Deck 11: An Introduction to International Finance

Question 1

The 1997 Asian financial crisis first struck in:

A) Hong Kong
B) Thailand
C) Singapore
D) South Korea

Answer 1

Thailand

Question 2

What are Mortgage Backed Securities MBS)?

A) Investments packaged by banks to discourage homeownership
B) A category of mortgages that receive financial support from financial institutions.
C) Securities that combine mortgages and existing company stock to raise new capital.
D) Investments that bundle mortgages to be sold to investors with different risk levels.

Answer 2

Investments that bundle mortgages to be sold to investors with different risk levels.

Question 3

A main difference of U.S. financial crisis in year 2008-09 from crises in emerging market economies such as Mexico is that:

A) U.S. financial crisis have not resulted in substantial bank failures.
B) U.S. financial crisis tend to be of shorter duration.
C) speculative currency attacks have not played a dominant role in U.S. financial crisis.
D) U.S. authorities have not permitted insolvent financial institutions to stay in operation.

Answer 3

speculative currency attacks have not played a dominant role in U.S. financial crisis.

Question 4

IMF conditionality refers to:

A) policy changes that government in a borrowing country has to make in order to borrow from the IMF.
B) the IMF's guidelines to disburse foreign aid to developing countries.
C) conditions that a country has to follow in order to become a member in the IMF.
D) the rescue package that the IMF gives out for free to country in crisis.

Question 5

Which of the following was not a contributing factor in the 1997 Asian Financial Crisis?

A) Currencies fixed to the U.S. dollar
B) Large capital inflows
C) Significantly undervalued currencies
D) Current account deficits

Question 6

When maintaining a pegged exchange rate fixed exchange rate), if the central bank runs out of foreign currency reserves, then:

A) it can always print more of domestic currency.
B) it can back the money supply by buying domestic assets.
C) it can sell its own currency and buy foreign currency reserves.
D) it must allow the domestic currency to float.

Question 7

Which of the following factors triggered the 1994-95 Mexican Peso crises?

A) A rise in oil price
B) A decline in the price of semiconductor, Mexico's major exporting goods
C) A sharp devaluation of peso
D) A flexible exchange rate regime

Question 8

In a portfolio investment,

A) investors are directly involved in managing the operations.
B) as in direct investment, investors export goods and services abroad.
C) investors transfer the technology to local investors.
D) investors have little control over operations.

Question 9

Which of the following is NOT the root cause of the 1997 Asian financial crisis?

A) A sudden capital flight
B) Chronic trade surplus in Asian countries before the crisis year
C) Close relations between business, banks, and government agencies, which led to risky lending decisions.
D) A fixed exchange rate system

Question 10

Which of the following factors potentially increased the vulnerability to the 1997 Asian financial and currency crisis?

A) trade account surplus.
B) massive reverse outflows of capital.
C) technological transfer from advanced countries.
D) symmetric information in financial market.

Question 11

Which of the following is NOT a contributory factor in the 2008-09 Great Recession?

A) The use of low introductory mortgage rates in sub-prime lending; when they expired, the mortgagees were unable to pay the increased payments.
B) Mortgages being sold on by their originating organization and not being kept on its books.
C) Chinese government bought too many U.S. government bonds.
D) The increasing complexity and interconnectivity of financial instruments such as credit default swaps.

Question 12

In the U.S. balance of payments, direct foreign investment is distinguished by portfolio investment by:

A) The type of capital investment
B) Type of industry
C) Size of investment
D) Percentage of ownership

Question 13

When some troubled emerging-market nations experience a currency crisis, it affects other healthy emerging-market nations by raising risk premia and reducing investor confidence in the whole region portfolios. As a result, healthy emerging-market nations also prone to have a currency crisis as well. This phenomenon is known as:

A) experiential learning
B) contagion
C) moral hazard
D) emerging market dysfunction

Question 14

Typically, a financial crisis tends to happen after:

A) massive influx of capital flows
B) chronic balance of trade deficits
C) a large depreciation causing a sudden increase in the local currency value of international debts denominated in other currencies.
D) All of the above

Question 15

Which of the following is a warning indicator of a potential financial crisis?

A) Transparency in government operations
B) Floating exchange system
C) Decline in foreign reserves
D) All of the above are warning indicators

Question 16

Policy in the IMF is determined by voting, and votes are allocated by:

A) Population
B) Annual GDP
C) GDP per capita
D) Financial contributions

Question 17

The IMF's view of conditionality is that:

A) The adjustments required are those that promote long-run growth.
B) Borrowing countries should be penalized during the borrowing period.
C) Adjustments ensure that the IMF can earn a profit.
D) The support of the IMF will encourage growth.

Question 18

Suppose that an emerging economy has its currency pegged to the $. Its currency is under pressure to depreciate. To maintain a fixed exchange rate, the central bank of this economy has to intervene by:

A) selling its currency, causing it to gain dollar reserves.
B) selling its currency, causing it to lose dollar reserves.
C) buying its currency, causing it to gain dollar reserves.
D) buying its currency, causing it to lose dollar reserves.

Question 19

Initial conditions in the year before the crisis in Thailand, Indonesia, Malaysia, the Philippines, and Korea in 1997 indicate that I. capital inflows/GDP were very low.
II) nonperforming bank loan ratios were high.
III) current account deficits were high.
IV) credit growth was fast.

