Question 1

Beginning in about 1990, lending to and investing in developing countries began to increase. One explanation for this is that:

Accepted Answer

Deregulation and privatization in the developing countries opened up profitable new investment opportunities.

Question 2

From the early 1980s through today, the largest net borrower in the world has been:

Accepted Answer

The United States has been the largest net borrower in the world since the early 1980s. This is due to a combination of factors, including a trade deficit, government spending, and borrowing to finance investment and consumption.

Question 3

If international financial transactions are prohibited:

Accepted Answer

When international financial transactions are prohibited, lenders in richer countries will face a decrease in demand for their financial services, leading to reduced investment opportunities and hence lower rates of return. On the other hand, borrowers in poorer countries will face limited access to international capital markets and face higher borrowing costs due to limited competition, making it difficult for them to obtain affordable capital. This implies that lenders will earn lower rates of return, and borrowers will pay higher interest rates. Therefore, option C is the correct choice.

Question 4

The Brady Plan helped to end:

Accepted Answer

The Brady Plan was introduced in 1989 to address the debt crisis that began in the 1980s, primarily affecting Latin American countries. It allowed for the restructuring of their debt with the involvement of banks and governments, which helped to alleviate the crisis.

Question 5

Official lending and investing are usually done by:

Accepted Answer

Official lending and investing are typically done by governments or multilateral institutions, such as the World Bank or International Monetary Fund, which have the financial resources and authority to engage in large-scale lending and investment activities. Multinational enterprises may engage in lending or investing, but it is not typically considered "official" in the same way that government or multilateral institution activities are. Private individuals can purchase government bonds, but this is not usually considered to be lending or investing in the same way that larger-scale activities are. Commercial banks may participate in lending or investing, but they are typically not considered to be official actors in the same way that governments or multilateral institutions are.

Question 6

The 1982 debt crisis was caused in part by:

Accepted Answer

The debt crisis of 1982 was caused in part by falling developing country exports and high real interest rates. This led to difficulties in servicing their external debt, leading to defaults and the need for bailouts from international organizations like the IMF. Falling world interest rates (A) would have actually made it easier for developing countries to service their debt. Rapid increase in cheap imports (B) and rising commodity prices (D) may have had some impact on individual countries, but they were not major factors in the overall debt crisis.

Question 7

Which of the following is a major benefit of international lending?

Accepted Answer

International lending allows lenders and investors to diversify their investments more broadly, which can contribute to reducing portfolio risk and increasing potential returns. It also facilitates the flow of capital to regions where resources are scarce and to industries that require large amounts of capital investment. The other options listed are not major benefits of international lending.

Question 8

The large net international lender since 1980 has been:

Accepted Answer

Japan has been the largest net international lender for many years, accumulating large amounts of foreign assets through its trade surpluses and investments abroad.

Question 9

From pre-World War II years to the early 1980s, which of the following countries was the principal lender in the world?

Accepted Answer

The United States was the principal lender in the world from pre-World War II years to the early 1980s. This was due to several factors, including the country's strong and stable economy, the dominance of the U.S. dollar as a global reserve currency, and the active role of U.S. banks and financial institutions in international lending. During this period, the United States provided a significant amount of loans and investments to other countries, particularly in Europe and Asia, which helped to fuel post-war reconstruction and economic growth.

Question 10

Which of the following contributed to the Asian Crisis?

Accepted Answer

Local borrowers selling local currency to hedge against exchange rate risks contributed to the crisis by putting pressure on the currency, leading to devaluation and financial instability.

Question 11

Since 2000 developing countries received large net capital inflows in the form of:

Accepted Answer

Developing countries received large net capital inflows in the form of foreign direct investments, which refers to long-term investments made by multinational corporations in developing countries for the purpose of establishing manufacturing facilities or purchasing businesses. Short-term lending, official loans from foreign governments and the IMF, and debt service also occurred, but the largest inflows were from foreign direct investments.

Question 12

Which of the following crises involved the use of "tesobonos"?

Accepted Answer

The use of "tesobonos" was involved in the Mexican crisis in 1994. Tesobonos were short-term Mexican government bonds denominated in dollars that were used to finance the government's budget deficit. The crisis occurred when investors lost confidence in Mexico's economy and began to sell off their tesobonos, causing their value to plummet and leading to a devaluation of the Mexican peso.

Question 13

_____ refers to purchasing shares in a foreign enterprise largely owned and controlled by the investor.

Accepted Answer

Direct investment refers to investing in a foreign enterprise, whereby the investor purchases shares in a foreign company that they partially or wholly own and control. This is different from portfolio investment, where investors purchase shares in foreign companies without owning or controlling them. Short-term lending refers to providing short-term loans to foreign enterprises, while official capital flows refer to government loans and grants to foreign countries.

Question 14

Which of the following resulted in a surge in international lending to developing countries in the mid-1970s to early 1980s?

Accepted Answer

Lending to developing countries gained momentum through "herding" behavior as banks followed each other in lending to these countries, often without thorough risk assessment.

Question 15

International financial freedom:

Accepted Answer

International financial freedom can lead to more efficient allocation of resources, potentially maximizing world product by allowing capital to flow to where it is most productive.

Question 16

Borrowers in wealthy countries that have few domestic investment opportunities would gain if:

Accepted Answer

The answer of Borrowers in wealthy countries that have few...

Question 17

In August 1982, which of the following countries declared that it was unable to service its foreign debt and thereby triggered a long-lasting crisis in international lending?

Accepted Answer

In August 1982, Mexico declared that it was unable to service its foreign debt, which led to a crisis in international lending known as the Latin American Debt Crisis. This crisis had far-reaching effects on not only Mexico but also other Latin American countries and the global economy as a whole.

Question 18

By restricting foreign lending, a country with sufficient market power can:

Accepted Answer

By restricting foreign lending, a country can reduce the supply of credit available to foreign borrowers, which results in increasing the demand for credit among such borrowers. This, in turn, leads to a higher interest rate that foreign borrowers must pay to obtain credit in the country.

Question 19

The 1997 Asian crisis first struck in:

Accepted Answer

The 1997 Asian crisis first struck in Thailand. It then spread to other Asian countries such as South Korea, Indonesia, Malaysia, and the Philippines.

Question 20

Assume that investment opportunities are less in high-wealth countries and more in low-wealth countries. Now, if all barriers to international financial transactions are removed, borrowers in _____ countries lose and lenders in _____ countries gain.

Accepted Answer

The answer of Assume that investment opportunities are less in...

Quiz 21: International Lending and Financial Crises