Deck 11: The International Monetary System

Question 1

Under the 1976 Jamaica Agreement, gold was abandoned as a reserve asset.

Answer 1

True

Question 2

The Bretton Woods system could work only as long as the U.S. inflation rate remained low and the United States did not run a balance-of-payments deficit.

Answer 2

True

Question 3

The process of dollarization occurs when a country abandons its own currency and adopts another currency-typically the U.S. dollar.

Answer 3

True

Question 4

The U.S. balance-of-payments position flourished throughout the 1970s under the guidance of President Nixon.

Question 5

As the only currency that could be converted into gold, the British pound occupied a central place in the fixed exchange rate system up until 1973.

Question 6

A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.

Question 7

It has been shown that countries with pegged exchange rates have a lower annual inflation rate than countries with floating regimes.

Question 8

When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a pegged exchange rate regime.

Question 9

Critics argue that a floating exchange rate system can be affected by uncertainty and the bandwagon effect.

Question 10

Under a currency board system, the government has the absolute authority to set interest rates.

Question 11

When the Bretton Woods participants established the International Monetary Fund, nations who chose to borrow from the IMF could borrow a limited amount without adhering to any specific agreements.

Question 12

Under the gold standard, a country in balance-of-trade equilibrium earns income from exports that is equal to the money its residents pay for imports.

Question 13

Since 1973, exchange rates have become less volatile and more predictable.

Question 14

During the Bretton Woods negotiations, there was a consensus among the countries represented that fixed exchange rates were preferred.

Question 15

The activities of the International Monetary Fund have declined after the collapse of the Bretton Woods system in 1973.

Question 16

Under a floating exchange rate system, a country's ability to expand or contract its money supply as it sees fit is limited by the need to maintain exchange rate parity.

Question 17

The architects of the Bretton Woods agreement wanted to avoid high unemployment, so they built the fixed exchange rate system to be highly inflexible.

Question 18

A pegged exchange rate means the value of the currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

Question 19

Pegged exchange rates are most popular in larger nations.

Question 20

The U.S. dollar, EU euro, Japanese yen, and British pound are all free to float against each other, which means their exchange rates never fluctuate.

Question 21

The institutional arrangements that govern exchange rates are called the

A) generally accepted accounting principles.
B) general agreement on tariffs and trade.
C) international monetary system.
D) general agreement on trade in services.
E) financial management information system.

Question 22

In terms of the gold standard, the amount of currency needed to purchase one ounce of gold was referred to as the

A) gold to bond ratio.
B) gold reserve ratio.
C) gold mix ratio.
D) gold par value.
E) gold net value.

Question 23

The gold standard was adopted in response to the

A) expansion in the volume of international trade due to the Industrial Revolution.
B) inability of governments to convert gold into paper currency on demand at a fixed rate.
C) widening gap between the developed and the developing nations.
D) failure of the Bretton Woods fixed exchange rate system.
E) failure of the U.S. dollar to act as a reference currency.

Question 24

One way a company can build strategic flexibility is by contracting out manufacturing processes around the globe.

Question 25

Two nations that are part of a recently formed common market have an exchange rate system where the values of their currencies are set against each other at a mutually agreed on exchange rate. This type of exchange rate system is called

A) clean float.
B) floating.
C) fixed.
D) dirty-float.
E) pegged.

Question 26

Cissen and Napor are two neighboring countries that actively trade goods and services with each other. Under the gold standard, there will be a net flow of gold from Napor to Cissen when

A) Cissen is in trade deficit with Napor.
B) Napor is in balance-of-trade equilibrium with Cissen.
C) Cissen is in trade surplus with Napor.
D) Cissen imports more than it exports to Napor.
E) Napor balance of payment to Cissen is favorable.

Question 27

The government of an Asian country allows its currency to nominally float freely against other currencies, but the government has the right to intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value. What this country is doing is called a ________ float.

A) fixed
B) clean
C) pegged
D) dirty
E) capital

Question 28

The forward exchange market is an accurate predictor of future exchange rates.

