt is held by the developing world (as a whole)? Which countries hold the most debt? Are these the countries where the debt burden is the greatest?

Answer 2

The debt burden is greater in Africa than in Latin America, as measured by debt in relation to GNP. Information on total LDC debt is provided in and information for specific nations in.

Question 3

Provide a definition of the current account, the capital account, and the cash account. What is the relationship between the three accounts?

Answer 3

Discussed in the chapter.

Question 4

How did the Mexican debt crisis of the early 1980s come about? How has the Mexican economy coped during the past 20 years, in the aftermath of the debt crisis? What has been the legacy of the debt crisis for the Mexican economy?

Question 5

Explain how international trade and trade policy helped South Korea transform itself from an underdeveloped country to a high income country in the space of a single generation. You might begin by discussing South Korea's trade strategy. Why do you think international trade is of such vital importance to South Korea?

Question 6

Outline the elements of an IMF stabilization package. Explain the mechanism by which it is?expected to help a balance of payments deficit. How successful have these packages been? ?Explain your answer.

Question 7

Discuss the options for financing a balance of payments deficit.

Question 8

What kinds of domestic policies, short of significant debt reduction, can be followed to alleviate a debt crisis? How effective have these policies been?

Question 9

The flow of private foreign investment and grants and loans is included in a country's

A)current account.
B)capital account.
C)cash account.
D) None of the above.

Question 10

An IMF official was quoted as acknowledging that the Fund's stabilization packages have often led to adjustment without growth. However, he said, "the Fund is a firefighter, not a carpenter, and you cannot expect the firefighter to rebuild the house as well as put out the fire." Provide a balanced evaluation of this statement.

Question 11

What is meant by the term odious debt?

Question 12

Explain what is meant by capital flight. How would you distinguish capital flight from the normal desire of investors to diversify their portfolios by investing abroad?

Question 13

Why may the debt crisis be only "sleeping," rather than "dead?"

Question 14

What is meant by petrodollar recycling? Explain the mechanism by which this phenomenon occurred. What were the consequences of this phenomenon for developing countries?

Question 15

Outline the principal sources of the debt crisis.

Question 16

Explain how a devaluation is supposed to reduce the external debt of a developing country. Give two reasons why a devaluation may be less effective than expected.

Question 17

Consider debt-equity swaps as an approach to debt reduction. Briefly describe how this works. State two arguments in favor of significant reliance on this strategy and two arguments against.

Question 18

What economic variables would you need to consider in order to distinguish between a developing country with a short-term balance of payments problem and one in a debt crisis? Explain what data you would need to look at and why.

Question 19

Provide a concise statement on the relationship between the debt crisis and: (a) foreign direct investment, (b) trade liberalization, (c) absolute poverty, and (d) investment levels.

Question 20

Debt service payments appear in

A)the current account.
B)the capital account.
C)the cash account.
D) errors and omissions.

Question 21

Special Drawing Rights are financial assets created by

A)the World Bank.
B)the United Nations Development Program.
C)multinational corporations.
D) the International Monetary Fund.

Question 22

The debt service ratio is defined as

A)the ratio of total debt to export earnings.
B)the ratio of total debt to GDP.
C)the ratio of payments on foreign debt to export earnings.
D) the ratio of payments on foreign debt to GDP.

Question 23

Debt equity swaps may lead to

A)increased foreign ownership.
B)greater domestic inflation.
C)lower debt servicing requirements.
D) all of the above.
E) none of the above.

Question 24

A typical IMF stabilization package involves

A)erecting barriers against foreign investment.
B)overvaluing the exchange rate.
C)liberalization of exchange controls.
D) a reduction in interest rates.
E) all of the above.

Question 25

Exchange of developing country debt (at a discount) for private ownership of state-owned assets is called

A)debt-equity swaps.
B)debt restructuring.
C)the Brady Plan.
D) debt-nature swaps.

Question 26

If the current account is a deficit of 25 then

A)the capital account is a surplus of 25.
B)the cash account is a surplus of 25.
C)the capital account is a surplus of 25 if the cash account is zero.
D) the cash account is a deficit of 25.

Question 27

The debt service ratio is the ratio of

A)external debt to the size of the service sector.
B)external debt to total GNP.
C)internal debt to the size of the service sector.
D) internal debt to total GNP.
E) none of the above.

Question 28

Which of the following was not a factor contributing to the debt crisis in Latin America?

A)The oil shocks
B)Trade liberalization in many developing countries
C)An increase in global interest rates.
D) A lack of investment opportunities in the developed countries
E) All of the above

Question 29

The basic transfer is defined as

A)net capital inflow.
B)interest payments on foreign debt.
C)net capital inflow divided by interest payments on foreign debt.
D) net capital inflow minus interest payments on foreign debt.

Question 30

The concept of odious debt implies

A)an excessive debt.
B)a debt that is not the responsibility of the nation's people.
C)a large debt burden.
D) the total external debt of a nation's people.

Question 31

A significant problem of a dual exchange rate system is that it

A)is difficult to administer.
B)leads companies to pursue rent-seeking behavior.
C)promotes black markets.
D) All of the above.
E) None of the above.

Question 32

The need for exchange controls may arise from

A)overvalued exchange rates.
B)export promotion policies.
C)a current account surplus.
D) all of the above.

Question 33

A country with high inflation, rising budget and trade deficits, and a rapidly expanding money supply

A)is in transition.
B)has macroeconomic instability.
C)is practicing import substitution.
D) is practicing export promotion.