QCM : Global Financial Integration and Crises — 22 questions

Questions et réponses du QCM

1. What does financial globalization primarily refer to?

The integration of domestic financial markets into a more interconnected global market through cross-border capital flows
The elimination of all trade barriers between countries through goods and services liberalization
The spread of identical tax systems and labor laws across all countries
The replacement of national currencies with a single global currency

The integration of domestic financial markets into a more interconnected global market through cross-border capital flows

Explication

Financial globalization is the integration of domestic financial markets through cross-border flows of capital and investment. It is narrower than general globalization, which also includes social, political, and technological interconnection.

2. Which set best captures the main drivers of financial globalization?

Tariff reductions, subsidies, and export quotas across trading blocs
Population growth, urbanization, and industrial policy coordination
Deregulation, technological advancement, liberalization, and openness of capital accounts
Fixed exchange rates, gold convertibility, and trade surpluses

Deregulation, technological advancement, liberalization, and openness of capital accounts

Explication

The course identifies deregulation, technology, liberalization, and capital-account openness as the main drivers. The other options describe trade or monetary arrangements rather than the financial globalization process.

3. Which feature is a key characteristic of financial globalization?

Free movement of capital across borders
Elimination of all exchange-rate fluctuations
Strict separation of domestic and foreign financial institutions
Complete uniformity of national financial laws

Free movement of capital across borders

Explication

A core feature of financial globalization is the free movement of capital. The course notes that regulatory convergence exists, but it is only partial rather than fully uniform.

4. What does financial innovation contribute to financial globalization?

It replaces bank intermediation with barter exchange
It prevents international lending by restricting portfolio flows
It creates new instruments and markets that help transfer risk across borders
It guarantees fixed exchange rates between all countries

It creates new instruments and markets that help transfer risk across borders

Explication

Financial innovation includes instruments such as derivatives and securitization that support cross-border risk transfer. It expands the tools available for global finance rather than blocking it.

5. How is financial globalization described over time in the course material?

As a process limited only to the postwar era
As occurring in waves with retreats after major shocks
As a phenomenon caused solely by digital payments
As a smooth and uninterrupted long-run trend

As occurring in waves with retreats after major shocks

Explication

The material emphasizes that financial globalization moves in waves, not as a steady linear trend. Major shocks can trigger retreats and reversals.

6. What happened after World War I to the Classical Gold Standard?

Gold convertibility was suspended and war finance through money creation destroyed prewar parities
All currencies immediately became fully floating against the dollar
Sterling replaced gold as a universal settlement asset
The IMF was created to enforce the old parities

Gold convertibility was suspended and war finance through money creation destroyed prewar parities

Explication

World War I ended the Classical Gold Standard by suspending gold convertibility and relying on money creation for war finance. This broke the prewar exchange-rate parities.

7. Which four categories are used in the MSCI market classification framework?

Liquid, Illiquid, Fixed, and Floating
Developed, Emerging, Frontier, and Standalone
Advanced, Transitional, Emerging, and Closed
Core, Peripheral, Balanced, and Restricted

Developed, Emerging, Frontier, and Standalone

Explication

MSCI classifies equity markets into Developed, Emerging, Frontier, and Standalone categories. These are the four framework outcomes described in the course.

8. What must a market satisfy to qualify under the MSCI framework?

All three dimensions of the framework
Only the market accessibility dimension
Only the market size and liquidity dimension
Only the economic development dimension

All three dimensions of the framework

Explication

A market must satisfy all three MSCI dimensions to qualify for a category. The course stresses that accessibility is heavily weighted, but not the only criterion.

9. Which set of factors belongs to the market accessibility pillar in MSCI classification?

Interest-rate targeting, money creation, and exchange reserves
Foreign ownership limits, capital controls, settlement arrangements, and regulatory stability
Industrial diversification, export share, and household savings
GDP growth, inflation, and fiscal balance

Foreign ownership limits, capital controls, settlement arrangements, and regulatory stability

Explication

Market accessibility covers how easily investors can buy, hold, and move securities, including ownership limits, capital flows, operational processes, and institutional stability. The other options describe macroeconomic indicators rather than accessibility.

10. Why does MSCI place special weight on market accessibility?

Because it reflects the real investor experience of entering, operating in, and exiting a market
Because it applies only to sovereign bond markets
Because it measures only the size of a country’s GDP
Because it replaces the need for liquidity and development tests

Because it reflects the real investor experience of entering, operating in, and exiting a market

Explication

Accessibility captures the practical ease of investing, so it is the most qualitative and heavily weighted dimension. A market can be large but still difficult to access if barriers remain high.

11. Why can market accessibility matter more than GDP size in MSCI-style investability judgments?

Higher GDP always means lower settlement risk
Economic size eliminates the need for institutional stability
GDP size automatically guarantees free capital movement
A large economy can still be hard to invest in if foreigners face barriers such as ownership caps or repatriation limits

A large economy can still be hard to invest in if foreigners face barriers such as ownership caps or repatriation limits

Explication

The course stresses that even large markets can be unattractive or difficult for investors if access barriers are high. GDP alone does not capture how investable a market really is.