Question 29

The country of Ambos Republic defined its currency, ambos, as being equivalent to 16 grains of "fine" (pure) gold. Assuming that there are 480 grains in an ounce, the gold par value of the ambos is

A) 30.
B) 28.
C) 20.
D) 22.
E) 14.

Question 30

One unit of a peso in a Latin American country was defined as equivalent to 12 grains of "fine" (pure) gold, while one unit of its neighboring countries currency, a dollar, was defined as equivalent to 18 grains of "fine" (pure) gold. Using the gold par value concept (with 480 grains in an ounce), the exchange rate for converting the peso to the dollar is

A) 1.5 peso = 1 dollar.
B) 1 peso = 1 dollar.
C) 3 peso = 2 dollar.
D) 1 peso = 1.5 dollar.
E) 2 peso = 1 dollar.

Question 31

Some countries let the foreign exchange market determine the relative value of its currency. This is called a ________ exchange rate.

A) fixed
B) floating
C) forward
D) pegged
E) nominal

Question 32

The United States returned to the gold standard in 1934 when more dollars were needed to buy an ounce of gold than before. This implied that the dollar

A) was no longer used for pegged rates.
B) was worth less.
C) could control the spot exchange rate.
D) had maintained a steady value.
E) was worth more.

Question 33

Some IMF economists argue that higher inflation rates might be good if the consequence is greater growth in aggregate demand.

Question 34

Many of the world's developing nations peg their currencies, primarily to the

A) U.S. dollar.
B) Saudi riyal.
C) Japanese yen.
D) Chinese yuan.
E) German deutsche mark.

Question 35

In a floating exchange rate, the relative value of a currency

A) is more predictable and less volatile.
B) is determined by market forces.
C) changes infrequently only under a specific set of circumstances.
D) is set against other currencies at some mutually agreed on exchange rate.
E) does not depend on the free play of market forces.

Question 36

The currency of the United Arab Emirates is fixed relative to the U.S. dollar: this means that the exchange rate between the United Arab Emirates dirham and other currencies is determined by the dollar exchange rate. This is an example of a ________ exchange rate.

A) flexible
B) pegged
C) real
D) dirty-float
E) floating

Question 37

A banking crisis occurs when there is a speculative attack on the exchange value of currency.

Question 38

Under the gold standard, gold flows reduce the money supply in one nation when another nation experiences a trade surplus. The nation with a trade surplus has a swell in the money supply, which leads to price increases. At the same time, the nation with a reduction in the money supply will cause prices to fall. The lower prices create more demand for product from the nation with a reduction in the money supply, which leads to a

A) balance-of-trade.
B) facilitating payment.
C) tragedy of the commons.
D) floating exchange rate.
E) planned economy.

Question 39

In the 1930s, countries were devaluing their currencies at will in order to boost exports, thus shattering confidence in the

A) floating exchange rate system.
B) gold standard system.
C) fixed exchange system.
D) Bretton Woods system.
E) managed-float system.

Question 40

A ________ exists in a country when the income its residents earn from exports is equal to the money its residents pay to other countries for imports.

A) currency crisis
B) balance-of-trade equilibrium
C) balance-of-payments deficit
D) balance-of-trade surplus
E) fiscal deficit

Question 41

The adoption of the Marshall Plan redirected the efforts of the World Bank and it then turned its focus on

A) helping European nations rebuild after the war.
B) creating a balance-of-trade in Latin America.
C) creating the gold standard.
D) lending money to third-world nations.
E) eliminating inflation rates.

Question 42

What was the result of President Lyndon B. Johnson's attempts to finance his welfare programs?

A) increased exports
B) a rise in price inflation
C) increased taxes
D) a positive trade balance
E) an increase in the value of the dollar

Question 43

What action did President Nixon take to enable devaluation of the dollar during the increase in U.S. inflation in 1971?

A) The IMF member countries would adopt the gold standard to fix exchange rates.
B) The United States would no longer support the World Bank.
C) A new 15 percent tax would be charged on U.S. exports.
D) The dollar would no longer be convertible into gold.
E) German deutsche marks would be the new reference currency.

