Deck 14: Exchange Rates and the International Monetary System

Question 1

In a system of perfectly flexible exchange rates,an expansionary U.S.monetary policy will cause

A)a rise in the value of the dollar relative to foreign currencies.
B)a fall in the value of the dollar relative to foreign currencies.
C)no change in the value of the dollar relative to foreign currencies.
D)a change in the value of the dollar relative to foreign currencies but the direction of the change is uncertain.

Answer 1

B

Question 2

What was the goal of the Bretton Woods agreement? Why did it collapse?

Answer 2

The international monetary agreement's primary goal was to set up a fixed exchange rate system where the value of the dollar was fixed in terms of gold and convertible into gold,and all other countries agreed to fix the price of their currency in terms of the dollar. To sustain these fixed exchange rates,however,all countries had to follow U.S.monetary and fiscal policy.When they did not during the 1960s,the U.S.began to run chronic deficits while other countries refused to revalue their currency.The situation finally became untenable and the U.S.chose to let the dollar float.

Question 3

Under a fixed exchange rate system,the exchange rate

A)is equal to one.
B)fluctuates as the price of gold fluctuates.
C)is fixed and interest rates must vary in response to balance of payment movements.
D)can periodically change as economic conditions change.

Answer 3

C

Question 4

A current account deficit in a nation's balance of payments accounts implies that

A)imports are equal to exports.
B)exports exceed imports.
C)expenditures are more than income.
D)income is more than expenditures.

Question 5

A system of exchange rate determination with no central bank intervention is a

A)fixed exchange rate system.
B)flexible exchange rate system.
C)floating exchange rate system.
D)either a flexible or a floating exchange rate system.

Question 6

In a system of flexible exchange rates,expansionary monetary policy abroad would induce

A)a rise in the U.S.exchange rate.
B)a fall in the U.S.rate of exchange.
C)a balance of payments surplus for the United States.
D)no change in U.S.exchange rates.

Question 7

With a fixed exchange rate,an increase in the domestic price level will,for a constant foreign price level,

A)increase exports and decrease imports.
B)make foreign goods relatively more expensive to U.S.citizens but U.S.exports will be relatively cheaper to foreigner buyers.
C)increase both exports and imports.
D)make foreign goods relatively cheaper to U.S.citizens but U.S.exports will be more expensive to foreign purchasers.

Question 8

A supply of foreign exchange occurs in the United States when

A)a U.S.citizen wants sells stock on a European stock exchange.
B)the United States exports steel to Japan.
C)United States citizens travel abroad.
D)All of the above

Question 9

Capital inflows in the balance of payments accounts include

A)purchases of financial assets by U.S.residents.
B)direct investments in foreign countries.
C)indirect investments in foreign countries.
D)purchases of U.S.government bonds by foreigners.

Question 10

The U.S.dollar exchange rate describes the

A)the deficit/surplus situation in the balance of payments.
B)the price of a foreign currency in terms of dollars.
C)the deficit/surplus situation in the merchandise trade balance.
D)future changes in foreign balance of payments.
E)none of the above.

Question 11

One explanation for the fall in the value of the U.S.dollar since 2001is

A)the mix of an tight fiscal/tight monetary policy over the period.
B)the relative weakness of the U.S.economy over the period.
C)a higher degree of accommodation of supply shocks in the United States relative to our trading partners.
D)the disintegration of the Bretton Woods system during these years.

Question 12

Can a central bank control domestic interest rates and fix their exchange rate at the same time? Explain,focusing on the implications for the use of stabilization policy.

Question 13

What is a major advantage of flexible exchange rates?

Question 14

What impact does an increase in the money supply have on a countries exchange rate in a floating exchange rate system? Provide a graph of the foreign exchange market to illustrate.

Question 15

A decline in the exchange rate means that

A)the price of foreign exchange has declined.
B)foreign currency has appreciated while the dollar has depreciated.
C)foreign currency has depreciated while the dollar has appreciated.
D)either a or c

Question 16

Which of the following statements is (are)correct?

A)Under a fixed exchange rate system,potential conflicts arise between the goals of internal balance and external balance.
B)With a fixed exchange rate system,a central bank has to give up control over domestic interest rates but retains control over inflation.
C)Countries may find that expansionary policies,which might be desired in order to reduce the unemployment rate,may lead to income levels that are too low to balance the trade account and could lead to balance of payments surpluses.
D)Both a and c
E)Both b and c

Question 17

The current account in a nation's balance of payments accounts includes

A)exports of U.S.computers
B)imports of German automobiles.
C)purchases of foreign stocks.
D)Both a and b
E)All of the above

Question 18

Assuming that the exchange rate rises by 5 percent,hence,the dollar volume of exports rises by 5 percent,then foreign exchange earnings would

A)remain constant.
B)increase by 5 percent.
C)actually decrease by 5 percent.
D)increase by 10 percent.

