Deck 13: Balance of Payments,debt,financial Crises,and Stabilization Policies

Question 1

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

Answer 1

A

Question 2

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 is international trade of such vital importance to South Korea?

Answer 2

Discussed in the case study.
Multiple Choice

Question 3

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

Answer 3

Large trade deficit.Large fiscal deficits in most OECD countries,market perception that risk of sovereign debt default is high,and risk of deflation all contribute to a cautious outlook for the future.

Question 4

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 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 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 7

Outline the principal sources of the debt crisis.

Question 8

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.

Question 9

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 10

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 11

What is meant by the term Odious Debt"?

Question 12

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.

Question 13

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 14

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

Question 15

Discuss the options for financing a balance of payments deficit.

Question 16

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 17

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

Question 18

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 19

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 20

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 21

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 22

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 23

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 24

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 25

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 26

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 27

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 28

Exchange of developing country debt (at a discount)for private ownership of state-ownedassets is called
(a)debt-equity swaps.
(b)debt restructuring.
(c)the Brady Plan.
(d)debt-nature swaps.

Question 29

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 30

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.