Q1. [1] medium thorough-understanding
Which of the following best explains why the Great Depression had such a severe impact on countries that had borrowed heavily from the US during the mid-1920s?
(A) These countries had used US loans exclusively to import American goods, so when US exports fell, these countries lost their main source of income.
(B) When US banks recalled their overseas loans, these countries could no longer finance their economies, leading to bank failures, falling currencies and collapsing commodity prices.
(C) The US imposed heavy tariffs specifically on goods from debtor nations, shutting out their exports and leaving them unable to repay or refinance their debts.
(D) These countries had borrowed in gold, but falling gold prices meant the real value of their debt doubled, making repayment impossible.
- A These countries had spent US loans on consumer goods rather than productive investment, leaving them with nothing to show for the debt.
- B When US loans dried up, these countries could no longer finance their economies, leading to bank failures, currency collapses and commodity price slumps.
- C The US demanded immediate full repayment of all loans, forcing these countries to sell their gold reserves and causing deflation.
- D These countries had tied their currencies directly to the US dollar, so when the dollar collapsed, their economies collapsed too.
Generated by claude-sonnet-4-6 · 2026-06-26 15:01 · grounding rag
Model Answer
Answer: (B)
When US banks recalled overseas loans, countries dependent on them could no longer finance their economies, leading to bank failures, currency collapses and commodity price slumps.
Source: The Making of a Global World, Section 3.4
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Explanation
The passage directly states: "In the mid-1920s, many countries financed their investments through loans from the US… US overseas lenders panicked at the first sign of trouble… Countries that depended crucially on US loans now faced an acute crisis" — causing bank failures (Europe) and commodity price collapse (Latin America). Option B matches this exactly. The other options introduce details (gold borrowing, dollar peg, consumer-goods spending) not supported by the textbook passage.