Question 44

How does the International Monetary Fund (IMF) provide loans to deficit-laden countries?

A) It prints the required currencies, thereby increasing money supply in those countries.
B) It acts as a market, buying goods from these countries and selling them to developed countries.
C) A pool of gold and currencies contributed by its members provides the resources for lending operations.
D) The World Bank lends the required amount to the IMF at a low interest rate.
E) It collects money from those countries that wish to devaluate their currencies.

Question 45

The collapse of the fixed exchange rate system has been traced to the

A) U.S. macroeconomic policy package of 1965-1968.
B) establishment of the gold standard.
C) Marshall Plan, under which the United States lent money to European nations.
D) failure of the International Monetary Fund to impose monetary discipline.
E) increased U.S. tax rate financing Great Depression-era programs.

Question 46

A South American country has a fixed exchange rate regime. What would be the result if the country rapidly increased its money supply by printing more currency?

A) It would lead to an increase in the worth of the currency.
B) The prices of imports would become more attractive in the country.
C) The country's goods would be highly competitive in world markets.
D) Trade surplus in the country would increase.
E) It would lead to price deflation in the country.

Question 47

One reason for the collapse of the gold standard in 1939 was the

A) difficulty and complexity in using the gold standard to determine the exchange rate.
B) agreement by governments to convert paper currency into gold on demand at a fixed rate.
C) cycle of competitive currency devaluations by various countries.
D) expansion in the volume of international trade after the Industrial Revolution.
E) inability of the gold standard to act as a mechanism for achieving balance-of-trade equilibrium by all countries.

Question 48

The International Development Association of the World Bank only provides loans to

A) entrepreneurial companies.
B) the poorest nations.
C) European countries.
D) Westernized nations.
E) start-up companies.

Question 49

One aspect of the Bretton Woods agreement was a commitment not to use ________ as a measure to fix the value of currencies.

A) a planned economy
B) devaluation
C) isolationism
D) government loans
E) the U.S. dollar

Question 50

The 1944 Bretton Woods conference created two major international institutions that play a role in the international monetary system-the International Monetary Fund (IMF) and the

A) United Nations.
B) European Union.
C) World Trade Organization.
D) World Bank.
E) G20.

Question 51

Under the U.S. macroeconomic policy package of 1965-1968, President Lyndon Johnson backed an increase in U.S. government spending that was financed by

A) the sale of gold reserves.
B) borrowing from the International Monetary Fund.
C) an increase in the money supply.
D) an increase in taxes.
E) selling bonds in the international capital market.

Question 52

All countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold, according to the 1944

A) Bretton Woods agreement.
B) Washington Consensus.
C) World Bank treaty.
D) Group of Five treaty.
E) United Nations agreement.

Question 53

The initial focus for the World Bank was to help

A) boost the money supply in North America.
B) reconstruct the war-torn economies of Europe.
C) assess the economic infrastructure of communist nations.
D) revive the gold standard system.
E) stimulate trade between Cuba and the United States.

Question 54

A potential downfall of the Bretton Woods system was that it would not work if

A) the currency of choice, the U.S. dollar, was under speculative attack.
B) only one form of currency was used as the basis for exchange.
C) gold was valued higher than the dollar.
D) at least ten nations failed to agree to the system.
E) services were not included in the agreement.

Question 55

The objective of establishing the World Bank was to

A) revive the gold standard.
B) promote general economic development.
C) control and manage the International Monetary Fund.
D) promote a floating exchange rate system.
E) approve large currency devaluations.

Question 56

Which term was NOT defined in the International Monetary Fund's Articles of Agreement but was intended to apply to countries that had suffered permanent adverse shifts in the demand for their products?

A) competitive disadvantage
B) capital flight
C) fundamental disequilibrium
D) break-even point
E) diseconomies of scale

Question 57

Due to a variety of macroeconomic and microeconomic factors, two Eastern European nations suffered permanent adverse shifts in the demand for their manufactured goods. Per the IMF's Articles of Agreement, these nations suffered from

A) a competitive advantage.
B) capital flight.
C) a fundamental disequilibrium.
D) a break-even point.
E) diseconomies of scale.

