Unit 13 - Page 425 - 429

What is the primary concern of international debt in poorer nations?

• It helps them develop quickly

• It excludes them from global economic benefits

• It increases their economic independence

• It reduces trade opportunities

Answer explanation

• Answer: B) It excludes them from global economic benefits

• Explanation: Many poor countries spend so much money paying off their debts that they cannot invest in education, healthcare, or infrastructure. This keeps them from growing economically.

• Example: Imagine you owe a huge loan and have to spend all your income paying it back instead of buying food or improving your home.

What does "external debt" (foreign debt) refer to?

• Debt owed within the country

• Debt owed to international creditors

• Debt owed by citizens rather than the government

• Debt that is not subject to repayment

Answer explanation

• Answer: B) Debt owed to international creditors

• Explanation: External debt is money a country borrows from other countries or international organizations.

• Example: If Ghana borrows money from the World Bank, this is external debt.

How does external debt affect a country’s economy?

• It increases domestic savings

• It reduces economic vulnerability

• It impacts creditworthiness and financial stability

• It eliminates the need for exports

Answer explanation

• Answer: C) It impacts creditworthiness and financial stability

• Explanation: If a country has too much debt, lenders may stop giving it more loans, making it harder to manage its economy.

• Example: A family that always borrows money and never repays it will find it harder to get new loans.

Which of the following best describes a major issue with external debt?

• High interest rates make repayment difficult

• It strengthens a country's economy

• It is only used for infrastructure projects

• It ensures financial stability

Answer explanation

• Answer: A) High interest rates make repayment difficult

• Explanation: Some loans come with high interest, making it harder for poor countries to pay back what they owe.

• Example: A person borrowing $1,000 with high interest might end up paying back $2,000 or more.

The debt service ratio measures:

• The total amount of a country's debt

• The proportion of export earnings used to repay debt

• The percentage of GDP allocated to public services

• The ratio of debt owed to debt paid

Answer explanation

• Answer: B) The proportion of export earnings used to repay debt

• Explanation: This shows how much of a country’s income from exports goes into paying debt.

• Example: If Kenya earns $100 million from exports and spends $30 million on debt repayment, its debt service ratio is 30%.

What is the typical debt service ratio for many poor countries?

• Less than 5%

• Between 10–20%

• Over 50%

• Between 30–50%

Answer explanation

• Answer: B) Between 10–20%

• Explanation: Many poor countries use 10-20% of their export earnings to pay back loans.

• Example: If a business earns $10,000 monthly and spends $1,500 on loan repayment, it has a 15% debt service ratio.

Why is a high debt service ratio a problem for developing nations?

• It leads to more foreign investments

• It diverts funds from essential services

• It reduces trade barriers

• It decreases reliance on international loans

Answer explanation

• Answer: B) It diverts funds from essential services

• Explanation: If too much money goes to debt payments, there’s little left for education, healthcare, or infrastructure.

• Example: A government that spends most of its budget on debt repayments may not have enough to build hospitals.

The term “debt crisis” refers to:

• A situation where a country can easily repay its loans

• When a country is unable to meet its debt obligations

• When a country accumulates a surplus of funds

• When countries refuse to accept foreign aid

Answer explanation

• Answer: B) When a country is unable to meet its debt obligations

• Explanation: A country faces a debt crisis when it can't pay back what it owes.

• Example: If a family borrows too much and cannot pay rent, they face a financial crisis.

What is one of the main causes of debt crises in LICs?

• Low levels of government spending

• High levels of borrowing without the ability to repay

• Increasing global trade

• A decrease in foreign investments

Answer explanation

• Answer: B) High levels of borrowing without the ability to repay

• Explanation: Some poor countries borrow more than they can afford, leading to financial trouble.

• Example: A person who keeps using credit cards without paying them off will eventually go bankrupt.

What often happens to a country in a debt crisis?

• It gains economic stability

• It is forced to restructure or seek debt relief

• It stops all international trade

• It increases government spending

Answer explanation

• Answer: B) It is forced to restructure or seek debt relief

• Explanation: When a country can’t pay its debts, it might ask lenders to reduce or restructure payments.

• Example: If a business cannot pay its loans, it might negotiate lower monthly payments with the bank.