EC146 Exam #2

____ 6. A country's debt burden can be measured by a. the ratio of debt to GNP b. interest payments as a percentage of GNP c. interest payments as a percentage of exports. d. All of the above. e. None of the above.

All of these are ways to measure it. They provide a relative measure of the size of the debit, which is the only relevant way to measure debt size.

____ 13. The event that ended up triggering the 2008 financial crisis was: a. a housing bubble that burst. b. new legislation that reregulated the banks. c. excessive borrowing by a group of developing countries. d. the discovery of a massive Ponzi scheme by a well-known New York financier.

a. a housing bubble that burst.

____ 24. A chaebol is a. a large Korean industrial conglomerate. b. a select group of government policy makers and regulators. c. an internal watch-dog agency for private banking for the purpose of maintaining competitiveness in the financial markets.

a. a large Korean industrial conglomerate. An industrial enterprise that dominates the national economy and has strong state support.

_____ 22. Hyman Minsky's hypotheses are most accurately described as stating that: a. a sudden change in economic conditions causes speculative businesses to become Ponzi ventures. b. rational investors know how to evaluate investments under all probable economic outcomes. c. it takes a very severe shift in economic circumstances to convert hedge financing into speculative financing or speculative financing into Ponzi financing. d. a financial system in which most financing arrangements fall into the category of hedge financing is unstable and likely to result in a financial crisis.

a. a sudden change in economic conditions causes speculative businesses to become Ponzi ventures. See previous answer feedback and textbook for more details on the 'sudden shift' in conditions.

____ 7. American depository receipts (ADRs): a. account for nearly half of all U.S. investment in foreign stocks. b. are used exclusively by foreign investors to buy U.S. stocks. c. were a popular means for buying foreign stocks before the development of foreign stock markets in the 1980s. d. are an obsolete form of banking that no longer exists in developed economies.

a. account for nearly half of all U.S. investment in foreign stocks. This is a fact and not too much of an issue for our narrative about financial crises. However, we can see that it is one more way that the financial flows meter ratchets higher (more hot money flows)

___ 1. According to the interest parity condition, the only way to keep exchange rates constant is for policy makers to: a. adjust their economic policies to satisfy the interest parity condition, regardless of any other policy objectives they might have. b. resolutely stick to their policies no matter what happens to interest rates, prices, or economic conditions elsewhere in the world. c. intervene in the foreign exchange markets whenever the exchange rate begins to change. d. ignore people's expectations and continue doing whatever they were doing.

a. adjust their economic policies to satisfy the interest parity condition, regardless of any other policy objectives they might have. If government keeps expectations stable and does not move interest rates with policy changes parity should remain in force. Of course, this is rarely done in practice.

____ 20. John Maynard Keynes and Hyman Minsky offer models that show a. an unregulated financial system is inherently unstable. b. unrestrained capitalism was superior to a mixed socialist/capitalist system. c. the U.S. financial system can indeed generate endless rises in asset values and corporate profits. d. All of the above. e. None of the above.

a. an unregulated financial system is inherently unstable. Keynes and post-Keynesians disagree with conventional or orthodox economic theory that deregulated markets are safer and less risky. This is an important point for our HDX vs. Orthodox contrast.

The forward foreign exchange markets: a. are operated by the same dealers who operate the spot markets. b. are operated by small banks located in off-shore banking centers such as Panama, Grand Cayman, and the Bahamas. c. are necessary for carrying out triangular arbitrage. d. are useless for hedging against foreign exchange risk.

a. are operated by the same dealers who operate the spot markets. Explained in the textbook and repeated in class, the FX market (forward and spot) is dominated by big players, mostly the big banks and speculative funds.

