The international financial system Exercise 1

 

 

A) Please decide whether the following statements are correct or not.

 

Q1: The removal of capital controls has created a more integrated web of national capital markets and also a global financial system. C

Q2: Great Britain invested mostly in the service sector, especially in the financial and banking sector before World War I. I

Q3: In relative terms, capital movement is much larger today than a hundred years ago. I

Q4: Today, the bulk majority of international capital flows are long-term. I 

Q5: In spite of the fact that short-term international capital flow has intensified in the last few decades, finance is still characterized by a home bias. C

Q6: If the world were really integrated financially, then national savings and investment rates would no longer correlate so closely. C

Q7: If the world were really integrated financially, then interest rates around the world would be less equal. I

Q8: The U.S. is slightly peculiar in the sense that albeit it is a low-saving country, its investment rate is relatively high. C

Q9: The U.S. is dependent on foreign borrowings because its investment rate exceeds its savings rate. C

Q10: Despite the intensification of capital movements, significant national differences in capital costs still characterize the modern world economy. C

Q11: The pre-East Asian crisis period was characterized by region-specific crises. C

Q12: The East Asian crisis was also a region-specific one, because it bursted out in Thailand and no spill-over effect evolved. I

Q13: According to Minsky, the events leading up to a financial crisis normally begin with a “displacement”, that is, an external shock. C 

Q14: An investment boom is preceded by a rapid and substantial expansion of credit.C

Q15: According to Milton Friedman, speculation is the effort of investors to protect themselves against irresponsible national governments. C

Q16: Financial speculation is a heard phenomenon. I

Q17: The East Asian crisis started in Thailand. C

Q18: In 1999 Brazil suffered a huge budget surplus, which triggered an immediate devaluation of the country’s national currency. I

Q19: The ultimate reason for proposing a new international financial architecture was to suspend the IMF and the World Bank, and to create new financial institutions that would be responsible for managing global crises. I

Q20: The transparency of financial conditions is crucial to the prevention of financial crises. C

  

Q1: According to the IMF, what was the basic problem with Korea?

(a) On the one hand Korea transformed itself into an advanced industrial economy, but on the other hand its financial system had been weakened by government interference in the economy and by close linkages between banks and conglomerates.

(b) The high rate of inflation caused the economy to deteriorate.

(c) The low demand for Korean goods triggered a severe deficit in its trade balance, thereby devaluating the Korean national currency, the won.

(d) Korea belongs now to the group of advanced industrial economies, but its macroeconomic policies had been incorrectly pursued by the weak government.

 

Q2: What were the main objectives of the Korean crisis resolution strategy of the IMF?

(a) To lay the foundation for the resumption of non-sustained recovery in international affairs.

(b) To increase demand for its export goods.

(c) To increase both domestic and international demand.

(d) To restore confidence and stabilize financial markets.

 

Q3: Why was it necessary to increase interest rates substantially at the very beginning of the programme?

(a) It aimed at avoiding a debt spiral.

(b) It aimed at reducing inflation and increasing consumption.

(c) It aimed at stabilizing the national currency, the won, and avoiding a depreciation-inflation spiral.

(d) It aimed at creating a new monetary regime.

 

Q4: How did authorities try to mitigate the negative consequences of the restrictive measures?

(a) They provided direct support through private works programs

(b) They provided different kinds of social programmes for investors who lost during the crisis.

(c) Restrictive fiscal measures were adopted.

(d) Among other things, they strengthened the social safety net by expanding the unemployment insurance system.

 

Q5: How did the IMF evaluate its programme?

(a) The policies have contributed to the eradication of crony capitalism in the country.

(b) The policies have helped to successfully restore external stability, and initiate the reform of the financial and corporate sectors.

(c) The IMF failed to help the countries in trouble due to its mismatched policies.

(d) The policies have helped to successfully restore internal stability, and initiate macroeconomic reform.

 

Q6: Did the Korean government exert macroeconomic discipline during and after the crisis (look at the table)?

(a) No.

(b) Yes, indeed, it did so.

(c) No, because it increased its external debt.

(d) No, because it experienced a huge deficit in the current account balance.