This is a model of a practice exam question and answer. Use your mouse to move the cursor over each main section of the essay:

• The Introduction,
• The Body, and
• The Conclusion.

Boxes will appear explaining the important features of each section. Click on the sections for further information, and read the explanations at he end of the essay.

Question:  How did the financial crises in Latin American countries and East Asian countries differ.

Financial crises generally stem from either government failure, the under- or over-supply of public goods, or market failure, the divergence of market equilibrium from Pareto optimality. The Latin American crisis was caused by government failure, while the East Asian crisis was mainly caused by market failure.

The Latin American crisis resulted from government failures which stemmed directly from the behaviour of politicians and bureaucrats. Based on optimism of continued high prices of primary products, the governments significantly increased consumption and investment. This, associated with high administrative cost and large transfer payments for social welfare programs under the pressure of populism and losses from inefficient state enterprises, led to large budget deficits. When the second oil boom collasped, associated with the downfall of primary product prices, overvalued exchange rates caused the current balance of payments to record major deficits. Foreign capital, which used to be the main financial source, started to flee due to the fear of insolvency, forcing the governments to rely mainly on printing money, resulting in inflation. Under the circumstances, the governments failed to cut expenditures because of populism, causing a vicious circle with hyperinflation of several hundred to several thousand percent per year. This is why the Latin American crisis is called a solvency crisis.

The East Asian crisis, in contrast, occurred because of market failure. With the liberalization of international capital movements, fixed exchange rates, and the absence of prudent banking regulations, the euphoria created by extraordinary level of past economic growth caused an investment boom. The boom was fed mainly by foreign capital without proper risk management, resulting in decreased rates of returm to firms’ investment as well as increased incremental capital output ratios. Declining returns triggered a sudden recall of loans from foreign creditors, creating a liquidity shortage in private banks and firms. This meant they could no longer meet debt service obligations, leading to their collapse. Therefore, the crisis emerged from the herd behavior of foreign investors who rushed to recover their loans out of fear that the boom was turning to bust. The East Asian crisis can be considered a market failure resulting from imperfect market information. However, the governments of affected countries could also be blamed for failing to provide appropriate public goods such as prudent supervision and regulation of risky transactions as well as domestic demand control.

In conclusion, policy makers must learn from these two examples to beware of both heavy government intervention and open markets with inadequate controls, which can lead to instability and the retardation of development.

Question: Ask a brief question which you can answer in 300 words.

Introduction: Your essay must begin with a SHORT introduction of one, two, or maximum three sentences. It must DIRECTLY answer the question in general terms, and include keywords from the question and their definitions if appropriate. It must NOT contain background information or interesting “facts”. Check the detailed explanation at the FASID Electronic Essay correction home: http://www.geocities.com/fasidexams/ecorrection/index.html - click on “Intro”.

Body: The body of your essay must have TWO or THREE paragraphs. Each paragraph begins with a TOPIC SENTENCE, which states the main idea, i.e. the keywords, of the paragaraph. These keywords should also be repeated in the INTRODUCTION. The rest of the paragraph EXPLAINS the topic sentence and/or provides EXAMPLES. You must use clear logicial indicators to connect sentences LOGICALLY and accurately. At the Electronic Essay home, click on “Flow” to find logical indicators, and “R.O.” to learn how to use them.

Conclusion: The conclusion of an exam essay does NOT repeat your main points. It gives the IMPLICATIONS, which must always refer to the main point of this course, that is, “Why are some countries rich while some countries are poor”. For each question, you should ask yourself, “How does the information in this essay help to make countries richer?” or “How does the information in this essay explain why countries are poor?” The answer to these questions are the “policy implications”.