Deck 13: Balance of Payments, Debt, Financial Crises, and Stabilization Policies   

Question 1

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

Answer 1

not answered

Question 2

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

Answer 2

not answered

Question 3

Debt service payments appear in
(a) the current account.
(b) the capital account.
(c) the cash account.
(d) errors and omissions.

Answer 3

A

Question 4

Discuss some of the reasons why economists are concerned about the current recovery from the global financial crisis.

Question 5

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 6

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 7

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 8

Discuss the options for financing a balance of payments deficit.

Question 9

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?

Question 10

Outline the principal sources of the debt crisis.

Question 11

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 12

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

Question 13

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 14

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 15

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 16

What is meant by the term Odious Debt"?

Question 17

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

Question 18

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 19

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 20

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 21

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.

Question 22

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 23

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 24

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 25

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 26

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 27

Special Drawing Rights are financial assets created by
(a) the World Bank.
(b) the United National Development Program.
(c) multinational corporations.
(d) the International Monetary Fund.

Question 28

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 29

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 30

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 31

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 32

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 33

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.