Question 19

What is the main cost of maintaining a fixed exchange rate? Provide two reasons,then,why countries fix their exchange rates.

Question 20

Assume that the fixed exchange rate system of 100 pesos = 1 dollar is above the equilibrium exchange rate of 90 pesos= 1 dollar in a flexible exchange rate system.Then the dollar would be

A)undervalued and the peso would be overvalued.
B)overvalued and the peso would be undervalued.
C)revalued.
D)depreciated and the peso would be appreciated.

Question 21

The higher the exchange rate,the

A)the lower the dollar cost of imported goods and the higher the demand for foreign exchange.
B)higher the dollar cost of imported goods and the lower the demand for foreign exchange.
C)higher both the dollar cost of imported goods and the demand for foreign exchange.
D)the lower both the dollar cost of imported goods and the demand for foreign exchange.

Question 22

Assuming the United States sends foreign aid payments to another country.Then,this is shown in the U.S.balance of payments account as a

A)credit in the current account.
B)debit in the current account.
C)debit in the capital account.
D)credit in the capital account.
E)credit in the official reserve transactions account.

Question 23

An advantage of a flexible exchange rate system relative to a fixed system is that in a flexible rate system

A)currency speculation will be reduced.
B)balance of payments surpluses and deficits can be dealt with using fiscal policy,not monetary policy.
C)inflation will be minimized by the "discipline of the balance of payments."
D)the price of imported goods will be kept relatively low.
E)none of the above.

Question 24

The current international monetary system is best described as a

A)fixed rate system.
B)completely flexible rate system.
C)gold standard.
D)mercantilist system.
E)managed floating rate system.

Question 25

Assume that the fixed exchange rate system of 1.1 euros = 1 dollar is below the equilibrium exchange rate of 1.3 euros = 1 dollar in a flexible exchange rate system.Then,at the fixed exchange rate,the dollar would be

A)undervalued and the euro would be overvalued.
B)overvalued and the euro would be undervalued.
C)revalued and the euro would be devalued.
D)depreciated and the euro would be appreciated.

Question 26

Under a fixed exchange rate system,the central bank must

A)have an unlimited supply of domestic currency.
B)have a very large supply of foreign assets.
C)follow a constant money growth rule.
D)allow the money supply to adjust to keep interest rates and exchange rates unchanged.

Question 27

Total credits in the balance of payments accounts are equal to the

A)supply of foreign exchange.
B)demand for dollars.
C)demand for foreign exchange.
D)supply of dollars.
E)Either a or b

Question 28

A trade surplus could be balanced by all of the following except

A)borrowing from domestic citizens.
B)selling domestic assets to foreigners.
C)borrowing from foreigners.
D)selling foreign assets already owned by U.S.citizens to foreigners.

Question 29

A trade deficit can be financed by all of the following except

A)a surplus in the capital account.
B)a surplus in the official reserves transaction account.
C)selling U.S.assets to foreigners.
D)U.S.citizens buying foreign stocks and bonds.

Question 30

The statistical discrepancy is

A)also known as the "errors and omissions term."
B)the amount that must be added to balance the total balance of payments to make it equal to zero.
C)the adjusted amount to balance the capital account.
D)the adjusted amount to balance the current account.
E)Both a and b

Question 31

Which of the following statements is (are)correct? Under a floating exchange rate system

A)dramatic swings in the dollar have become less common the last 20 years.
B)the dollar has exhibited considerable volatility,particularly over the last 20 years.
C)the value of the dollar has been targeted within a specific range.
D)a gradual increase in the value of the dollar has taken place.

Question 32

The official reserve transactions balance in the United States balance of payments accounts is

A)reflects the difference between government spending and total taxes.
B)negative if a current account deficit exceeds a capital account surplus.
C)positive if a current account deficit exceeds a capital account surplus.
D)none of the above

Question 33

Alternative proposals to change the current system of exchange rates include

A)a new explicit system of fixed exchange rates.
B)adjustable target zones for exchange rates.
C)a dirty float rate system.
D)Both a and b
E)Both b and c

Question 34

Capital outflows in the balance of payments accounts include

A)purchases of financial assets by U.S.residents.
B)direct investments in foreign countries.
C)indirect investments in foreign countries.
D)purchases of U.S.real estate by foreigners.
E)all of the above

Question 35

In a system of flexible exchange rates,lower inflation abroad would induce

A)a rise in the U.S.exchange rate.
B)a fall in the U.S.rate of exchange.
C)a balance of payments deficit for the United States.
D)no change in U.S.exchange rates.

Question 36

Goods produced in the U.S.are made more competitively priced when

A)the dollar appreciates.
B)the dollar depreciates.
C)the exchange rate is fixed.
D)the money supply is decreased.

