Questions and Problems (Chapter 8)

1. What are the causes of poverty? Why do many countries cannot grow faster and catch
up with rich countries?

2. The convergence theory sometimes are considered as deceptively simple. Explain why.

3. Explain why the distinction between debt and equity finance is useful in analyzing the
response of developing countries to unforeseen events such as recession or terms of trade
change?

4. Explain why in exchange rate-based stabilization plan may result in a real appreciation?

5. "Sharp contractions in a country's output and employment invariably result from a

crisis in which the country suddenly loses access to all foreign sources of funds." Explain
how the current account identity necessitates these contractions.

6. What is the domino effect or contagion?

7. Explain the spillover to Russia and Rssia’ crisis.

8. The 1980s are considered as the "lost decade" of Latin American growth. Explain why??

9. Some critics of the adoption of fixed exchange rates by developing countries argued that these
exchange rates can create a kind of moral hazard. Discuss this argument.

10. Under which exchange rate arrangements, fixed or flexible exchange rates, the portfolio
diversification can produce more benefits?