Question 1

The following are all the forms of debt finance:

Accepted Answer

Debt finance typically includes forms of borrowing such as bonds, bank loans, and official finance (e.g., from government or international institutions), distinguishing it from equity finance which involves raising capital through selling shares or stock.

Question 2

The term Original Sin by two economists Barry Eichengreen and Ricardo Hausmann is used to describe what?

Accepted Answer

The term Original Sin, coined by economists Barry Eichengreen and Ricardo Hausmann, refers to the inability of developing countries to borrow in their own currencies. This leaves them vulnerable to fluctuations in exchange rates and limits their ability to manage their own economies.

Question 3

During the time period of 1981-1983 what dramatic world issue happened?

Accepted Answer

During the early 1980s, developing countries were unable to make payments on their foreign loans due to the economic recession happening all around the world. This led to a universal default, which caused a dramatic world issue.

Question 4

A considerable advantage that richer countries have over poorer ones is exemplified by the fact that:

Accepted Answer

Richer countries have the advantage of being able to denominate their foreign debts in their own currencies, which gives them greater control over their monetary policy and reduces the risk of currency fluctuation. This advantage allows them to borrow money at lower interest rates and to avoid the risk of a sudden devaluation of their currency, which can be devastating for poorer countries that are unable to do the same.

Question 5

Explain why despite enormous natural resources, much of Latin America's population remains in poverty and the region has been repeatedly experiencing financial crises.

Accepted Answer

The answer of Explain why despite enormous natural resources, much...

Question 6

Since foreign credit dries up in crises when it is most needed, developing countries can protect themselves from default by

Accepted Answer

Accumulating high levels of international reserves allows a country to have a buffer against external shocks and helps them avoid default in times of financial crisis. This is because they can use these reserves to continue paying their debts and financing imports even when foreign credit is unavailable or expensive.

Question 7

Which Latin American country defaulted on loans in 2005 and paid off their creditors at only 1/3 value?

Accepted Answer

Argentina defaulted on loans in 2001 and again in 2014. The country negotiated with creditors and in 2005, paid off their creditors at only 1/3 value.

Question 8

In 1981-1983, the world economy suffered a steep recession. Naturally, the fall in industrial countries' aggregate demand had a direct negative impact on the developing countries. What other mechanism was an even more important contributor to this event?

Accepted Answer

The collapse in primary commodity prices, which resulted in a significant increase in the interest burden that debtors had to pay, was an even more important contributor to the 1981-1983 recession than the fall in industrial countries' aggregate demand. This was because many developing countries relied heavily on the export of primary commodities and a collapse in prices led to a deterioration in their terms of trade and a significant increase in their debt burden.

Question 9

Describe alternative forms of capital inflow to finance external deficits and explain why these methods were used in different times?

Accepted Answer

The answer of Describe alternative forms of capital inflow to...

Question 10

How would you define exchange control?

Accepted Answer

Exchange control is a policy in which the government restricts or regulates the outflow and inflow of foreign currency. Option A is the most accurate definition out of the given options. In this case, the government allocates foreign exchange through decree rather than through the market.

Question 11

What factors lie behind capital inflows to the developing world?

Accepted Answer

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Question 12

With which country did the Debt Crisis of the early 1980s begin?

Accepted Answer

The Debt Crisis of the early 1980s began in Mexico, when it had trouble servicing its external debt due to a combination of high-interest rates and falling export revenues.

Question 13

Explain why the distinction between debt and equity finance is useful in analyzing the response of developing countries to unforeseen events such as recession or terms of trade change?

Accepted Answer

The answer of Explain why the distinction between debt and...

Question 14

There are many ways developing countries finance their external deficits except

Accepted Answer

Foreign exchange rates are not a way for developing countries to finance their external deficits. Instead, they are an important factor that affects the cost of financing such deficits, as changes in exchange rates can increase or decrease the level of external indebtedness and affect the relative competitiveness of domestic goods and services in the international market. Bank finance, portfolio investment, bond finance, and official lending are all significant sources of external finance for developing countries.

Question 15

Why may equity finance be preferred to debt finance for developing countries?

Accepted Answer

Equity finance does not require repayments, therefore a fall in domestic income would not affect the obligations of the country towards shareholders.

Answer: D 
 Debt finance, on the other hand, may result in constraints on spending due to repayment obligations which can be affected by the tax structure. Equity finance leaves the country with more financial freedom.

Question 16

In 1991, Argentina established a radical institutional reform after experiencing a decade marked by financial instability. This program was called the new Convertibility Law. What did this law do?

Accepted Answer

The new Convertibility Law made Argentina's currency fully convertible into U.S. dollars at a fixed rate and required that the monetary base be backed completely by gold or foreign currency. This was intended to provide stability to the economy by limiting inflation and ensuring a steady supply of foreign currency reserves.

Question 17

In the instances where a loan has been issued under certain terms and has to be repaid, what happens when the borrower does not uphold these stipulations?

Accepted Answer

When a borrower fails to meet the terms of a loan, it is known as a default. This means that the borrower has failed to repay the loan according to the agreed upon schedule or has violated some other terms of the loan agreement. The lender may take legal action to recover the funds owed or may pursue other forms of recourse.

Question 18

As of 2010, how large is the debt of developing countries to the rest of the world?

Accepted Answer

As of 2010, the debt of developing countries to the rest of the world was approximately $5 trillion.

Question 19

Which of the following is a reason that developing countries are running large surpluses?

Accepted Answer

Developing countries may run large surpluses due to a strong desire to accumulate international reserves to protect against a sudden stop of capital inflows. This can help stabilize their economy and prevent a crisis similar to what happened in the Asian Financial Crisis of 1997-1998.

Question 20

When a government defaults on its obligations, the event is called a

Accepted Answer

A sovereign default occurs when a government is unable or unwilling to meet its financial obligations, including debt payments. This can have significant consequences for both the government and the economy, as it can lead to a loss of investor confidence, higher borrowing costs, and financial instability. The other answer choices do not accurately describe a government defaulting on its obligations.

Quiz 22: Developing Countries: Growth, Crisis, and Reform