When expectations are rationally set and the interest parity condition holds (international investment is not restricted), future changes in the spot exchange rate: a. are unpredictable. b. follow a predictable path. c. are predictable only if people use their full information set. d. are predictable if government policy makers do not interfere with the foreign exchange market.

a. are unpredictable

Suppose that the exchange rate, defined in domestic terms, begins to rise. The domestic central bank can prevent the rise in the exchange rate by: a. buying its own currency in the foreign exchange market. b. buying foreign currency in the foreign exchange market. c. selling its own currency in the foreign exchange market. d. decreasing domestic interest rates.

a. buying its own currency in the foreign exchange market. Here the question defines the XR as "in domestic terms" meaning the way we have been doing it (ie., US$/UK POUND). So given this specification (domestic/foreign), we would prevent the rise in the exchange "rate" by buying the domestic currency. Remember, a rise in the rate as it is specified here means the dollar is depreciating. Should we want to prevent the rise in the rate (meaning depreciation of the dollar), we would intervene in the FX markets on the buy side -- buying dollars would prop up its value. So that is what the CB would do.

____ 25. John Maynard Keynes' description of how investors set expectations: a. conflicts with Muth's rational expectations hypothesis that underlies modern macroeconomic and financial analysis. b. is perfectly compatible with the rational expectations hypothesis that underlies modern macroeconomic and financial analysis. c. suggests that financial markets work even better than the rational expectations hypothesis predicts. d. explains why the short-term focus of financial markets results in prices that efficiently guide long-run investment decisions.

a. conflicts with Muth's rational expectations hypothesis that underlies modern macroeconomic and financial analysis.

____ 7. The "three persons" in the three person game of debt resolution after the 1982 debt crisis were: a. developing country governments, private banks, and developed country governments. b. the International Monetary Fund, the World Bank, and the Washington Consensus. c. the private banks in developed countries, the IMF, and the United States. d. the World Trade Organization, the World Bank, and the International Monetary Fund.

a. developing country governments, private banks, and developed country governments. For example, Brazil (developing country government), USA (developed country government) and Citibank (big international lender bank).

Denoting the forward exchange rate as ftt+1, the spot exchange rate as et, r as the domestic rate of return on assets, and r* as the foreign rate of return on assets, then the covered interest parity condition is: a. et = [(1 + r*)/(1 + r)](ftt+1). b. et = [(1 + r)/(1 + r*)](ftt+1). c. et = [(1 + r)/(1 + r*)] + (ftt+1). d. (ftt+1) = [(1 + r*)/(1 + r)]et.

a. et = [(1 + r*)/(1 + r)](ftt+1). Success! See the supplemental homework for more details on the covered parity condition formula. Here the formula is presented correctly only once. Make sure you match that up with the way it is presented in the homework key. See text for more details. Forward markets are represented with (ftt+1) notation and most be present in the formula to indicate the "covered" interest rate parity condition, as opposed to the "uncovered interest rate parity condition (which uses the expected XR, not forward rate).

____ 11. Among the consequences of the 2008-2009 global financial crisis is: a. increased government debt related to government transfers to financial conglomerates. b. the fragmentation of the financial sector as financial conglomerates were broken up and reorganized. c. the definitive abandonment of the "too big to fail" principle. d. a sharp reversal of deregulation as governments completely rebuilt the regulatory structures they had abandoned earlier.

a. increased government debt related to government transfers to financial conglomerates. Unfortunately, we just got a big bailout (transfers by government) without the rest of the listed items. Many argue we are likely to repeat without profound changes to these markets.

____ 17. International financial history after the 1982 debt crisis is characterized by: a. increasing flows of foreign capital from developing countries to developed countries. b. China becoming the biggest borrower of capital from the developed countries. c. the Brady Plan's complete success in preventing more financial crises and defaults. d. all of the above. e. none of the above.

a. increasing flows of foreign capital from developing countries to developed countries. These outflows would end up contributing to the subprime bubble later as the capital flows sought higher returns in the form of CDOs.

_____ 23. Macroeconomic policymakers prevent the growth of speculative and Ponzi financing by: a. setting reserve requirements for commercial banks and restricting loan terms. b. guaranteeing loans and deposits. c. permitting the mergers of different financial organizations so that they can more readily shift from one kind of financial activity to another. d. All of the above. e. None of the above.

a. setting reserve requirements for commercial banks and restricting loan terms. Minsky would argue for more regulation but he knew it is hard to prevent end runs around the road blocks to ruin. But he did see government as possibly inhibiting or outlawing certain activities.

