Question

One possible meaning of the term financial crisis includes ______________.

A) the potential problems ahead in using the U.S. dollar as the main international currency

B) insolvency of a banking system

C) an inflow of short-term capital to a country

D) the potential moral hazard problem created by international institutions such as the IMF

2. An exchange rate crisis is caused by _____________.

A) a sudden and an unexpected collapse in the value of a nation’s currency

B) the inability of the IMF to predict the immediate collapse of the currency of a country

C) the adoption of a flexible exchange rate system by a country or group of countries

D) the adoption of a fixed exchange rate system by a country or group of countries

3. _______ is the international institution that serves as a lender of last resort.

A) IBRD

B) WTO

C) IMF

D) World Bank

Answer 1

1. Option B is the answer.

• Insolvency of a banking system.
• One possible meaning of the term financial crisis includes insolvency of a banking system. When assets are less than the liabilities, there exists a major risk of financial crisis in that bank. When banking system is not working properly and bank has more liabilities than its actual assets, then there exists financial crisis. Thus insolvency of a banking system can indicate the financial crisis.

2. Option A is the answer.

• A sudden and an unexpected collapse in the value of a nation's currency.
• An exchange rate crisis is caused by a sudden and an unexpected collapse in the value of a nation's currency. Exchange rate crisis usually arises when there is a doubt regarding whether the central bank of a country has enough foreign exchange rate reserves to maintain the fixed exchange rate . When the nation's currency unexpectedly falls, then there is a high chance of exchange rate crisis to occur.

3. Option C is the answer.

• IMF.
• IMF is the international institution that serves as a lender of last resort. IMF stands for International Monetary Fund and it is an organization of 189 countries which focuses on establishing global monetary corporation, secure financial services, economic growth, international trade etc. Its primary purpose is to ensure stability in the policies regarding international monetary system and its proper working.