12. What is one reason index stability matters for investors tracking MSCI benchmarks?

Sudden rule changes can force passive funds into unwanted selling or rebalancing
It removes the need for settlement systems
It determines a country’s demographic dividend
It guarantees equal inflation rates across markets

Sudden rule changes can force passive funds into unwanted selling or rebalancing

Explication

Index stability matters because passive ETFs and index funds may have to trade abruptly if barriers or classifications change. That makes access rules highly consequential for actual investors.

13. Why does capital mobility make financial crises more severe?

Because it forces every country to use the same currency
Because it eliminates leverage from financial markets
Because it prevents any foreign borrowing from taking place
Because fast cross-border funding can amplify both booms and reversals

Because fast cross-border funding can amplify both booms and reversals

Explication

Capital mobility can intensify booms and crisis dynamics by allowing funds to move quickly across borders. This rapid movement can magnify fragility when conditions reverse.

14. What is original sin in the context of crisis vulnerability?

The inability to borrow abroad in one’s own currency
The practice of fixing exchange rates permanently
The presence of too much domestic savings
The use of barter in local trade

The inability to borrow abroad in one’s own currency

Explication

Original sin refers to emerging economies’ inability to borrow in their own currency abroad, which creates exchange-rate exposure. That makes debt burdens rise when the currency depreciates.

15. Which pattern is most recognizable in many financial crises?

A permanent rise in wages with no financial stress
A boom in lending and asset prices followed by deleveraging and reversal
A steady decline in asset prices before any credit expansion
A shift from fixed to floating exchange rates without credit effects

A boom in lending and asset prices followed by deleveraging and reversal

Explication

A common crisis pattern is credit and asset-price expansion followed by reversal, deleveraging, and distress. The course links this to leverage, fragility, and contagion.

16. Why is fiat money vulnerable during a crisis?

Because it automatically causes barter shortages
Because it cannot be used for payments
Because it depends on institutional trust, which can break down quickly
Because it is always backed by gold reserves

Because it depends on institutional trust, which can break down quickly

Explication

Fiat money depends on trust in institutions and the currency itself. When credibility shocks occur, purchasing power can fall rapidly.

17. What tends to happen when negative interest rates push capital into a country?

Exports stop responding to exchange rates
Investors may move into riskier assets, helping inflate asset prices
Households cannot borrow at all
Asset prices must immediately collapse

Investors may move into riskier assets, helping inflate asset prices

Explication

Negative rates can trigger portfolio rebalancing toward riskier assets, raising demand and asset prices. The course notes this can support the economy but also increase financial instability.

18. Why did Switzerland use negative-rate policy in part during safe-haven inflow pressure?

To force banks to stop lending domestically
To fix the price of gold
To curb capital entering for safety reasons
To eliminate all foreign trade

To curb capital entering for safety reasons

Explication

Switzerland used negative rates partly to discourage safe-haven inflows that strengthened the currency and created pressure. The policy was aimed at reducing unwanted capital inflows.

19. What is the spot foreign-exchange market used for?

A long-term loan between central banks
Immediate currency exchange at the current price, typically with T+2 settlement
A regime where exchange rates are permanently fixed
A contract that fixes an exchange rate for a later date

Immediate currency exchange at the current price, typically with T+2 settlement

Explication

The spot market is for immediate FX exchange at the current price, usually settling in T+2 days. A forward contract, not a spot trade, locks in a future rate.

20. What best describes a currency swap?

A cash transfer with no foreign-exchange leg
A spot exchange combined with a forward exchange
A permanent peg to the dollar
A policy of letting the exchange rate float freely

A spot exchange combined with a forward exchange

Explication

A currency swap combines spot and forward legs and is often used as a borrowing-and-repayment structure in foreign currency. It is more complex than a simple spot or forward trade.

21. How do household debt crises typically begin?

With mortgage credit expansion and a housing price bubble
With a trade surplus and falling household borrowing
With a government default on sovereign bonds
With a sudden rise in commodity exports

With mortgage credit expansion and a housing price bubble

Explication

The course says household debt crises usually start with expanding mortgage credit and a housing bubble. When prices later fall, balance sheets deteriorate quickly.

22. Why do household debt crises often persist after the bust?

Foreign lenders stop all global trade
Asset prices recover fully before consumption falls
Banks immediately erase all loan losses
Households cut spending sharply because they cannot inflate away debt on their own

Households cut spending sharply because they cannot inflate away debt on their own

Explication

Households cannot inflate away debt individually, so they reduce consumption after prices fall, prolonging weak demand. This keeps the downturn going through a balance sheet recession dynamic.

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Financial globalization — definition?

Integration of domestic markets into global markets.

Key features of financial globalization?

Free capital movement, global financial services, interdependence.

Historical waves of integration — example?

Gold standard era, Bretton Woods, post-1980s liberalization.

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