Question 37

The United States balance of payments accounts

A)records all earnings from the foreign activities of U.S.residents.
B)records all expenditures of U.S.citizens' abroad.
C)records all earnings from the foreign activities of foreign governments.
D)Both a and b
E)All of the above

Question 38

Assuming a flexible exchange rate,then an expansionary monetary policy in the foreign exchange market will shift

A)the demand curve for foreign exchange to the right
B)the demand curve for foreign exchange to the right and the supply curve of foreign exchange to the left.
C)both the demand curve for foreign exchange and the supply curve of foreign exchange to the right.
D)both the demand curve for foreign exchange to the left.
E)none of the above.

Question 39

The Bretton Woods system

A)established fixed par values for currencies in terms of gold.
B)was to be a system of adjustable pegs to the dollar.
C)expected countries with persistent surpluses to devalue their currencies.
D)was after the Great Depression in order to end the downturn.

Question 40

Which of the following are advantages of greater exchange rate flexibility?

A)The alleviation of potential conflicts that arise between the internal balance and the external balance.
B)The insulation of the domestic economy from economic shocks.
C)An expansion abroad would have contractionary effects on the domestic economy.
D)Both a and b
E)Both a and c

Question 41

In the U.S.balance of payments,exports to Europe are recorded as a

A)a use of funds in the current account.
B)negative item in the current account.
C)capital inflow item.
D)capital outflow item.
E)None of the above

Question 42

Capital outflows in the balance of payments accounts include

A)the sale of financial assets by U.S.residents to foreign citizens.
B)direct investments in the U.S.by foreign corporations.
C)indirect investments in the U.S.by foreign corporations.
D)purchases of U.S.government bonds by foreigners.

Question 43

To maintain a fixed exchange rate,when the exchange rate moves above the target level,the central bank must

A)sell foreign currency from reserves.
B)buy foreign currency.
C)raise taxes.
D)raise government spending.
E)pass a law that increases the exchange rate.

Question 44

To maintain a fixed exchange rate,in response to an increase in the government budget deficit the central bank must

A)sell foreign currency from reserves.
B)buy foreign currency.
C)raise taxes.
D)raise government spending.
E)pass a law that increases the exchange rate.

Question 45

If the surplus in the capital account are greater than the deficit in the current account,then

A)the current account must be positive in the long-run.
B)the current account must be negative in the long-run.
C)exports must be less than imports.
D)official reserve transactions must be negative.

Question 46

An increase in U.S.official reserve assets is entered in the U.S.balance of payments accounts as a

A)credit.
B)debit.
C)current account item.
D)None of the above

Question 47

Within a system of perfectly flexible exchange rates,an decrease in the United States demand for imports would result in a

A)rise in the exchange rate.
B)fall in the exchange rate.
C)balance of payments deficit.
D)balance of payments surplus.

Question 48

Which of the following should depreciate a county's currency?

A)an increase in its government budget deficit.
B)a decrease in its money supply.
C)an increase in economy growth.
D)an increase in import tariffs.
E)none of the above.

Question 49

If total domestic savings exceeds domestic investment,then the country will:

A)run a trade surplus.
B)
B)borrow from abroad.
C)have to float its exchange rate.
D)a and

Question 50

The exchange rate between the dollar and the euro is

A)the price of European goods relative to U.S.goods.
B)the price of U.S.goods relative to European goods.
C)the number of euros you get for lending one dollar to a European for a year.
D)the number of euros you get for one dollar.

Question 51

In a system of flexible exchange rates,a reduction in the money supply will cause

A)a rise in the value of the dollar relative to foreign currencies.
B)a fall in the value of the dollar relative to foreign currencies.
C)no change in the value of the dollar relative to foreign currencies.
D)a change in the value of the dollar relative to foreign currencies but the direction of the change is uncertain.

Question 52

An decrease in domestic savings

A)decreases foreign borrowing.
B)will improve the trade balance.
C)will increase exports.
D)will increase foreign borrowing.

Question 53

In a floating exchange rate system,when national savings falls then the equilibrium exchange rate

A)falls and the trade balance falls.
B)falls and the trade balance rises.
C)rises and the trade balance falls.
D)rises and the trade balance rises.

Question 54

Under a fixed exchange rate system,the central bank must

A)keep interest rates constant relative to the country they are targeting.
B)keep money growth constant relative to the country they are targeting.
C)follow a constant money growth rule.
D)allow the money supply to adjust only to whatever level will ensure the exchange rate remains unchanged.

Question 55

In a floating exchange rate system,an increase in the value of the exchange rate could be caused by

A)an increase in taxes.
B)an decrease in government spending.
C)a decrease in the domestic money supply.
D)a decrease in exports.

Question 56

In a floating exchange rate system,an appreciation of the exchange rate could be caused by

A)a cut in taxes.
B)a decrease in government spending.
C)an increase in the domestic money supply.
D)a decrease in the foreign demand for U.S.goods.

Question 57

Debits (negatives)in the current account of the balance of payments accounts include

A)imports of goods.
B)exports of services.
C)transfers received from other countries.
D)purchases of U.S.government bonds by foreigners.
E)all of the above.