_____ 26. Among the reasons why economists failed to anticipate the 2008 global financial crisis is: a. the acceptance of the efficient markets hypothesis. b. that predictions of the future were largely based on experience from the recent past, which did not include any major financial crisis in developed economies. c. the exclusive use of economic models that were based on mathematics and microfoundations, which for practical reasons were limited to stable linear systems. d. All of the above. e. None of the above.

a. the acceptance of the efficient markets hypothesis.

____ 12. In the 1990s: a. there were financial crises in Mexico and East Asia. b. there were financial crises in India, Pakistan, and Bangladesh. c. the international capital markets functioned smoothly everywhere. d. the United States suffered the only real financial crisis in 1991.

a. there were financial crises in Mexico and East Asia. There were financial crises in Mexico (1994) and East Asia (1997).

____ 1. The eurocurrency market first appeared in: a. London during the 1950s. b. New York after World War II. c. London in the late 1800s. d. Paris during the 1980s.

a.London during the 1950s. Some say London (Soviet Union was first Eurodollar participants -- even lending). But some say Soviet Union (its bank) in Paris (but not Paris in 1980s - so D is wrongt). In any case, it was during the Cold War and it began as an attempt to keep dollar deposits away from US government.

If the U.S dollar is valued at 12.5 Mexican pesos, what is the U.S. dollar price of a peso? a. $12.00. b. $.08. c. $.125. d. $1.25.

b. $.08.

If the Chilean escudo is valued at four Mexican pesos, what is the escudo price of a peso? a. 4.00 escudos. b. .25 escudos. c. .04 escudos. d. 2.00 escudos.

b. .25 escudos.

____ 5. Which of the following does not accurately describe the international investment position? a. It is a measure of the country's overall net stock of overseas assets. . b. It is a compilation of flows of payments over a period of time, usually a year. c. It measures the net stock of domestically-owned foreign assets and foreign-owned domestic assets. d. It reflects the present value of past foreign asset accumulation.

b. It is a compilation of flows of payments over a period of time, usually a year.

____ 21. The Mexican and Asian debt crises were different in which of the following ways? a. Asian countries had much more foreign debt than Mexico. b. Mexico was inward oriented but Asian countries had greatly expanded foreign trade. c. Mexico was characterized by crony capitalism, but Asian countries were not. f. All of the above. g. None of the above.

b. Mexico was inward oriented but Asian countries had greatly expanded foreign trade. This is only partially true (B). Mexico had been trying import substitution development (an inward or backward strategy), whereas some Asian countries aimed to grow through exports (outward strategy).

In general, for n different currencies, there are: a. n different exchange rates. b. [n(n - 1)]/2 different foreign exchange rates. c. n+1 different exchange rates. d. just two different exchange rates, e and its reciprocal 1/e.

b. [n(n - 1)]/2 different foreign exchange rates. We could assume n currencies and if we use the indicated formula ([n(n-1)]/2 we will get the total number of different exchange rates possible (or that would prevail). This would count the reciprocal of say $/Pound twice, since each is a different "rate". If we had n=4 national currencies, for example, we would have [4(4-1)]/2 = 12/2=6 rates. So assume the following: US UK JAPAN CANADA Total number of rates = 6 (SEE LIST BELOW) 1. US/UK 2. US/JAPAN 3. US/CANADA 4. UK/JAPAN 5. UK/CANADA 6. JAPAN/CAN

An effective exchange rate is: a. an exchange rate at which currencies are actually exchanged in the foreign exchange market. b. a weighted average of a whole set of foreign exchange rates. c. an exchange rate that is adjusted purchasing power in the two countries whose currencies are compared by the exchange rate. d. an exchange rate that remains unchanged for at least five years.

b. a weighted average of a whole set of foreign exchange rates. Not to be confused with "real exchange rates" the effective exchange rate is a trading volume of trading partners weighted exchange rate.

____ 13. When we compare a country's domestic expenditures and its net income, the term often used for the sum of domestic expenditures is: a. gross expenditures. b. absorption. c. accumulation. d. disbursement.

b. absorption.

