Deck 20: Capital Flows and the Developing Countries

Question 1

On average, developing countries typically are _____ relative to developed countries.

A) capital abundant
B) labor scarce
C) labor abundant
D) technology abundant
E) R&D abundant

Answer 1

labor abundant

Question 2

For developing countries, current account _____ tend to couple with financial account _____ .

A) deficits, surpluses
B) surpluses, surpluses
C) deficits, deficits
D) surpluses, deficits
E) balances, balances

Answer 2

deficits, surpluses

Question 3

Borrowing by a country in the form of bonds or bank loans is known as:

A) equity.
B) securitization.
C) debt.
D) formula lending.
E) sovereign default

Answer 3

debt.

Question 4

Government borrowing from commercial banks is known as:

A) equity.
B) sovereign lending.
C) financial lending.
D) official development assistance.
E) IMF conditionality.

Question 5

Borrowing by countries in the form of FDI or investment in stocks is known as:

A) official development assistance.
B) equity.
C) debt.
D) sovereign lending.
E) All of the above

Question 6

A characteristic of _____ is that payments have to made at a certain point in time no matter what condition of the borrower.

A) equity
B) FDI
C) debt
D) ODA
E) IMF conditionality.

Question 7

Inflows of debt and equity to the developing countries total about:

A) $122 billion.
B) $500 billion.
C) $1 trillion.
D) $2 trillion.
E) $5 trillion.

Question 8

The total stock of debt for developing countries is:

A) $100 billion.
B) $500 billion.
C) $1 trillion.
D) $1.5 trillion.
E) $2.7 trillion.

Question 9

The total stock of foreign exchange held by a country at any point in time is known as:

A) ODA.
B) equity.
C) FDI.
D) foreign reserves.
E) debt reserves.

Question 10

A _____ debt/export ratio will make it _____ for a country to make payments on its debt.

A) low, hard
B) high, easy
C) low, easy
D) negative, impossible
E) None of the above

Question 11

The inability of a country to repay all its foreign debt when it is due is known as:

A) debt.
B) equity.
C) default.
D) financial rift.
E) sovereign lending

Question 12

An exchange rate shock is usually caused by a _____ in the _____ of foreign exchange.

A) decrease, supply
B) increase, supply
C) decrease, demand
D) consistency, demand
E) disruption, demand

Question 13

An exchange rate shock will tend to cause a _____ shift of the _____ curve.

A) rightward, AS
B) leftward, AS
C) increase, AD
D) large, AD
E) small, AD

Question 14

Which of the following macroeconomic consequences would be associated with an exchange rate shock?

A) an increase in the price level
B) a decrease in the price level
C) an increase in real GDP
D) an increase in both the price level and real GDP
E) no change in the price level or real GDP

Question 15

Which of the following would not usually be associated with an exchange rate shock?

A) an increase in the price level
B) a decrease in real GDP
C) a leftward shift of the AS curve
D) an increase in real GDP
E) None of the above

Question 16

An exchange rate shock would have much more serious consequences in a _____ country than in a _____ country.

A) developed, developing
B) developing, developed
C) high-income, low-income
D) high-income, middle-income
E) Asian, Latin American

Question 17

Primary commodities account for approximately _____ percent of developing country exports.

A) 10
B) 27
C) 40
D) 60
E) 66

Question 18

Exports and imports account for _____ and _____ of the collective GDPs of the developing countries.

A) 9, 10
B) 14, 15
C) 31, 29
D) 42.6, 58.2
E) 50, 50

Question 19

A large drop in the price of a primary commodity would tend to cause a _____ shift in the supply of foreign exchange and a(n) _____ of the currency.

A) leftward, appreciation
B) leftward, depreciation
C) rightward, appreciation
D) rightward, depreciation
E) rightward, pegging

Question 20

The demand for primary commodities is usually _____ .

A) elastic
B) inelastic
C) unit elastic
D) perfectly inelastic
E) not influenced by prices.

Question 21

Which of the following would not be a result of rising commodity prices?

