Exercises

Exercises

1.Single-choice questions

(1)The Mexican Peso Crisis was touched off by____________.

a.an unsurprising announcement by the Mexican government to devalue to peso against the dollar by 14 percent

b.an unexpected announcement by the Mexican government to devalue to peso against the dollar by 14 percent

c.an announcement by the Mexican government to enact a currency board arrangement with the US dollar

d.contagion from other Latin American and Asian financial markets

(2)Prior to the peso crisis, Mexico depended on foreign portfolio capital to finance its economic development.This foreign capital influx____________.

a.caused higher domestic inflation      b.led to an overvalued peso

c.helped Mexico’s trade balances      d.a and b are correct

(3)The Mexican peso crisis is significant in that____________.

a.it is perhaps the first serious international financial crisis touched off by cross-border flight of portfolio capital

b.selling by international portfolio managers had a highly destabilizing, contagious effect on the world financial system

c.it provides a cautionary tale that as the world’s financial markets are becoming more integrated; this type of contagious financial crisis is likely to occur more often

d.All of the above.

(4)The Asian Currency Crisis____________.

a.happened just prior to the Mexican peso crisis

b.turned out to be far more serious than the Mexican peso crisis in terms of the extent of contagion

c.was limited to Asian currencies

d.was almost over before anyone outside the pacific rim noticed

(5)Generally speaking, liberalization of financial markets when combined with a weak, underdeveloped domestic financial system tends to____________.

a.strengthen the domestic financial system in the short run

b.create an environment susceptible to currency and financial crises

c.raise interest rates and lead to domestic recession

d.None of the above.

(6)According to the “Trilemma” a country can attain only two of the following three conditions: ① A fixed exchange rate, ② Free international flows of capital, ③ An independent monetary policy.This difficulty is also known as____________.

a.the incompatible trinity        b.the Trilemma

c.the Tobin tax               d.All three can be had at the same time

(7)To avoid currency crisis in the face of fully integrated capital markets, a country can____________.

a.have a floating exchange rate

b.have a fixed exchange rate

c.have a fixed exchange rate that adjusts

d.a and b can both help to avoid currency crises

(8)Prior to the Argentine Peso Crisis,____________.

a.Argentina had a “dirty float” where the government allowed the exchange rate to float within wide bands

b.Argentina had a currency board arrangement with the peso pegged to the US dollar at parity

c.the Argentine government defaulted on its international debts

d.weakening of the US dollar led the Argentine government to abandon dollarization

2.Essay questions

(1)What is the financial crisis?

(2)What are the different explanations for the currency crisis and bank crisis?

(3)What’s the relationship between capital flows and financial crisis?

(4)What are the four forces combined to create the surge in international lending in 1974- 1982?

(5)What are the two major types of international efforts to resolve financial crises?