Exchange rates: a. are always stated in domestic terms. b. can be stated in either domestic terms or foreign terms. c. are always stated in foreign terms. d. must be stated in third-country terms in order to avoid conflict.

b. can be stated in either domestic terms or foreign terms.

_____ 16. Credit default swaps: a. are a type of loan. b. can be used to place a bet on the default of an investment even without owning the investment.* c. were invented by British investment houses in the nineteenth century. d. were issued by banks to cover their losses from investing in A.I.G.

b. can be used to place a bet on the default of an investment even without owning the investment. Essentially insurance that is really a bet because you don't own the asset you are 'insuring' against. The market for CDSs itself became a fatal link in the chain of financial innovation that destroyed the world's economy and created the worst recession since the Great Depression.

____ 9. The availability of ADRs that can be bought and sold on U.S. stock markets most likely: a. increases the total amount of direct purchases of foreign stocks by Americans. b. decreases the total amount of direct purchases of foreign stocks by Americans. c. has no effect whatsoever on the total amount of foreign investment by Americans. d. increases the amount of U.S. assets acquired by foreign investors.

b. decreases the total amount of direct purchases of foreign stocks by Americans. Because there is lower risk with ADRs since you don't have to go into the stock and another currency (hence no currency risk), this provides an attractive substitute and thus would reduced demand for direct purchase of foreign stocks

The markets where different currencies are bought and sold are known collectively as the: a. international market. b. foreign exchange market. c. money market. d. All of the above. e. b and c above.

b. foreign exchange market.

The markets where different currencies are bought and sold are known collectively as the: a. international market. b. foreign exchange market. c. money market. d. all of the above. e. b and c above.

b. foreign exchange market.

Fiat money: a. is currency that is tender by law but is not redeemable into gold or silver. b. makes the job of the money changer not easier because of expectations. c. means that future purchasing power of national moneys no longer matter for the exchange rate. d. All of the above are correct.

b. makes the job of the money changer not easier because of expectations.

The presence of perfect triangular arbitrage means that: a. a government need only manipulate supply and demand in the n−1 foreign exchange markets where its currency trades to keep its exchange rates fixed. b. the exchange rate between any two currencies will be the same in markets around the world. c. if any one exchange rate changes, other exchange rates will remain unchanged. d. it is not difficult for policy makers to keep exchange rates fixed.

b. the exchange rate between any two currencies will be the same in markets around the world.

____ 6. The international investment position of the United States during the 1980s: a. went from negative to positive. b. went from positive to negative. c. remained unchanged. d. fluctuated randomly.

b. went from positive to negative. A well known and concerning trend for some -- positive to negative net position. see textbook for more background on this trend.

____ 4. Which of the following statements is true? a. A country cannot consume more than it produces. b. If a country cannot borrow additional money, it must default on its loans. c. A contractionary monetary policy that slows domestic investment can actually make servicing foreign debt more difficult. d. Changes in exchange rates affect international trade, but they have little effect on a country's ability to service foreign debt.

c. A contractionary monetary policy that slows domestic investment can actually make servicing foreign debt more difficult. The servicing of foreign debt when the economy is sinking is often thought to be easier (less imports given same exports leads to surplus on trade account). But if it weakens the banking sector to the point of failure or tax revenue falls it might be harder to service foreign debt, especially if it is a period of exchange rate collapse and there are dollar denominated loans on the books at home.

____ 18. Which of the following statements about the financial history of the U.S. after 1990 is true? a. The U.S. Federal Reserve Bank generally kept the money supply very tight. b. Consumer goods inflation was high. c. Housing prices increased very rapidly between 2002 and 2006. d. All of the above. e. None of the above.

c. Housing prices increased very rapidly between 2002 and 2006. The only one that fits here is housing prices and the period cited is the period of rapid increase leading up to the 2007-08 international financial catastrophe.

