Question 1

In the 1990s this agency has acted like an international lender of last resort to cope with financial instability.

Accepted Answer

The International Monetary Fund (IMF) has acted as an international lender of last resort to cope with financial instability in various countries during the 1990s.

Question 2

Assume that a fixed exchange rate is overvalued.Describe the situation of a speculative crisis against this currency.What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

Accepted Answer

The answer of Assume that a fixed exchange rate is...

Question 3

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,the Bank of England was required to buy ________ and sell ________,thereby ________ international reserves.

Accepted Answer

C)marks;pounds;gaining. Under the mechanism, if the German mark depreciated below its lower limit against the British pound, the Bank of England would buy marks and sell pounds to support the mark. This action would increase the Bank of England's holdings of foreign currency (marks), thereby increasing its international reserves.

Question 4

Critics of the IMF contend that its lending in the ________ crisis,which was used to bail out foreign lenders,set the stage for the ________ crisis because these lenders expected to be bailed out if things went wrong and thus provided funds that were used to fuel excessive risk taking.

Accepted Answer

The IMF's lending during the Mexican crisis in the 1990s, which was used to bail out foreign lenders, set the stage for the East Asian crisis in the late 1990s. These lenders expected to be bailed out if things went wrong, which led them to provide funds that were used to fuel excessive risk-taking in the East Asian economies. Therefore, option D (Mexican; East Asian) is the best choice.

Question 5

A capital ________ can promote financial instability in an emerging-market country because it is what forces a country to ________ its currency.

Accepted Answer

A capital outflow can promote financial instability in an emerging-market country because it represents a withdrawal of investment, leading to a decrease in the value of the country's currency. This often forces the country to devalue its currency to make its exports more competitive and stabilize the economy.

Question 6

An advantage of an international lender of last resort is its ability to prevent ________,in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of ________ if creditors expect to be protected if a crisis occurs.

Accepted Answer

Contagion refers to the spread of a crisis from one country to others, particularly through financial channels. An international lender of last resort can help prevent contagion by providing liquidity to countries in need, thereby reducing the risk of speculative attacks on other currencies. Moral hazard is a problem because if creditors believe they will be bailed out in the event of a crisis, they may take on excessive risk, which could ultimately lead to more crises. Adverse selection is not directly related to the concept of an international lender of last resort. Currency virus is not a commonly used term in this context.

Question 7

A case for capital inflow controls can be made because capital inflows

Accepted Answer

Capital inflows can cause a lending boom, which can lead to excessive risk-taking and unsustainable borrowing. This, in turn, can contribute to financial instability and crises. Therefore, capital inflow controls may be necessary to manage the risks associated with volatile capital flows, such as limiting the amount, timing, or composition of inflows.

Question 8

Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system.What alternative policies are available to eliminate the overvaluation of the exchange rate?

Accepted Answer

The answer of Explain and demonstrate graphically the situation of...

Question 9

Under the Exchange Rate Mechanism of the European Monetary System,when the British pound depreciated below its lower limit against the German mark,the German central bank was required to buy ________ and sell ________,thereby ________ international reserves.

Accepted Answer

When the British pound depreciates below its lower limit against the German mark, the German central bank is required to buy pounds and sell marks, thereby gaining international reserves.

Question 10

Critics of the IMF contend that its lending in the Mexican crisis,which was used to bail out foreign ________,set the stage for the ________ crisis because these ________ expected to be bailed out if things went wrong.

Accepted Answer

The sentence mentions that the IMF's lending in the Mexican crisis was used to bail out foreign lenders, not borrowers. It also states that this set the stage for the East Asian crisis because these lenders expected to be bailed out if things went wrong. Therefore, the correct option is B, which states that the IMF's lending was used to bail out foreign lenders and led to the East Asian crisis.

Question 11

Which of the following is not a disadvantage of controls on capital outflows?

Accepted Answer

The answer of Which of the following is not a...

Question 12

An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.

Accepted Answer

An international lender of last resort creates a moral hazard problem because depositors and other creditors may take more risks with their investments in banks, knowing that they will be bailed out in case of a crisis. This can encourage risky behavior by banks and increase the probability of a financial crisis.

Question 13

Under the Exchange Rate Mechanism of the European Monetary System,when the British pound depreciated below its lower limit against the German mark,the Bank of England was required to buy ________ and sell ________,thereby ________ international reserves.

Accepted Answer

When the British pound depreciated below its lower limit against the German mark, the Bank of England had to buy marks and sell pounds, which was aimed at preventing the pound from falling below the lower limit. However, this also meant that the Bank of England was losing international reserves as it had to use them to purchase marks.

