Deck 5: Exchange Rate Systems

Question 1

What is the name of the account in which many central banks require their banks to hold a percentage of the deposits as reserves at the central bank?

A) retained earnings
B) excess reserves
C) margin account
D) required reserves

Answer 1

D

Question 2

Which account should NOT be included in the asset section of a central bank balance sheet?

A) currency in circulation
B) official international reserves
C) domestic credit
D) government bonds

Answer 2

A

Question 3

When the central bank attempts to influence the supply of money in a country by the sale or purchase of government bonds,the practice is known as ________.

A) open market operations
B) a sterilized float
C) a dirty float
D) changing the required reserves

Answer 3

A

Question 4

The phenomenon of foreign currency driving out local currencies as a means of payment and a savings vehicle is known as ________.

A) seigniorage
B) dollarization
C) sterilization
D) devaluation

Question 5

The exchange rate system in which a country allows the value of the currency to be determined by the market forces of supply and demand is known as a

A) currency board.
B) floating exchange rate.
C) target zone.
D) pegged exchange rate system.

Question 6

What is the name of the exchange rate system in which countries allow the value of their currency to be determined freely in the foreign exchange markets around the world without any government restrictions?

A) European currency unit
B) fixed currencies
C) floating currencies
D) dirty float currency

Question 7

What is the name of the unit of account created by the IMF which is sometimes used to denominate contracts?

A) European currency unit
B) special drawing right
C) floating currencies
D) basket of currencies

Question 8

Official international reserves consist of three major components EXCEPT:

A) gold reserves.
B) foreign exchange reserves.
C) deposits of private financial institutions.
D) IMF-related reserves assets.

Question 9

In fixed exchange rate systems,the tendency is for the domestic currency to be ________.

A) undervalued
B) at parity
C) overvalued
D) unchanged relative to the rest of the world's currencies

Question 10

In the ________ exchange rate system,the currency has limited flexibility and the rate is kept within a fixed band.

A) currency board
B) floating exchange rate
C) target zone
D) pegged exchange rate system

Question 11

What is the name for the set of regulations pertaining to flows of capital into and out of a country?

A) capital controls
B) target zone system
C) crawling peg
D) lead-lag operations

Question 12

What is the name of the exchange rate system where the governments attempt to make sure the values of their currencies trade at particular values in the foreign exchange market,relative to another currency or a "basket" of currencies?

A) European currency unit
B) fixed currencies
C) floating currencies
D) dirty float currency

Question 13

What is the negative side effect on the money supply of a non-sterilized foreign exchange intervention?

A) A higher money supply eventually leads to lower inflation, and the foreign exchange objective of the central bank's policy may conflict with its abroad goal of price stability.
B) A higher money supply eventually leads to higher inflation, and the foreign exchange objective of the IMF's policy may conflict with its domestic goal of price stability.
C) A higher money supply eventually leads to lower inflation, and the foreign exchange objective of the central bank's policy may conflict with its domestic goal of price stability.
D) A higher money supply eventually leads to higher inflation, and the foreign exchange objective of the central bank's policy may conflict with its domestic goal of price stability.

Question 14

What are the three major components of the official reserves account?

A) foreign exchange reserves, gold, and IMF-related reserve assets
B) foreign exchange reserves, foreign government bonds, gold
C) IMF-related reserve assets, gold, and U.S. Dollars
D) gold, IMF-related reserves assets, and government-owned land

Question 15

Which one of the following is not one of the three main currency systems in practice today?

A) currency boards
B) floating exchange rates
C) target zones
D) pegged exchange rate systems

Question 16

What is the name for the composite currency that consists of various units of other currencies?

A) pegged currency
B) seignorage
C) basket of currency
D) special drawing rights

Question 17

The special drawing rights of the IMF and the European currency unit are two examples of ________.

A) currency boards
B) floating exchange rates
C) target zones
D) baskets of currencies

Question 18

When a central bank buys foreign currency,its international reserves ________.

A) decrease
B) increase
C) remain unchanged
D) are difficult to determine

Question 19

Which of the following would NOT be a major component of a country's official reserves?

A) foreign exchange
B) IMF-related reserve assets
C) gold
D) government bonds

Question 20

What is the name of the value of the real resources that the central bank obtains through the creation of base money?

A) seigniorage
B) sterilized intervention
C) dollarization
D) target zone

Question 21

Why are pegged exchange rates often overvalued and difficult to governments to maintain?

Question 22

In which one of the following systems would it be least difficult to quantify the currency risk?

A) floating exchange system
B) target zone system
C) pegged exchange rate system
D) currency board

Question 23

If you were attempting to characterize the currency in a floating rate system,the most important factor to analyze is the ________ of the future exchange rate changes.

A) conditional distribution
B) histogram
C) sample mean
D) sample variance

Question 24

What is the most likely outcome if a central bank suddenly prints a large amount of new money?

A) no change in the inflation rate
B) higher inflation
C) recession
D) prosperity

Question 25

Describe the Bretton Woods currency system?

Question 26

What is the relationship of currency risk in a floating exchange rate system to the future exchange rate changes?

Question 27

When countries have pegged exchange rate systems,they often set up ________ to improve the credibility of the system in the eyes of the global traders.

A) target zone systems
B) futures markets for currencies
C) currency board systems
D) sterilized interventions

Question 28

Why would a central bank buy or sell foreign currency?

Question 29

Which one of the following systems would most often be used by a developing economy?

A) target zone
B) currency board
C) floating exchange rate
D) crawling peg

Question 30

How would a target zone system or a pegged exchange rate system that has been in place mask the true currency risk?

Question 31

Identify the most important components of the official international reserves of a central bank?

Question 32

For a fixed exchange rate system to work successfully,the government that oversees its operations must be able to make tight budget and monetary policies prevail from the beginning.Agree or disagree and explain why.