____ 21. According to Hyman Minsky, when a project's cash flow from operations are not sufficient to meet even interest or dividend payments, much less cut into the outstanding debt, the project is catergorized as: a. hedge financing. b. speculative financing. c. Ponzi financing. d. roll-over financing.

c. Ponzi financing

You are an established speculator with an excellent reputation, but you do not have any liquid funds at the moment. You are sure that the dollar is going to appreciate in the near future, even though the forward exchange rate implies dollar depreciation. How can you set yourself up to profit from the appreciation of the dollar that you expect but the forward market does not expect to occur? a. Borrow dollars and sell them on the spot market. b. Buy foreign currency forward. c. Sell foreign currency forward. d. Do nothing; anything you do will result in a loss because you have to borrow.

c. Sell foreign currency forward. That is, you sold the pound forward at a high price and you can buy it lower for delivery when the forward contract is due because the market got it wrong and you got it right. You win!

Foreign exchange market intervention is carried out: a. by foreign exchange dealers who seek to profit from expected exchange rate changes. b. by a nation's authorities when they suspect fraudulent behavior or insider trading. c. by a country's central bank to influence the exchange rate. d. by the International Monetary Fund to provide liquidity to the foreign exchange market.

c. by a country's central bank to influence the exchange rate. Central banks do the intervening to keep there currencies (or that of another country) in line with targets or to prevent a currency (usually their own) from getting too high or low. The economic impact of either is the justification -- it will be damaging to the macro economic picture.

The foreign exchange rate: a. must always be stated as the foreign currency price of the domestic money. b. is always stated as the domestic currency price of foreign money. c. can be stated as either the foreign currency price of the domestic money or as the domestic currency price of foreign money. d. is always given in terms of U.S. dollars.

c. can be stated as either the foreign currency price of the domestic money or as the domestic currency price of foreign money.

____ 3. Exchange rate intervention: a. has no domestic effects; it only affects foreign economies. b. does not change the money supply and is therefore cannot change exchange rates. c. changes a country's money supply. d. is carried out by the International Monetary Fund

c. changes a country's money supply. Money supply changes take place because the Central Bank is selling or buying in the market and this will impact the supply of money.

____ 5. The 1974 oil price increase differed from the 1979 oil price increase in that: a. the 1974 price hike did not stick, but the 1979 hike was sustained for more than a decade. b. the former was precipitated by political events, the latter was purely an economic phenomenon. c. developed economies maintained much tighter monetary policies after 1979. d. interest rates were much higher after 1974 than the nearzero rates after 1979.

c. developed economies maintained much tighter monetary policies after 1979. The policy of the Fed after 1979 was aimed at stopping inflation at any cost. So the second oil crisis was not the same as the first after it happened. The price inflation was stopped with a sharp recession induced by the Fed in 1980-1.

____ 19. Among the policy responses to the 2008 financial crash and global recession was: a. a large set of new financial regulations. b. the breakup of the large financial conglomerates. c. expansion of the money supply and the reduction of short-term interest rates. d. All of the above. e. None of the above.

c. expansion of the money supply and the reduction of short-term interest rates.

____ 15. The Asian crisis in the 1990s is often blamed on: a. anti-trade policies of many East Asian countries. b. policies that inhibited economic growth. c. fixed exchange rates and fragile banking systems with weak balance sheets containing many non-performing investments. d. excessively large government budget deficits.

c. fixed exchange rates and fragile banking systems with weak balance sheets containing many non-performing investments. Often it is attributed to fixed exchange rates and fragile banking systems with weak balance sheets containing many non-performing investments. Of course, allowing free inflow of capital was a set up for a sudden reversal and collapse. This neo-liberal policy push came from Washington and institutions peddling the orthodox theories of more openness is always better idea.

____ 25. A currency board a. has the power to establish monetary policy and determine exchange rates. b. is an agency of a country's central bank. c. has been used to establish credibility in the financial markets after long periods of inflation. d. gives a country more independence in both monetary and fiscal policy.

c. has been used to establish credibility in the financial markets after long periods of inflation. Helps keep decisions transparent and honest.

