Midterm1SuggestedSolutions-1 - ECON 162 ECONOMICS OF MEXICO...

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ECON 162 ECONOMICS OF MEXICO SPRING 08 MIDTERM EXAM (SUGGESTED ANSWERS) SHORT QUESTIONS 1. (15 points) Explain the link between “Petrodollars” and the Mexican debt crisis. Petrodollars were dollars that OPEC countries deposited in European and U.S. banks from the sale of oil. These banks needed desperately to lend this money in order to pay the interest to OPEC countries, so Mexico seemed like a good investment because banks believed that lending to developing nations was easy and profitable. Mexico then took too many of those loans and later was unable to pay them. 2. (15 points) List and explain the Pros and Cons of Privatization. PROS 1. It represents revenues, so it relieves pressure to the gov’t budget 2. Less investment needs to be financed by the government 3. More efficient production due to increased competition, lower costs CONS 1. Public investment is not always inferior to private investment, the case for Externalities, public goods, natural monopolies, etc. 3. (15 points) Explain what did the “Brady Plan” consist of? The Brady plan, named after the U.S. Secretary of the Treasury, consisted mainly of 3 measures to relieve Mexico’s debt problems: 1. It reduced the face value of the debt. That is, to reduce the bonds’ principal.
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This note was uploaded on 02/27/2009 for the course ECON 162 taught by Professor Martinez during the Winter '08 term at UCSD.

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Midterm1SuggestedSolutions-1 - ECON 162 ECONOMICS OF MEXICO...

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