1. If the U.S. dollar fell sharply in value and the U.S. could no longer pay its
ID: 1204621 • Letter: 1
Question
1. If the U.S. dollar fell sharply in value and the U.S. could no longer pay its depts to foreigners, how could the IMF be of help? In what way could the IMF have been of help prior to the occurrence of these problems? 2. How does herding behavior and self-fulfilling expectations contribute to a financial crises and to the possibility of contagion? Explain. 3. Is a financial crises more likely to be associated with foreign direct investment or portfolio investment? Explain. Is a financial crises more likely to occur in developed countries or less developed countries? How does your answer relate to problems in the EU? 4. Can the IMF make a small countries financial crises worse? Explain. 5. What is the World Bank's main function and can the World Bank sustain profitability by strictly following its charter? Explain. 6. List and support three proposals to restructure the international financial architecture. 7. When compared to portfolio investment, why is FDI a more stabilizing type of capital flow to developing nations?
Explanation / Answer
1.
IMF (International Monetary Fund) is an international trade and peace organization setup to provide financial assistance to member countries. It is responsible for the creation and maintenance of the international monetary system, and thus strives to provide a systematic mechanism for foreign exchange transactions in order to encourage investment and promote balanced global economic trade.
When a country experiences a fall in the value of its currency, IMF comes to its rescue. It enters the foreign exchange market and making the currency a lot more expensive to acquire such as raising interest rates or creating high demand of currency in the market, by belling bonds.
The IMF could also have informed the countries beforehand by looking at their past data and using forecasting techniques to check whether the currency is expected to rise or fall in future.
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