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)

(a) the role of finance is typically overvalued.

(b) international financial flows have a crucial role in economic development.

(c) international capital flows have no role at all in economic development.

(d) economic growth is determined by the degree of financial liberalisation.

Q2: Economists also believe that… (p. 271)

(a) capital movements should be entirely abolished.

(b) the free movement of capital should be regulated adequately.

(c) regulation is a necessary step towards achieving stability in international economy.

(d) international financial flows should be free from government regulation.

Q3: According to economists, … (p. 271)

(a) capital should move freely from the poor countries to the rich ones.

(b) capital should move from countries with surplus savings to nations with a shortage of savings.

(c) money should move from countries with deficit savings to nations with a surplus of savings.

(d) goods and services 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)

(a) it will be used less effectively.

(b) it will not be used.

(c) it will be used most effectively.

(d) it does not cost too much.

Q5: The prevailing opinion in the U.S.A. is that … (p. 271)

(a) the international movement of capital should not be governed by the market.

(b) international financial flows should not be governed by the market.

(c) the international financial system should be governed by regulations.

(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)

(a) As a result of new theoretical models.

(b) Due to the East Asian crisis.

(c) Due to the unreliability of the IMF.

(d) As a result of the challenges posed by the IMF.

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

(a) capital account liberalisation

(b) money market liberalisation

(c) political liberalisation

(d) trade liberalisation

Q8: Moral hazard is … (p. 272)

(a) not a problem at all.

(b) a hidden action problem.

(c) a hidden information problem.

(d) a domestic phenomenon.

Q9: Why can moral hazard emerge by virtue of the IMF’s support? (p. 272)

(a) If the IMF rescues politicians, they will engage in less risky activities, because these politicians know that they will be bailed out every time.

(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.

(c) If the IMF does not rescue anyone, borrowers will not engage in risky activities, because these borrowers know that they will be bailed out.

(d) If the IMF rescues borrowers, no bail out activity happens.

Q10: According to Friedman, what was the original mandate of the IMF? (p. 272)

(a) Preventing poor countries to accumulate a high level of debt.

(b) Supervising the fixed exchange rate regime between 1944-1971.

(c) To rescue troubled countries.

(d) To provide loans to poor countries.

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

(a) The elimination of the IMF.

(b) The renewal of the IMF.

(c) The creation of a new financial institution.

(d) The provision of aid to poor countries.

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

(a) investors are rational.

(b) politicians are irrational.

(c) savers are irrational.

(d) borrowers are poor.

Q1: When was the IMF set up?

(a) at the beginning of World War II

(b) in 1990

(c) at the end of World War II

(d) in 1956

Q2: What was the original mandate of the IMF?

(a) To help rebuild domestic economies after World War II.

(b) To help reconstruct the devastated European continent after World War II.

(c) To help rebuild the international financial system and stabilize currencies after World War II.

(d) To help rebuild the international financial system and destabilize currencies after World War II.

Q3: What is the IMF’s main mission today?

(a)To prevent the international financial system from an ultimate collapse.

(b) To prevent economies from dollar shortages that would endanger the stability of the international financial system.

(c) To save crisis-struck economies from economic collapses.

(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?

(a) Reducing government spending, boosting international savings, and impairing growth targets.

(b) Restricting government spending, boosting domestic savings, raising interest rates, scaling back big infrastructure projects and paring growth targets.

(c) Increasing public spending, reducing interest rates and national savings.

(d) Increasing government expenditure, reducing domestic savings, and scaling back big infrastructure projects.

Q5: What negative effects can the IMF-induced policies have in the crisis-hit Asian countries?

(a) Falling prices, increased unemployment, political instability.

(b) Rising prices, increased social services, falling productivity.

(c) Rising prices, reduced social services and more unemployment, in extreme cases leading to political instability.

(d) Rising prices, reduced social costs, political calamity and riots.

Q6: What would be the alternative to IMF prescriptions?

(a) Steadily draining financial reserves, capital flight and economic meltdown.

(b) Intense economic growth and increased international aid inflow.

(c) Political instability, falling inflation and raising budget deficit.

(d) Capital flight, economic recovery and increased trust in national policies.

Q7: Why is it important to “inject needed discipline into an economy”?

(a) To increase economic growth.

(b) To be able to pay back debt.

(c) To increase economic intervention.

(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.

(b) While lower interest rates are a damper on business, they also make banks and businessmen less cautious about whom they lend to.

(c) While higher prices are a damper on economic growth, they also make politicians and businessmen less careful about whom they lend to or what sectors they invest in.

(d) While higher return on bonds are a damper on politics, they also make politicians and market agents more careful about whom they lend to.

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.

(b) Governments should reduce consumption and increase confidence.

(c) Governments should take into account the needs of foreign investors as well.

(d) Governments must pay back their debt to foreign investors.

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?

(a) Because the microeconomy was in bad shape; it was characterized by a high inflation rate and high savings.

(b) Because the macroeconomy was in good shape; it was characterized by low inflation rate and high savings.

(c) Because the macroeconomy was in good shape; it was characterized by a relatively high inflation rate and low savings.

(d) Because the microeconomy was in good shape; it was characterized by a low inflation rate and high savings.

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