Question 58

The architects of the Bretton Woods agreement built limited flexibility into the fixed exchange rate system in order to

A) avoid high unemployment.
B) facilitate competitive currency devaluations.
C) widen balance-of-payments gap between countries.
D) increase money supply and thereby price inflation.
E) avoid balance-of-trade equilibrium between countries.

Question 59

If Canada suffered from "fundamental disequilibrium," and its government choose not to devalue its currency, a likely consequence of this would be

A) a persistent trade surplus.
B) a balance-of-payments equilibrium.
C) an increase in exports.
D) high unemployment.
E) deflation.

Question 60

One aspect of the International Bank for Reconstruction and Development (IBRD) scheme of the World Bank is that

A) the resources to fund IBRD loans are raised through subscriptions from wealthy members.
B) the interest rate charged by the World Bank is higher than commercial banks' market rate.
C) the borrowers have to pay the bank's cost of funds plus a margin for expenses.
D) the bank avoids offering low-interest loans to risky customers whose credit rating is often poor.
E) it was established to approve currency devaluations that are beyond 10 percent.

Question 61

What is the effect of a monetary contraction in a fixed exchange rate system?

A) It forecasts low interest rates.
B) It increases the demand for money.
C) It puts downward pressure on a fixed exchange rate.
D) It leads to an inflow of money from abroad.
E) It can lead to high price inflation.

Question 62

One argument for a fixed exchange rate system is that

A) governments can contract their money supply without worrying about the need to maintain parity.
B) trade balance adjustments do not require the intervention of the International Monetary Fund.
C) it ensures that governments do not expand the monetary supply too rapidly, thus causing high price inflation.
D) speculations in exchange rates boost exports and reduce imports.
E) each country should be allowed to choose its own inflation rate.

Question 63

Following the global financial crisis in 2008-2009, the economy of Greece fell apart and has struggled to regain strength. What is one reason for the demise of the Greek economy?

A) closing borders to trade in 2008
B) new trade agreement with the United States
C) a lack of entrepreneurial spirit
D) adoption of the euro in 2001
E) a dynamic trade program with France

Question 64

How was the global monetary system affected by major events in the 1970s, including the OPEC oil crisis in 1971 and the loss of confidence in the U.S. dollar in the late 1970s?

A) The value of the U.S. dollar stabilized.
B) Exchange rates become much more volatile.
C) Exchange rates become more predictable.
D) The fixed rate system was adopted to calculate exchange rates.
E) The European Monetary System as an institution has gained more prominence.

Question 65

The cabinet members agreed that it would be best to have the value of their island nation's currency follow that of the U.S. dollar. This is an example of a ________ exchange rate regime.

A) target
B) pegged
C) spot
D) command
E) free float

Question 66

A newly independent Eastern European nation wants to adopt a floating exchange rate system in order to restore monetary control to its government. Using the monetary autonomy argument, how do this country's ministers justify establishing this system?

A) Each country should be allowed to choose its own inflation rate.
B) Speculation in exchange rates dampens the growth of international trade and investment.
C) Unpredictability of exchange rate movements makes business planning difficult.
D) Variable exchange rates are more receptive to a trade balance.
E) Trade deficits are determined by the balance between savings and investment in a country, not by the external value of its currency.

Question 67

One reason for the rapid rise in the value of the dollar between 1980 and 1985 despite a large trade deficit was due to

A) political stability in all other parts of the world.
B) heavy capital outflows from the United States.
C) low real interest rates in the United States.
D) slow economic growth in the developed countries of Europe.
E) increasing exports against decreasing imports in the United States.

Question 68

A developing country might want to commit itself to converting its domestic currency on demand into another currency at a fixed exchange rate. To do this, it should implement a(n)

A) free-float exchange rate system.
B) clean-float exchange rate system.
C) pure-float exchange rate system.
D) currency board.
E) gold standard.

Question 69

In January 1976, the ________ revised the International Monetary Fund's Articles of Agreement to reflect the new reality of floating exchange rates.

