Question 1

Following the severe contraction following the East Asian financial crisis in the late 1990s, many emerging market economies began to:
A) cut unnecessary investment projects.
B) "save" foreign currency export earnings by investing them in developed market assets and holding higher levels of foreign currency reserves.
C) borrow more when interest rates were lower, and repay when they are higher.
D) make sure their foreign currency earnings were used to build capital in their own economies.

Accepted Answer

Many emerging market economies learned from the East Asian financial crisis and began to save foreign currency export earnings by investing them in developed market assets and holding higher levels of foreign currency reserves. This helped to protect their economies from sudden capital outflows and currency devaluations.

Question 2

Lessons from the emerging market economies of the dangers of growing internal and external debt _____ in the developed economies, causing ______.
A) were taken into account; a more responsible use of borrowed funds
B) were disregarded; extreme vulnerability to banking, default, and even currency crises
C) made their way into economic textbooks early on; newly trained economists to be up to speed on the dangers of deficits and debt
D) made a huge impression; people to increase saving and reduce borrowing

Accepted Answer

The sentence states that the lessons from emerging market economies were of the dangers of growing internal and external debt, which were disregarded in the developed economies, causing extreme vulnerability to banking, default, and even currency crises. Therefore, the best choice is B.

Question 3

The flow of capital investment from emerging markets to developed markets resulted in:
A) greatly reduced borrowing costs and created a huge wave of investment funds in developed market economies.
B) overpriced assets in the emerging market economies.
C) increased political leverage for the emerging markets in developed economies.
D) a decline of responsibility in the emerging markets as they relied on developed economies for returns on investment.

Accepted Answer

The flow of capital investment from emerging markets to developed markets often leads to reduced borrowing costs in developed markets due to the increased supply of capital. This influx of funds can stimulate investment in these economies by making it cheaper for businesses and governments to finance new projects and expansions.

Question 4

The performance of the Australian dollar from 2002-07 illustrates which major points about international investments?

Accepted Answer

The answer of The performance of the Australian dollar from...

Question 5

How is the Balassa-Samuelson model useful in forecasting real exchange rates?

Accepted Answer

The answer of How is the Balassa-Samuelson model useful in...

Question 6

While the financial crisis was devastating in many ways, your textbook author says the worst consequence is:
A) low levels of output and high unemployment that could linger for several years.
B) the inability of banks to borrow.
C) the difficulty of conducting monetary policy in an era of increased regulation.
D) some of the European peripherals had to come to the rescue of the United States.

Accepted Answer

The low levels of output and high unemployment that could linger for several years are the worst consequence of the financial crisis because they have long-lasting impacts on individuals, families, and the economy as a whole. The inability of banks to borrow and the difficulty of conducting monetary policy in an era of increased regulation are significant challenges, but they can be addressed with policy interventions. The idea that the European peripherals had to come to the rescue of the United States is not accurate as the crisis originated in the United States and affected the global economy.

Question 7

Suppose a country is experiencing significant productivity growth of 5% relative to that of another country with 2% productivity growth. Both countries have about 40% of their consumption in nontraded goods. What does this imply about the rate at which the exchange rate will change?

Accepted Answer

The answer of Suppose a country is experiencing significant productivity...

Question 8

Briefly describe the insights of the Balassa-Samuelson model regarding deviations from LOOP.

Accepted Answer

The answer of Briefly describe the insights of the Balassa-Samuelson...

Question 9

In the decade preceding the financial crisis, as growing emerging market economies began to realize current account surpluses due to very high rates of saving, they channeled investment from _____ to ______.
A) the United States; Russia
B) rich nations; poor nations
C) their own economies; developed market economies
D) high-yield assets; low-yield assets

Accepted Answer

In the decade before the financial crisis, emerging market economies, experiencing high rates of saving and current account surpluses, invested their excess savings in developed market economies. This was partly due to the search for safe investment opportunities and the relatively low interest rates in their own countries.

Question 10

The LOOP and the existence of PPP depend on entities being able to trade without cost, thereby moving prices. What are trade costs that limit arbitrage and prevent price convergence?

Accepted Answer

The answer of The LOOP and the existence of PPP...

Question 11

Compared with the developed market economies that had borrowed heavily in the run up to the financial crisis, the emerging market creditors:
A) suffered much more because of borrowers who defaulted on loans.
B) suffered much less because the governments in those nations raised taxes.
C) fared well and recovered rapidly because they restricted borrowing and saving foreign currency reserves.
D) had to cut government spending and reduce money creation as austerity measures.

Accepted Answer

Emerging market creditors fared well and recovered rapidly because they restricted borrowing and saved foreign currency reserves. They were cautious in their lending practices and did not borrow excessively, which helped them withstand the effects of the financial crisis better than the developed market economies that had borrowed heavily. Additionally, many emerging market governments implemented policies to encourage savings and restrict spending, which further strengthened their financial positions.

Question 12

Some groups of nations have experienced surplus in their CAs for several years, whereas for others the surplus is temporary. Within what groups of nations are surplus nations included?
A) slow-growth advanced economies with high savings rates, oil-exporting nations, and most of Asia
B) sub-Saharan African nations, the Indian continent, and the Nordic countries
C) Argentina, Chile, and Brazil, as well as several Central American nations
D) Ireland, Spain, and Portugal

Accepted Answer

Slow-growth advanced economies with high savings rates (such as Germany and Japan), oil-exporting nations (such as Saudi Arabia and Venezuela), and most of Asia (such as China and South Korea) are known for experiencing consistently high levels of surplus in their CA. The other options do not include nations that are typically known for having a surplus in their CA.