Question 14

A capital ________ can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks,which helps trigger a ________.

Accepted Answer

An inflow of capital can lead to a lending boom and excessive risk-taking on the part of banks, which can ultimately trigger a financial crisis. This is because the excessive lending and risk-taking can create an unsustainable bubble in the economy that eventually bursts, leading to a crisis.

Question 15

The East Asia currency crisis in 1997 started in

Accepted Answer

The East Asia currency crisis started in Thailand in July 1997 and then spread to other countries in the region, including South Korea, Indonesia, and the Philippines. Japan was not directly affected by the crisis, although it did experience some economic slowdown as a result.

Question 16

In September 1992,the Bundesbank attempted to keep the mark from appreciating relative to the British pound,but it failed because participants in the foreign exchange market came to expect the

Accepted Answer

Participants in the foreign exchange market expected the mark to appreciate, which made it difficult for the Bundesbank to keep the mark from appreciating relative to the British pound.

Question 17

An advantage of an international lender of last resort is its ability to prevent ________,in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of ________ if creditors expect to be protected if a crisis occurs.

Accepted Answer

An international lender of last resort can prevent contagion, which is when a successful speculative attack on one currency leads to attacks on others. However, the problem with such a lender is the possibility of moral hazard if creditors expect to be protected if a crisis occurs.

Question 18

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,the German central bank was required to buy ________ and sell ________,thereby ________ international reserves.

Accepted Answer

When the German mark depreciated below its lower limit against the British pound, the German central bank was required to buy pounds (to support the pound) and sell marks (to increase the supply of marks in order to increase its value in relation to the pound), thereby losing international reserves.

Question 19

Between May and July 1997,concerns about the large current account deficit in Thailand and the weakness in the Thai financial system caused speculators to suspect that Thailand might be forced to

Accepted Answer

The concerns about Thailand's current account deficit and weak financial system led to speculators suspecting that the Thai government may not be able to defend the value of the baht. As a result, there was a significant outflow of foreign capital, which put pressure on the baht. Thailand eventually devalued its currency in July 1997, which triggered a financial crisis across East Asia.

Question 20

An international lender of last resort creates a serious moral hazard problem because ________ and other ________ of banking institutions expect that they will be protected if a crisis occurs.

Accepted Answer

Deposit insurance and the existence of a lender of last resort can create a moral hazard problem because depositors and other creditors of banking institutions expect that in the event of a crisis, their deposits will be protected, and they may take on greater risks than they would in the absence of such protection.

Quiz 18: The International Financial System

In the 1990s this agency has acted like an international lender of last resort to cope with financial instability.

Assume that a fixed exchange rate is overvalued.Describe the situation of a speculative crisis against this currency.What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,the Bank of England was required to buy and sell ,thereby international reserves.

Critics of the IMF contend that its lending in the crisis,which was used to bail out foreign lenders,set the stage for the crisis because these lenders expected to be bailed out if things went wrong and thus provided funds that were used to fuel excessive risk taking.

A capital can promote financial instability in an emerging-market country because it is what forces a country to its currency.

An advantage of an international lender of last resort is its ability to prevent ,in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of if creditors expect to be protected if a crisis occurs.

A case for capital inflow controls can be made because capital inflows

Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system.What alternative policies are available to eliminate the overvaluation of the exchange rate?

Under the Exchange Rate Mechanism of the European Monetary System,when the British pound depreciated below its lower limit against the German mark,the German central bank was required to buy and sell ,thereby international reserves.

Critics of the IMF contend that its lending in the Mexican crisis,which was used to bail out foreign ,set the stage for the crisis because these expected to be bailed out if things went wrong.

Which of the following is not a disadvantage of controls on capital outflows?

An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.

Under the Exchange Rate Mechanism of the European Monetary System,when the British pound depreciated below its lower limit against the German mark,the Bank of England was required to buy and sell ,thereby international reserves.

A capital can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks,which helps trigger a .

The East Asia currency crisis in 1997 started in

In September 1992,the Bundesbank attempted to keep the mark from appreciating relative to the British pound,but it failed because participants in the foreign exchange market came to expect the

An advantage of an international lender of last resort is its ability to prevent ,in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of if creditors expect to be protected if a crisis occurs.

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,the German central bank was required to buy and sell ,thereby international reserves.

Between May and July 1997,concerns about the large current account deficit in Thailand and the weakness in the Thai financial system caused speculators to suspect that Thailand might be forced to

An international lender of last resort creates a serious moral hazard problem because and other of banking institutions expect that they will be protected if a crisis occurs.