Exercise 2. A) Multiple choice questions (only one correct answer exists).

A) Multiple choice questions (only one correct answer exists).

Q1: Economists believe that… (p. 271) (b) international financial flows have a crucial role in economic development.

Q2: Economists also believe that… (p. 271) (d) international financial flows should be free from government regulation.

Q3: According to economists, … (p. 271) (b) capital should move from countries with surplus savings to nations with a shortage of savings.

Q4: In principle, capital should move to places, where… (p. 271) (c) it will be used most effectively.

Q5: The prevailing opinion in the U.S.A. is that … (p. 271) (d) the international financial system should be governed by the market.

Q6: Why did a number of prominent American economists start to argue for a more restricted international capital flow? (p. 271) (b) Due to the East Asian crisis.

Q7: Economists agree mostly unanimously on the virtues of … (p. 272) (d) trade liberalisation

Q8: Moral hazard is … (p. 272) (b) a hidden action problem.

Q9: Why can moral hazard emerge by virtue of the IMF’s support? (p. 272) (b) If the IMF rescues borrowers, they will engage in risky activities again and again, because these borrowers know that they will be bailed out each time.

Q10: According to Friedman, what was the original mandate of the IMF? (p. 272) (b) Supervising the fixed exchange rate regime between 1944-1971.

Q11: What advice did Friedman give regarding the suspension of moral hazard? (p. 273) (a) The elimination of the IMF.

Q12: According to the market-oriented position – such as the one shared by Milton Friedman – … (p. 273) (a) investors are rational.

Q1: When was the IMF set up? (c) at the end of World War II

Q2: What was the original mandate of the IMF? (c) To help rebuild the international financial system and stabilize currencies after World War II.

Q3: What is the IMF’s main mission today? (d) To save crisis-struck economies from balance-of-payments collapses that would endanger the stability of neighbours or even the international financial system.

Q4: What policies should have been adopted by Asian countries, as prescribed by the IMF? (b) Restricting government spending, boosting domestic savings, raising interest rates, scaling back big infrastructure projects and paring growth targets.

Q5: What negative effects can the IMF-induced policies have in the crisis-hit Asian countries? (c) Rising prices, reduced social services and more unemployment, in extreme cases leading to political instability.

Q6: What would be the alternative to IMF prescriptions? (a) Steadily draining financial reserves, capital flight and economic meltdown.

Q7: Why is it important to “inject needed discipline into an economy”? (d) To restore confidence among investors.

Q8: What are the direct and indirect consequences of IMF policies? (a) While higher interest rates are a damper on business, they also make banks and businessmen more careful about whom they lend to or what sectors they invest in.

Q9: What should national governments do to prevent another crisis? (a) Governments must resolutely attack the ingrained corruption and cronyism that clog so many national systems.

Q10: The IMF should basically concentrate on the macroeconomy. However, the real problem in Asia was with the private sector, and not the public sector. Why? (b) Because the macroeconomy was in good shape; it was characterized by low inflation rate and high savings.

topic 10.

Multinational corporations

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