____ 4. Foreign portfolio investment in the United States grew very rapidly in the 1980s and 1990s because: a. U.S. regulators opened stock and bond markets to foreign investors for the first time. b. the U.S. economy collapsed, thus making U.S. assets very inexpensive. c. many foreign governments eliminated restrictions that limited their citizens' and financial firms' ability to acquire foreign assets. d. All of the above. e. None of the above.

c. many foreign governments eliminated restrictions that limited their citizens' and financial firms' ability to acquire foreign assets.

____ 14. If a country "absorbs" 102 percent of its national product, then it: a. must have a trade surplus. b. must be a net lender to the rest of the world. c. must have a trade deficit. d. probably has a financial account deficit.

c. must have a trade deficit. When absorption is over 100%, there must be a deficit on the trade account by definition.

____ 8. American depository receipts (ADRs) are: a. stocks issued directly by foreign corporations but traded on U.S. stock exchanges. b. bonds issued by the U.S. government on behalf of foreign governments. c. receipts for actual foreign stocks deposited in U.S. banks that are traded on a U.S. stock exchange such as the New York Stock Exchange or the NASDAQ. d. illegal but still often used by Americans seeking to hide money overseas.

c. receipts for actual foreign stocks deposited in U.S. banks that are traded on a U.S. stock exchange such as the New York Stock Exchange or the NASDAQ.

Denoting the forward exchange rate as ftt+1, the expected future exchange rate as Eet+1 the spot exchange rate as et, r as the domestic rate of return on assets, and r* as the foreign rate of return on assets, the equations (1) et = [(1 + r*/(1 + r)](Eet+1) and (2) et = [(1 + r*)/(1 + r)](ftt+1): a. represent the (1) covered and (2) uncovered interest parity conditions, respectively. b. are equivalent in all respects. c. represent the (1) uncovered and (2) covered interest parity conditions, respectively. d. represent the (1) spot and (2) forward exchange markets, respectively.

c. represent the (1) uncovered and (2) covered interest parity conditions, respectively. This again simply presents the formulas for uncovered interest rate parity (which uses Eet+1) and the covered interest rate parity (which uses ftt+1)

____ 11. When international investment is not restricted, a commitment to fixing the exchange rate requires policy makers to: a. choose between policies that address specific domestic economic goals over policies that focus on exchange rate expectations. b. keep rates of return on assets from being lower than in other countries. c. sacrifice domestic political interests if their desired economic policies could upset expectations about future exchange rates. d. prohibit people from freely moving their wealth into and out of the country.

c. sacrifice domestic political interests if their desired economic policies could upset expectations about future exchange rates. To defend the XR, governments must sacrifice domestic political interests because these goals could (and typically will) upset expectations about future exchange rates. If the expectations and interventions required to maintain them go awry, we get the unraveling of the defense of the currency pegs (or fixed rates). You sacrifice domestic goals for external ones, which is the trilemma. You cannot have open borders to capital and expect to stay focused on domestic macroeconomic goals because you will end up undermining the fixed exchange rate regime you also desire. An impossible trinity.

____ 3. The development of eurocurreny markets began with: a. the restriction of foreign investment by the U.S. in the 1960s. b. the Bretton Woods Conference of 1944. c. the Suez Crisis of 1956. d. the repeal of the Glass-Steagall Act in 1999.

c. the Suez Crisis of 1956.

____ 8. After the 1982 default on their foreign debts by over 40 developing countries: a. the problem debtors were eventually able to use the secondary market to refinance their loans. b. the creditors refused to accept writing off any debt, and ultimately debtors were forced to repay their entire debt. c. the debtor nations suffered severe economic recessions that lasted for much of the 1980s and beyond. d. All of the above. e. None of the above.

c. the debtor nations suffered severe economic recessions that lasted for much of the 1980s and beyond. Nearly a decade of growth was lost. A heavy price to pay for developing countries trying to lift people out of poverty.

If there are 20 countries in the world, each with its own currency, then there are: a. 400 different foreign exchange markets. b. 19 different foreign exchange markets. c. 380 different foreign exchange markets. d. 190 different foreign exchange markets.

d. 190 different foreign exchange markets.***

Arbitrage: a. is the simultaneous purchase and sale of goods or assets in two distinct markets with different prices. b. permits the arbitrageur to profit from a difference in prices for a certain commodity or asset across different market segments. c. tends to eliminate price differences across different market segments.. d. All of the above.

d. All of the above.