A) Jamaica agreement
B) Bretton Woods agreement
C) Marshall Plan
D) General Agreement on Tariffs and Trade
E) Plaza Accord

Question 70

How does a country that introduces a currency board make its commitment to converting its domestic currency on demand into another currency at a fixed exchange rate credible?

A) borrowing funds from the International Monetary Fund and the World Bank
B) maintaining a trade surplus with foreign countries
C) holding foreign currency reserves equal at the fixed exchange rate to at least 100 percent of the domestic currency issued
D) importing more goods from foreign countries than it exports
E) printing foreign currencies

Question 71

The fall in the value of the U.S. dollar between 1985 and 1988 was caused by

A) economic growth in the developed countries of Europe.
B) a fall in prices of exported U.S. goods.
C) a trade surplus in the United States during the previous years.
D) a combination of government intervention and market forces.
E) the protectionism measures adopted by European countries.

Question 72

A country that has an exchange rate system under which its exchange rate is allowed to fluctuate against other currencies within a target zone is using a(n) ________ system.

A) free float
B) fixed peg
C) adjustable peg
D) pure float
E) capital float

Question 73

The foreign exchange market is sometimes referred to as a dirty-float system because

A) of the frequency of government intervention.
B) it doesn't account for developing economies.
C) it allows for greater monetary discipline.
D) it lacks spot exchange activity.
E) it reflects a planned economy.

Question 74

One attribute of a pegged exchange rate is that it leads to

A) a planned economy.
B) low inflation.
C) greater supply and demand.
D) a lack of monetary discipline.
E) a quick recession.

Question 75

One drawback of the currency board system is

A) the ease with which governments can set and manipulate interest rates acts as a limitation.
B) higher domestic inflation rates compared to the inflation rate in the country to which the currency is pegged can make the currency noncompetitive.
C) the currency board can issue additional domestic notes and coins even when there are no foreign exchange reserves to back it.
D) the system is a true fixed exchange rate regime, because the domestic currency is fixed against other currencies.
E) the system lacks commitment to convert domestic currency on demand into another currency.

Question 76

A country in South America is adversely affected by trade deficits and the government wants to move to a floating exchange rate system to help adjust trade imbalances. However, a political group is opposing this. As critics of floating exchange rates, they claim that trade deficits are determined by the

A) balance between savings and investment in a country.
B) external value of the currency of a country.
C) exchange rates of other currencies.
D) valuations made by International Monetary Fund and the World Bank.
E) mechanism of competitive currency devaluation.

Question 77

From mid-2008 through early 2009, the dollar's value moderately increased against major currencies, despite the fact that the American economy was suffering from a serious financial crisis. What caused this phenomenon?

A) High real interest rates in the United States compared to any other developed region in the world sparked an inflow of funds into the country.
B) U.S. assets were characterized by a high-risk, high-return payoff which prompted foreign investors to park their funds.
C) Foreign investors were excited at the possibility of high returns following the government bail-out of financial institutions.
D) Foreign investors put their money in low-risk U.S. assets such as low-yielding U.S. government bonds.
E) Foreign investors saw opportunities in the United States as the level of indebtedness had begun declining.

Question 78

How are interest rates typically affected by a strict currency board system?

A) Interest rates adjust automatically based on the supply and demand of domestic currency.
B) Developing countries receive lower interest rates.
C) Interest rates are based on the gold standard and remain steady.
D) Developed countries are required to pay higher interest rates.
E) The government is allowed to print money when necessary and charge interest for its use.

Question 79

What was abandoned per the Jamaica agreement of 1976?

A) floating exchange rate system
B) U.S. dollar as the reference currency
C) gold as a reserve asset
D) new membership to the International Monetary Fund
E) granting International Monetary Fund loans to less developed countries

Question 80

Under the Plaza Accord of 1985, the Group of Five major industrial countries concluded that it would be desirable if

A) the countries returned to a system of fixed exchange rates.
B) the participating members reverted to the gold standard.
C) the United States adopted protectionism to improve its trade balance.
D) most major currencies appreciated via the U.S. dollar.
E) governments did not regulate the buying and selling of currency.