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Unformatted text preview: Economics 161 Spring 2011 Global Integration of Latin America Review Sheet 3: Financial Crises May 24, 2011 Instructor: Marc-Andreas Muendler E-mail: firstname.lastname@example.org 1 Sovereign Risk Explain why higher default risk increases the interest are. Provide a numerical example to illustrate your verbal explanation. Explain in words the moral hazard problem associated with international debt service and default. Distinguish between ability and willingness to re- pay and explain two scenarios under which lacking willingness to repay can be concealed as lacking ability. 2 Quantity Theory of Money Explain why the Quantity Theory of Money implies that the annual rate of ination equals the annual rate of money growth. Suppose the foreign country does not change its money supply so that it has zero ination. Explain why, under this scenario, the annual rate of deprecation of the home currency also equals the annual rate of money growth. Finally, suppose the foreign country changes its money supply with a constant growth...
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- Spring '11