Rational expectations implies that people set their expectations: a. using the best available economic models. b. using the best available information. c. using their available information in an unbiased fashion. d. All of the above. e. None of the above.

d. All of the above.

____ 10. Which of the following contributed to the 2008 global financial crisis? a. Secretive over-the-counter financial markets. b. Short-term incentives for bankers. c. Deregulation of financial markets. d. All of the above. e. None of the above.

d. All of the above.

____ 12. At the start of the twenty-first century, the financial industry in the U.S. and many other high-income European countries was increasingly characterized by: a. agglomeration of financial activities into large financial firms. b. securitization of loans. c. deregulation and reduced government oversight. d. All of the above. e. None of the above.

d. All of the above.

____ 14. The collateralized debt obligations (CDOs) that were popular in the early 2000s were often split into tranches: a. each with different interest rates and a different priority status. b. that were individually rated by one of the principal ratings firms. c. designed to just barely warrant a specific rating under the economic and financial conditions at the time the CDO was issued. d. All of the above. e. None of the above.

d. All of the above.

____ 2. The eurocurrency markets developed because: a. governments provided incentives for banks to do foreign banking business. b. bank customers sought to evade government restrictions on international investment. c. some countries holding dollars preferred to hold them outside the U.S. d. All of the above. e. None of the above.

d. All of the above.

____ 10. A thorough explanation of the 1982 debt crisis should include some reference to: a. human nature, such as over-optimism and under-estimation of risk. b. the globalization of finance, which permitted huge amounts of money to move between countries. c. the trilemma. d. All of the above. e. None of the above.

d. All of the above. Here are the causal threads, plus the primary common denominator - the trilemma. All these factors relate to the debt crisis, but forcing neo-liberalism on many developing countries (meaning making them open up their borders to inflows of capital among other measures) set up the conditions for failed attempts to keep monetary policy independent along with fixed exchange rates. This impossible trinity was destined to wreck havoc, which it did and led to many countries going belly-up

____ 24. According to John Maynard Keynes, a. short-term prices driven by speculators and gamblers end up influencing long-term decisions by lenders and borrowers. b. the short-term focus of financial markets makes the allocation of savings to investment inefficient. c. financial markets would function better if there was a small financial transactions tax. d. All of the above. e. None of the above.

d. All of the above. All classic Keynes. Main point for him was the consequence that markets by definition cannot be efficient. Short term price moves irrational -- mess with prices long term investors are using in their decisions. A mess that conventional theory has to bend over backwards to contort into something resembling rationality and certainty and stability intrinsically, but not very successfully.

____ 16. Contributing to Asia's 1997 financial crash was: a. heavy borrowing overseas in dollars by banks and firms whose earnings were in local currency. b. the weak balance sheets of many Asian banks whose customers were often not solvent either. c. the fact that in Thailand, Malaysia, and Indonesia foreign loans were sometimes used to finance real estate speculation. d. All of the above. e. None of the above.

d. All of the above. Major factors played a role, but most importantly include: heavy borrowing overseas in dollars by banks and firms whose earnings were in local currency, weak balance sheets of many Asian banks (with dollar loans) whose customers were often not solvent either, and the fact that in Thailand, Malaysia, and Indonesia foreign loans were sometimes used to finance real estate speculation. Note that these three factors are linked to capital inflows.

____ 17. The 1933 Glass-Steagall Act: a. Limited savings banks to taking deposits and making mortgages. b. Limited commercial banks to making business and consumer loans. c. prohibited investment banks from soliciting small deposits from the general public through retail banking locations. d. All of the above. e. None of the above.

d. All of the above. The legacy legislation known as Glass-Steagall stems from the post 1929 stock market crash and ensuring Great Depression. It was aimed at making sure these events did not repeat. Unfortunately, all the reforms were undone during the decades leading up the the bubble mania of the new millennium.

