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ENC 306 Final Exam Practice Questions & Answers 2024/2025
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ENC 306 Final Exam Practice Questions & Answers 2024/2025 True or False Professor Bhagwati's phrase: "Trade in bhats is not the same as trade in bats" is intended to convey the view that a policy of free international capital mobility may not be socially optimal in contrast to a pol...

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  • October 25, 2024
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  • 2024/2025
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  • enc 306 final exam practice questions answers 20

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ENC 306 Final Exam Practice Questions
& Answers 2024/2025

True or False



Professor Bhagwati's phrase:



"Trade in bhats is not the same as trade in bats"



is intended to convey the view that a policy of free international capital mobility may not be socially
optimal in contrast to a policy of free trade. - ANSWERSTrue



Two nations are unable to smooth consumption across two states of nature because they lack a global
capital market.



Nation A's production is 40 in state 1 and 60 in state 2. Nation B's production is 60 in state 1 and 40 in
state 2.



Given these data, which below illustrates the type of consumption smoothing that can occur with a
global capital market?



a. Average consumption could become 50 and the variance of consumption 100

b. Average consumption could become 50 and the variance of consumption 0.

c. Average consumption could become 40 and the variance of consumption 100

d. Average consumption could become 60 and the variance of consumption 0

e. None of the above - ANSWERSb. Average consumption could become 50 and the variance of
consumption 0



Which of the following applies to Brady Bonds?

,a. They helped to resolve the Third World debt crisis precipitated by Mexico's default in 1982.

b. They helped replenish fund used for bailouts at the International Monetary Fund during the Asian
Crisis

c. Brady Bonds helped foreign investors protect their equity when investing in companies abroad by
guaranteeing their initial investment

d. All of the above

e. Only a & c - ANSWERSa. They helped to resolve the Third World debt crisis precipitated by Mexico's
default in 1982.



Which of the following can lead to international financial crises?



a. Waves of over-borrowing & over-lending

b. Failure to hedge foreign currency liabilities

c. Volatile global short-term lending

d. Contagion

e. All of the above - ANSWERSe. All of the above.



Which of the policies listed below are likely to make financial crises less likely to occur?



a. A nation strives to follow sound macroeconomic policies.

b. A nation provides incentives for short-term capital inflows

c. A nation eliminates the regulation & supervision of banks

d. A nation eliminates capital requirements for banks

e. All of the above actions make financial crises less likely - ANSWERSa. A nation strives to follow sound
macroeconomic policies.



Which of the following is NOT correct?

, a. Prior to WWI, large inflows of capital from Western Europe were instrumental in building railroads &
infrastructure in the areas of recent settlement

b. Private capital basically ignored poor nations from the 1930s to the 1970s

c. The crisis in Thailand, through a process of contagion, spread to other countries like South Korea and
Malaysia whose economic fundamentals were also unsound.

d. The recycling of petro-dollars in the mid-1970s led to a surge of private bank lending to poor nations,
especially to those having difficulties paying for their oil imports

e. All are correct - ANSWERSc. The crisis in Thailand, through a process of contagion, spread to other
countries like South Korea and Malaysia whose economic fundamentals were also unsound.



Knowing that IMF rescue packages are available leads nations to engage in riskier behavior when
borrowing. This is known as:



a. Global contagion

b. Moral hazard

c. Debt overhang

d. Debt restructuring

e. None of the above - ANSWERSb. Moral hazard.



In the diagram below, what happens to U.S. GNP when capital is permitted to flow freely between the
United States and Japan? - ANSWERSU.S. GNP rises by area d+e+f



In the diagram above, what happens to U.S. GDP when capital is permitted to flow freely between the
United States and Japan? - ANSWERSU.S. GDP RISES by area g+h+a+b+c+d+e+f



In the diagram above, what happens to World GDP when capital is permitted to flow freely between the
United States and Japan? - ANSWERSWorld GDP rises by area a+b+c+d+e+f



True or False



A unique aspect of the FX MKT is that you can make contracts today for future delivery or sale of
currency at a fixed price. - ANSWERSTrue

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