A) a depreciating currency
B) an appreciating currency
C) an increase in the supply of foreign exchange
D) an increase in real GDP
E) no change in the exchange rate

Question 22

The situation where exports of a commodity lead to an appreciating exchange rate and a loss of other types of exports is known as:

A) Friedman's dilemma
B) the free lunch problem
C) Asian contagion
D) Dutch disease
E) Euro disease

Question 23

If commodity prices are _____, then the government may want to limit the _____ of the currency by _____ foreign exchange.

A) high, depreciation, selling
B) high, appreciation, buying
C) high, depreciation, buying
D) high, appreciation, selling
E) low, appreciation, buying

Question 24

Which of the following is a method of fixing the exchange rate?

A) nonintervention in the foreign exchange market
B) exchange controls
C) sterilization
D) monetization
E) None of the above

Question 25

With exchange controls, the government becomes _____ with respect to foreign exchange.

A) a monopsonist
B) a monopolist
C) only a buyer
D) only a seller
E) indifferent

Question 26

Suppose that in a country with exchange controls that the demand for foreign exchange is increasing faster than the supply of foreign exchange. In this case a likely result would be:

A) a depreciating currency.
B) a shortage of foreign exchange.
C) no change in the real exchange rate.
D) that the government needs to increase aggregate demand.
E) that the price level rises rapidly.

Question 27

If the real exchange rate is appreciating, then a country's exports are becoming:

A) cheaper.
B) more expensive.
C) less expensive.
D) unobtainable.
E) more abundant.

Question 28

If a country has to ration foreign exchange, which class of goods would tend to get priority in terms of access to foreign exchange?

A) toys
B) cars
C) food
D) air conditioners
E) sports equipment

Question 29

Which of the following would be associated with a breakdown of exchange controls?

A) an appreciating currency
B) a depreciating currency
C) lower prices
D) higher real GDP
E) no change in fiscal policy

Question 30

_____ in the foreign exchange market may be a way of avoiding the macroeconomic consequences of an _____ exchange rate.

A) intervention, undervalued
B) sterilization, undervalued
C) intervention, overvalued
D) sterilization, overvalued
E) None of the above

Question 31

Expansionary monetary and fiscal policies may be optimal for internal balance but might create:

A) an overvalued exchange rate.
B) a balance of payments surplus.
C) low inflation and a trade surplus.
D) low unemployment and a trade surplus.
E) exchange rate appreciaton.

Question 32

A booming economy tends to create:

A) an increase in the supply of foreign exchange.
B) a decrease in the supply of foreign exchange.
C) an increase in the demand for foreign exchange.
D) a decrease in the demand for foreign exchange.
E) no demand for foreign exchange.

Question 33

If the demand for foreign exchange is _____ then the government may need to _____ foreign exchange to keep the exchange rate from _____ .

A) increasing, sell, appreciating
B) increasing, sell, depreciating
C) increasing, buy, depreciating
D) decreasing, buy, depreciating
E) decreasing, sell, appreciating

Question 34

If intervention in the foreign exchange market is not _____ then the intervention could affect the domestic money supply.

A) sterilized
B) monetized
C) controlled
D) sanctioned
E) flexible

Question 35

If a country does not have adequate amounts of foreign exchange to support intervention in the foreign exchange market then it may borrow foreign exchange and increase the country's:

A) equity.
B) debt.
C) sterilization.
D) FDI.
E) money supply.

Question 36

Which of the following is not associated with an exchange-rate shock linked to intervention in the foreign exchange market?

A) a rising debt/export ratio
B) falling foreign reserves
C) rising debt
D) a falling debt/export ratio
E) low FDI

Question 37

The IMF was founded in the:

A) 1940s.
B) 1950s.
C) 1960s.
D) 1970s.
E) 1980s

Question 38

The Bretton Woods system broke up in the:

A) early 1940s.
B) late 1950s.
C) early 1960s.
D) early 1970s.
E) early 1980s.

Question 39

The macroeconomic adjustments that the IMF asks countries to make in order to obtain loans is known as:

A) marginality.
B) debt conditions.
C) conditionality.
D) sovereignty.
E) default.

Question 40

IMF conditionality would usually lead to:

A) an increase in AD.
B) a decrease in AD.
C) a higher price level (P).
D) higher real GDP (Y).
E) a looser fiscal policy.