____ 9. Governments can influence the exchange rate by: a. directly purchasing or selling foreign exchange. b. tightening or loosening of domestic monetary policy. c. restricting international trade or investment. d. All of the above. f. None of the above.

d. All of the above. These should all be clearly linked in your minds after all the FX and XR work we have done. Flows of funds (investment) in and out, economic growth or contraction (by expanding or contracting the money supply), and intervention by CB (selling or buying FX) can all impact the XR.

____ 2. According to the interest parity condition, in a freely-floating foreign exchange market a country's spot exchange rate may remain constant throughout time if: a. economic growth is the same as in other countries. b. expectations about future exchange rates are constant. c. policy makers immediately adjust domestic policies when expectations change. d. All of the above. e. None of the above.

d. All of the above. This is essentially fleshing out more detail aimed at in the previous question. Van den Berg explains well the conditions needed to maintain parity. See more below.

____26. Which of the following did not occur during the 2001 Argentinian debt crisis? a. After several weeks of massive withdrawals of pesos from banks in order to exchange them for dollars, the Argentine government froze all bank accounts. b. The government resigned. c. The holders of most of the government debt did not agree to accept the government's offer of about thirty cents on the dollar and lengthened terms of repayment. d. The Argentinean government printed money so banks could continue to make loans.

d. The Argentinean government printed money so banks could continue to make loans. Printing of money was not an issue in that crisis.

____ 18. International financial history after the 1982 debt crisis is characterized by a. investments increasingly flowing from developing countries to developed countries. b. the accumulation of large foreign exchange reserves by developing countries. c. large trade deficits by some of the largest developed countries. d. all of the above. e. none of the above.

d. all of the above. All these factors and it ironically begins to resemble a developing country picture in developed countries, although the US is not a developing country by any means. The dollar actually soared during the 2008 crisis because of the worldwide flight to quality and safety in the US Treasury, so that is clearly the opposite of the XR crises we see elsewhere in the 1990s.

____ 23. Crony capitalism is a. a form of communism. b. not a factor in financial crises. c. more common in dictatorships as opposed to democracies. d. effectively a form of discrimination in the financial sector.

d. effectively a form of discrimination in the financial sector. Crony capitalism is centered on typically a family or extended family that dominates national politics and uses government to enrich friends and family through capitalist privileges awarded.

____ 22. Which of the following were among the reasons for the Asian crisis of 1997? a. appreciation of the U.S. dollar relative to Japanese and European currencies. b. China's 1994 depreciation of its currency. c. Over-valuation of the East Asian (Indonesia, Korea, Malaysia, the Philippines, and Thailand) currencies. d. Crony capitalism. e. All of the above. f. None of the above

e. All of the above. All of the above, which were linked together in some cases. See next answer feedback for more on crony capitalism.

____ 19. Which of the following were among the reasons for the Mexican peso crisis of 1994? a. Trade liberalization required by the North American Free Trade Agreement. b. Rising government budget deficits caused by pre-election spending by the PRI, the ruling party of Mexico. c. Pegging the peso to the dollar. d. Disregard for exchange rate risk. e. All of the above. f. None of the above.

e. All of the above. All of these send Mexico into the drink. It was a tough period and epitomizes the failure of some of the more orthodox models, even if there were some benefits and positive outcomes.

The foreign exchange markets are operated mostly by: a. government agencies. b. central banks. c. specially chartered firms located at airports and principal tourist centers. d. all of the above. e. None of the above.

e. None of the above.

____ 15. The 2008-2009 global financial crisis has: a. revealed that financial intermediaries and markets efficiently channeled savings to society's most advantageous investments. b. led to the breakup of the major financial conglomerates. c. validated the late twentieth century deregulation of the financial industry. d. All of the above. e. None of the above.

e. None of the above.

____ 20. Capital flight refers to: a. moving money into a country because of an expected devaluation of its currency. b. the response time of international banks to investment opportunities. c. the flow of transfers in the balance of payments. d. aggressive movement of funds among banks to capture funds and attract customers for loans. e. none of the above.

e. none of the above. None of the above -- it is an outflow, a sudden reversal of inflows due to many factors that drive the money away or pull it away to other economies.