Question 13

Explain the essence of the carry trade and why it is noteworthy.

Accepted Answer

The answer of Explain the essence of the carry trade...

Question 14

The global recession following the financial crisis hurt the weaker Eurozone debtor economies more because:
A) their central banks, backed by ECB lending, had lent based on expected high returns to investment that did not materialize.
B) their governments had to pull out of the euro.
C) their exchange rates depreciated.
D) they had to cut their military forces to balance their budgets.

Accepted Answer

The weaker Eurozone debtor economies borrowed heavily from banks, including their central banks, based on expectations of high returns to investment that did not materialize, leading to a crisis of solvency when revenues dwindled.

Question 15

Contributing to the crisis may have been government failure for all of the following reasons, EXCEPT:
A) too many guarantees and subsidies to banks and quasi-official financial institutions encouraging irresponsible lending.
B) a monetary policy that was "too easy," resulting in low interest rates and excessive borrowing.
C) a trend toward deregulation and lack of oversight of financial innovation.
D) a reversion to economic fundamentals such as balanced budgets and a paring down of financial innovation.

Accepted Answer

Option D suggests that government failure may have contributed to the crisis by reverting to economic fundamentals and paring down financial innovation. However, this statement is contradictory as a move towards economic fundamentals and a reduction in financial innovation can be seen as steps towards preventing a crisis rather than contributing to it. The other options - A, B, and C - are all valid reasons for government failure contributing to the crisis.

Question 16

Explain the two types of costs associated with default on debt.

Accepted Answer

The answer of Explain the two types of costs associated...

Question 17

Explain why and how the existence of trade costs affects arbitrage.

Accepted Answer

The answer of Explain why and how the existence of...

Question 18

Money creation to support spending in the aftermath of the financial crisis was ineffective because:
A) there was not enough of it.
B) banks, individuals, and firms used the additional liquidity to rebuild wealth by paying down debt rather than spending.
C) much of the money leaked out to overseas deposits.
D) spending was growing too fast and people were using money substitutes.

Accepted Answer

Money creation was not effective because banks, individuals, and firms used the additional liquidity to pay down debt instead of spending. This led to a decrease in the velocity of money and reduced the effectiveness of the monetary stimulus. Additionally, much of the money created did not stay within the domestic economy but leaked out to overseas deposits.

Question 19

The recent downward trends in interest rates worldwide could be attributed to:
A) tariffs and other nontariff trade barriers.
B) economic sanctions.
C) a savings glut.
D) excess consumption in developed nations.

Accepted Answer

The recent downward trends in interest rates are mainly due to a savings glut. This is because there is an oversupply of savings around the world, which is causing interest rates to fall. Additionally, factors such as aging populations, slower economic growth, and increased uncertainty have also contributed to the savings glut. Tariffs, economic sanctions, and excess consumption may affect the economy and financial markets, but they are not the primary drivers of the current low interest rates.

Question 20

The savings glut was likely caused by all of the following, EXCEPT a:
A) deficit in the fast-growing advanced countries.
B) surplus in slow-growing advanced countries.
C) surplus in emerging Asian economies.
D) deficit in petroleum-exporting countries.

Accepted Answer

The correct statement would be "The savings glut was likely caused by a deficit in petroleum-exporting countries." The other options listed are all potential causes of the savings glut.

Quiz 22: Topics in International Macroeconomics

Following the severe contraction following the East Asian financial crisis in the late 1990s, many emerging market economies began to:

Lessons from the emerging market economies of the dangers of growing internal and external debt _ in the developed economies, causing __.

The flow of capital investment from emerging markets to developed markets resulted in:

The performance of the Australian dollar from 2002-07 illustrates which major points about international investments?

How is the Balassa-Samuelson model useful in forecasting real exchange rates?

While the financial crisis was devastating in many ways, your textbook author says the worst consequence is:

Suppose a country is experiencing significant productivity growth of 5% relative to that of another country with 2% productivity growth. Both countries have about 40% of their consumption in nontraded goods. What does this imply about the rate at which the exchange rate will change?

Briefly describe the insights of the Balassa-Samuelson model regarding deviations from LOOP.

In the decade preceding the financial crisis, as growing emerging market economies began to realize current account surpluses due to very high rates of saving, they channeled investment from _ to __.

The LOOP and the existence of PPP depend on entities being able to trade without cost, thereby moving prices. What are trade costs that limit arbitrage and prevent price convergence?

Compared with the developed market economies that had borrowed heavily in the run up to the financial crisis, the emerging market creditors:

Some groups of nations have experienced surplus in their CAs for several years, whereas for others the surplus is temporary. Within what groups of nations are surplus nations included?

Explain the essence of the carry trade and why it is noteworthy.

The global recession following the financial crisis hurt the weaker Eurozone debtor economies more because:

Contributing to the crisis may have been government failure for all of the following reasons, EXCEPT:

Explain the two types of costs associated with default on debt.

Explain why and how the existence of trade costs affects arbitrage.

Money creation to support spending in the aftermath of the financial crisis was ineffective because:

The recent downward trends in interest rates worldwide could be attributed to:

The savings glut was likely caused by all of the following, EXCEPT a: