Deck 7: Exchange Rate Systems: Past to Present

Question 1

The World Bank was established following World War I to serve as an agent for central banks.

Answer 1

False

Question 2

A situation in which policymakers with a pegged exchange rate system change the parity value such that it takes fewer units of the domestic currency to purchase one unit of the foreign currency is called:

A) devaluation.
B) revaluation.
C) depreciation.
D) appreciation.

Answer 2

B

Question 3

The G5 group of nations includes:

A) Belgium, United States, Germany, United Kingdom, Japan.
B) France, United States, Germany, United Kingdom, Japan.
C) France, United States, Germany, China, Russia.
D) China, Brazil, Russia, India, United States, Germany.

Answer 3

B

Question 4

The __________ was a meeting of the G5 nations to announce that the nations would intervene in the foreign exchange market to drive down the value of the dollar.

A) Plaza Agreement
B) Louvre Accord
C) Jamaica Accord
D) 1975 Economic Summit

Question 5

An exchange rate regime in which policymakers peg the value of the domestic currency to the currency of another nation and allow the domestic currency to fluctuate around the parity within bands of plus or minus less than 1 percent of parity is called a:

A) pegged with bands system.
B) currency basket system.
C) conventional peg.
D) dirty or managed float.

Question 6

An exchange rate regime in which policymakers allow the value of the domestic currency to be determined only by market forces is called a:

A) pegged with bands system.
B) currency basket system.
C) float.
D) dirty or managed float.

Question 7

A currency whose current market value is less than that predicted by an economic theory or model is a(n) ________________ currency.

A) overvalued
B) undervalued
C) reserve
D) vehicle

Question 8

If the United States pegs the value of the dollar to gold at a parity rate of $35 per ounce, and British officials peg the value of the pound to gold at a rate of £10, then the implied rate of exchange between the dollar and the pound (dollar/pound) is:

A) 0.29.
B) 3.5.

Question 9

If policymakers of a non-European nation adopt the euro as their sole legal tender, this is called ________________.

A) a euro peg
B) a euro standard arrangement
C) dollarization
D) currency board

Question 10

The "trilemma" concept refers to the fact that a nation may simultaneously select a combination of any two, but not all three, of the following:

A) a managed, dirty float for the exchange rate; a non-independent monetary policy; closure of domestic markets to financial capital flows.
B) flexible bilateral and cross exchange rates; independent, discretionary foreign exchange market interventions; open, liberalized markets for cross-border trade of merchandise and services.
C) fixed bilateral and cross exchange rates; non-independent foreign exchange market interventions; closure of markets to cross-border trade of merchandise and services.
D) fixed exchange rates; an independent, discretionary monetary policy; open, liberalized markets for financial capital.

Question 11

Which one of the following is not a key element in the trilemma issue?

A) closure of domestic markets to international trade in goods and services
B) open and liberalized capital markets
C) pegged exchange rates
D) monetary policy independence and discretion

Question 12

The ______ is a supranational organization whose major responsibility is to lend reserves to member nations experiencing a shortage of reserves.

A) Bank for International Settlements
B) International Monetary Fund
C) World Bank
D) World Trade Organization

Question 13

What exchange rate arrangement did U.S. President Richard Nixon hail as the "most significant monetary agreement in the history o the world"?

A) gold standard
B) Bretton Woods system
C) Smithsonian Agreement
D) Jamaica Accords

Question 14

It is better to peg a currency than to let it float in the foreign exchange market.

Question 15

When policymakers peg the domestic currency to a currency basket that includes only two foreign currencies, they have only two exchange rates to focus on.

Question 16

The "post-Bretton Woods system" of exchange regimes today is best referred to as a flexible exchange rate system.

Question 17

The Jamaica Accords rewrote the articles of agreement of the International Monetary Fund, allowing flexible exchange rates.

Question 18

An independent currency authority and a currency board are the same thing.

Question 19

When a country "devalues" its currency, the value of the currency is "stronger."

Question 20

A currency board supplants a central bank and has fewer responsibilities than a central bank.

Question 21

Since the 1970s the United States has run a persistent deficit in its goods, services, and income account.

Question 22

Actions by U.S. President Richard Nixon were the primary cause of the end of the Bretton Woods system.

Question 23

The trilemma can be visualized using a triangle in which the three sides involve: giving up an independent monetary policy; a floating exchange rate regime; and capital controls that restrain movements of financial capital.

Question 24

According to the trilemma, as a nation moves toward more open, liberalized capital markets, a stable policy configuration requires that policymakers forego either:

A) an independent monetary policy or floating exchange rates.
B) an independent monetary policy or pegged exchange rates.
C) sacrificing monetary policy independence or conducting a managed float.
D) sacrificing monetary policy independence or conducting a dirty float.