Question 41

A country's _____ is related to its relative size in the world economy.

A) credit rating
B) IMF quota
C) FDI quota
D) foreign exchange quota
E) IMF account

Question 42

In the 1950s most borrowing from the IMF was done by _____ countries.

A) low-income
B) middle-income
C) high-income
D) smaller
E) Asian

Question 43

Recently, lending by the IMF has moved to loans with _____ maturities.

A) shorter
B) longer
C) more complex
D) abbreviated
E) monthly

Question 44

Which of the following is the term used to describe the tendency of market participants to engage in riskier behavior if they believe that they will not have to bear all of the costs of engaging in this behavior.

A) default
B) sovereignty
C) moral hazard
D) dilemma behavior
E) political risk

Question 45

The Asian crisis of the 1990s originated in:

A) Hong Kong.
B) South Korea.
C) Thailand.
D) Australia.
E) Indonesia

Question 46

The tendency for a financial crisis to spread to other countries in the region is known as:

A) moral hazard.
B) financial contagion.
C) Asian flu.
D) ripple theory.
E) panic.

Question 47

Which of the following is true of financial contagion?

A) A crisis always spreads to other countries.
B) It is observed only in foreign exchange markets.
C) It is more likely to be observed if the crisis was anticipated.
D) A crisis does not always spread to other countries.
E) A crisis is confined to Southern Europe.

Question 48

Developing countries are typically labor abundant relative to developed countries.

Question 49

Capital will tend to move from capital-abundant countries to capital-scarce countries.

Question 50

Capital inflows in excess of outflows create a deficit in the financial account.

Question 51

Historically, sovereign lending has been a very safe way for banks to make a profit.

Question 52

The World Bank does not loan money to countries but rather gives the money away in the form of grants.

Question 53

A MNC building a plant in a developing country is an example of debt.

Question 54

Owners of equity normally do not have a right to fixed payments in the form of a stream of income.

Question 55

Most of the money flowing into the developing countries is in the form of FDI going to middle-income countries.

Question 56

If outflows of foreign exchange exceed inflows, then the stock of foreign reserves will rise.

Question 57

The debt/export ratio is the ratio of the country's total foreign debt to its exports.

Question 58

Any country that has foreign debt eventually will default.

Question 59

An exchange rate shock usually leads to the depreciation of the currency.

Question 60

Exchange rate shocks have few, if any, macroeconomic consequences.

Question 61

An exchange rate shock would tend to cause an increase in the price level.

Question 62

An exchange rate shock would tend to cause a decline in real GDP.

Question 63

An exchange rate shock would tend to increase unemployment.

Question 64

An exchange rate shock would have much more serious economic consequences in a developed country than in a developing country.

Question 65

Exchange rate shocks are much more common in developed countries.

Question 66

Commodity price shocks refer to volatility in the price of manufactured products.

Question 67

A large change in the price of a commodity could cause an exchange rate shock.

Question 68

Primary commodities account for 80 percent of the exports of the developing countries.

Question 69

Exports and imports account for 31 and 29 percent of the collective GDPs of the developing countries.

Question 70

Rising commodity prices could create a macroeconomic environment of a lower price level coupled with a rising real GDP.

Question 71

Exports of commodities can lead to an appreciating currency that makes it more difficult for the country to export other types of products.

Question 72

Countries that export commodities never intervene in the foreign exchange market.

Question 73

In an exchange control system, the government becomes the only legal buyer and seller of foreign exchange.

Question 74

If the demand for foreign exchange is increasing faster than the supply of foreign exchange is increasing, then the currency needs to depreciate.

Question 75

Exchange controls never lead to a shortage of foreign exchange.

Question 76

MNCs never pay any attention to the real exchange rate when deciding where to locate production facilities in the world economy.

Question 77

The breakdown of an exchange control system could lead to an exchange rate shock.

Question 78

Intervention in the foreign exchange market may be a way for a country to avoid the macroeconomic consequences of an overvalued exchange rate.

Question 79

Increases in the price level (P) and real GDP (Y) would tend to decrease the demand for foreign exchange.

Question 80

If selling foreign exchange is not sterilized, then the money supply could fall.