A) I and IV only.
B) II and III only.
C) I, II, and III only.
D) II, III and IV only.

Question 20

An increase in capital inflow could harm the economy by:

A) Causing an appreciation of the recipient country's currency.
B) Increasing the political risk in the recipient country.
C) Creating congestion in the financial market.
D) Lowering tax receipts on capital outflows

Question 21

A contributing factor in the Latin American Debt Crisis 1982 was:

A) The significant devaluation of the dollar.
B) Declining expectations led to capital flight.
C) Falling oil prices lead to defaults by oil companies.
D) A sudden increase of capital inflows leading to currency devaluation.

Question 22

When seeking financial support from the IMF, country authorities describe their economic policies in an):

A) Exchange proposal
B) Conditionality
C) Letter of credit
D) Letter of Intent

Question 23

Which of the following is not a likely example of IMF conditionality?

A) Reduce current account deficit to 3% of GDP
B) Lower taxes 5%
C) Forced closure of unviable banks
D) Cap inflation at 5%

Question 24

Direct foreign investment is the capital flow of investment to acquire 10% or more of voting stocks of a firm abroad.

Question 25

The rapid increase of capital inflow has the potential to harm the economy.

Question 26

The IMF has been criticized for imposing conditions on loans because:

A) Borrowing governments should not be expected to repay the loans.
B) Most of the conditions are unnecessary and unrelated to the economy.
C) Borrowing countries will borrow from someone else if the conditions are too difficult.
D) The conditions tend to harm short-term growth and raise unemployment.

Question 27

Which of the following is not a benefit of FDI to the host country?

A) FDI promotes competition in domestic input markets
B) FDI allows the transfer of technology
C) FDI contributes to economic development
D) FDI limits human capital

Question 28

In general, the more competitive a country's markets are, the fewer the opportunities for ________.

A) Corruption
B) Free trade
C) Profits
D) Government seizures

Question 29

Capital flight is characterized by

A) Investment in the aviation industry
B) Sudden inflow of funds
C) Sudden outflow of funds
D) Seizure of capital by foreign governments

Question 30

Country risk analysis is the evaluation of a country's overall political and financial situations that may influence the country's ability to repay its loans.

Question 31

Country risk analysis is used to:

A) Establish negotiations with the IMF.
B) Set borrowing conditions with the domestic banks.
C) Assess the risk of international deals.
D) Forecast currency exchange conditions in the future.

Question 32

Factors considered in the country risk analysis include political risk, diversity of exports, and quantity of natural resources.

Question 33

The policies the IMF imposes on a member is expected to follow to ensure that the member will overcome its payment problems and able to repay back the funds are called:

A) Regulations
B) Conditionality
C) Enforcement
D) Rules of the loan

Question 34

The abuse of public authority or trust for private benefit is considered:

A) Corruption
B) Conditionality
C) Seizure
D) Political risk

Question 35

In international finance, the spending by a domestic firm to establish foreign operating units is called:

A) Capital flight
B) Domestic investment
C) Offshoring
D) Direct foreign investment

Question 36

Corruption practices by government officials threatens market integrity, distorts competition, and endangers economic development.

Question 37

What did the Great Recession in 2007 show about financial markets?

A) Financial markets throughout the world are highly connected.
B) Segmented markets are those most exposed to risk during financial crises.
C) The IMF failed to target corruption in financial markets before 2007 effectively.
D) The housing bubble only affected investors with a direct connection to the housing market.

Question 38

Which of the following were not present in the 1997 Asian Financial crisis?

A) Weak financial markets
B) External shocks
C) Overvalued currencies
D) Current account surpluses

Question 39

Suppose Country X experienced a financial crisis. One contributing factor to the crisis was the sudden increase in the cost of fuel in the country. This is an example of an):

A) Chronic current account deficits
B) External shock
C) Fixed exchange system
D) Over dependence on foreign capital

Question 40

Which of the following are considered in country risk analyses? I. Political stability
II) External debt
III) Labor supply
IV) International reserve holdings

A) I and III
B) I, II, and IV
C) II, III, and IV
D) I, II, III, and IV

Question 41

The IMF uses conditionality to punish lender countries following financial crises.

Question 42

In international finance, the spending by a domestic firm to establish foreign operating units is called direct domestic investment

Question 43

Which of the following are considered in country risk analyses? I. Economic growth
II) Amount of natural resources
III) Diversity of exports
IV) Quality of education

A) I only
B) II only
C) I and III
D) II and IV

Question 44

The motives for ownership of foreign operations can be explained by perfectly competitive market conditions and inferior expertise of the domestic firm.

Question 45

The IMF has included a clause of anti-corruption into its lending process.

Question 46

The evaluation of a country's overall political and financial situations that may influence the country's ability to repay its loans is called:

A) Country risk analysis
B) Foreign investment forecasting
C) Capital budgeting
D) Investment projecting

Question 47

Both ________ have included anticorruption policies as part of their lending process to countries.

A) NATO and the UN
B) The UN and the World Bank
C) The IMF and the World Bank
D) The IMF and UNESCO

Question 48

When a government seizes foreign investment, it is called capital flight.