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Chapter 18: Q. 18.5LO (page 397)
Identify the key functions of the World Bank and the International Monetary Fund.
The IMF keeps track of the economy globally and in member countries, lends to countries with balance of payments difficulties, and offers practical help to members.
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Suppose that every billion of dead capital reduces the average rate of growth in worldwide per capita real GDP by percentage point. If there is trillion in dead capital in the world, by how many percentage points does the existence of dead capital reduce average worldwide growth of per capita real GDP?
Assume that each billion in net capital investment generates percentage point of the average percentage rate of growth of per capita real GDP, given the nation's labor resources. Firms have been investing exactly billion in capital goods each year, so the annual average rate of growth of per capita real GDP has been percent. Now a government that fails to consistently adhere to the rule of law has come to power, and firms must pay million in bribes to gain official approval for every billion in investment in capital goods. In response, companies cut back their total investment spending to billion per year. If other things are equal and companies maintain this rate of investment, what will be the nation's new average annual rate of growth of per capita real GDP?
Identify which of the following situations currently faced by international investors are examples of adverse selection and which are examples of moral hazard.
Among the governments of several developing countries that are attempting to issue new bonds this year, it is certain that a few will fail to collect taxes to repay the bonds when they mature. It is difficult, however, for investors considering buying government bonds to predict which governments will experience this problem.
Foreign investors are contemplating purchasing stock in a company that, unknown to them, may have failed to properly establish legal ownership over a crucial capital resource.
. Companies in a less developed nation have already issued bonds to finance the purchase of new capital goods. After receiving the funds from the bond issue, however, the company's managers pay themselves large bonuses instead.
When the government of a developing nation received a bank loan three years ago, it ultimately repaid the loan but had to reschedule its payments after officials misused the funds for unworthy projects. Now the government, which still has many of the same officials, is trying to raise funds by issuing bonds to foreign investors, who must decide whether or not to purchase them.
For each of the following situations, explain which of the policy issues discussed in this chapter relates to the stance the institution has taken.
a. The IMF extends a long-term loan to a nation's government to help it maintain publicly supported production of goods and services that the government otherwise would have turned over to private companies.
b. The World Bank makes a loan to companies in an impoverished nation in which government officials typically demand bribes equal to percent of companies' profits before allowing them to engage in any new investment projects.
c. The IMF offers to make a loan to banks in a country in which the government's rulers commonly require banks to extend credit to finance high-risk investment projects headed by the rulers' friends and relatives.
Some international policymakers argue that the world's poor require stronger "nudges, "such as policies that prevent them grow making "bad" choices. How might stronger nudges limit economic freedom and potentially slow economic growth? (What Does reducing the range of people's choices expand or limit their economic freedom??
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