Deck 5: The International Monetary System and Exchange Rate Arrangements

Question 1

A 'fiat' currency is:

A) a currency which cannot be converted into gold
B) a currency which can only be converted into gold
C) a currency which can only be converted into gold and lira
D) a currency which can only be converted into gold and U.S. dollars

Answer 1

a currency which cannot be converted into gold

Question 2

If the actual exchange rate is below the equilibrium exchange rate, it will tend to:

A) rise
B) fall
C) remain unchanged due to intervention
D) rise, fall or remain unchanged depending on the circumstances

Answer 2

rise

Question 3

If a fixed exchange rate is set below the equilibrium rate, it will create:

A) a deficit in the domestic balance of payments
B) a surplus in the domestic balance of payments
C) inflation
D) deflation

Answer 3

a deficit in the domestic balance of payments

Question 4

If a fixed exchange rate is set above the equilibrium rate, it will create:

A) a deficit in the domestic balance of payments
B) a surplus in the domestic balance of payments
C) inflation
D) deflation

Question 5

Which of the following is NOT a characteristic of the movements in fixed exchange rates?

A) large
B) discrete
C) result from policy actions
D) determined by the balance of payments position

Question 6

Which of the following is NOT a characteristic of the movements in flexible exchange rates?

A) continuous
B) small
C) determined by changes in supply and demand
D) perfectly determined by the interest rate differential

Question 7

A 'Snake in the Tunnel' is:

A) the predecessor of the EMS
B) an example of a system with two bands
C)where currencies of member countries are allowed to fluctuate within a narrow band (the snake). against each other and a wider band against currencies of non-member countries (the tunnel)
D) all the given answers

Question 8

A 'dirty float' is:

A) a managed float
B) an unmanaged float
C) not a very widely adopted exchange rate system
D) all the given answers

Question 9

Problems associated with the dual exchange rate system include:

A) the commercial rate may be set at such a low level to make the domestic currency overvalued, which will have an adverse effect on the economy
B) the system works properly only if the two foreign exchange markets are segmented
C) the system works properly only if the two foreign exchange rates are closely related
D) all of the given answers

Question 10

Some countries peg their currencies to a single currency because:

A) this policy is prescribed by the IMF
B) this arrangement reduces imported inflation
C) the single currency belongs to the major trading partner
D) the arrangement is conducive to economic growth

Question 11

According to the IMF classification of exchange rate arrangements, managed floating differs from independent floating because:

A) under managed floating the exchange rate policy is managed as part of the overall macroeconomic policy
B) under managed floating there is some target level for the exchange rate
C) under managed floating the currency is managed by taking into account other countries' exchange rate arrangements
D) independent floating does not involve central bank intervention

Question 12

Under the gold standard the exchange rate moves within a band determined by:

A) an agreement among the countries adopting the system
B) interest rate differentials
C) the price of gold in one financial centre relative to another
D) the cost of shipping gold from one financial centre to another

Question 13

Which of the following was NOT an indicator of the role played by Britain under the gold standard?

A) Britain was the last major country to adopt the gold standard
B) The pound was the world's most important currency
C) London was the most important financial centre
D) Britain was the largest capital exporter

Question 14

The idea that the gold standard represented an automatic self-equilibrating adjustment mechanism has been questioned because:

A) the PSFM did not work smoothly
B) the monetary authorities sterilised balance of payments imbalances
C) the shortage of gold did not allow a smooth functioning of the system
D) the PSFM did not work smoothly and the monetary authorities sterilised balance of payments imbalances

Question 15

The gold standard was a system of:

A) fixed but adjustable exchange rates
B) crawling peg
C) managed floating
D) fixed exchange rates

Question 16

Assume that one ounce of gold is worth AUD150 and NZD185. Calculate the mint parity for the AUD/NZD exchange rate:

A) 0.8108
B) 1.2333
C) 35
D) 335

Question 17

In the period between the end of World War I and 1926:

A) fixed exchange rates were the norm
B) a system of flexible exchange rates was adopted
C) a revised version of the gold standard prevailed
D) a managed float was used

Question 18

The Bretton Woods system was a system of:

A) fixed but adjustable exchange rates
B) crawling peg
C) managed floating
D) fixed exchange rates

Question 19

The creation of the Bretton Woods system was accompanied by the establishment of:

A) the United Nations
B) the International Bank for Reconstruction and Development
C) the International Monetary Fund
D) both the International Bank for Reconstruction and Development and the International Monetary Fund

Question 20

The term 'competitive devaluation' implies:

A) a devaluation aimed at enhancing competition and the operation of a free market
B) a devaluation that is dictated by free market forces
C) a devaluation that is undertaken by one country in response to a similar measure by another country
D) none of the given answers

Question 21

Which of the following was NOT a problem of the Bretton Woods system?

A) The system lacked a real adjustment mechanism
B) It created destabilising speculation
C) It portrayed defects in the liquidity creation mechanism
D) The U.S. dollar was overvalued

Question 22

The term 'SDR' refers to:

A) Special Drawing Rights, which are potential claims on the freely usable currencies of member countries of the IMF
B) Special Depositing Rights, which are potential claims on the freely usable currencies of member countries of the IMF
C) Special Drawing Rights, which are potential claims on the IMF
D) Special Depositor Redemptions, which are potential claims on the freely usable currencies of member countries of the IMF

Question 23

The 'Triffin Paradox' may be explained by the following:

A)To avoid a liquidity shortage, the U.S. was required under Bretton Woods to run a balance of payments surplus, which would boost the value of the U.S. dollar, cause speculation of a revaluation and create a liquidity surplus
B) To avoid a liquidity shortage, the U.S. was required under Bretton Woods to run a balance of payments surplus, which would boost the value of the U.S. dollar, cause speculation of a revaluation and increase the liquidity shortage
C) To avoid a liquidity shortage, the U.S. was required under Bretton Woods to run a balance
D)To avoid a liquidity surplus, the U.S. was required under Bretton Woods to run a balance of payments surplus, which would boost the value of the U.S. dollar, cause speculation of a revaluation and create a liquidity surplus

Question 24

The collapse of the Bretton Woods system was marked by:

A) the fall of the Berlin Wall
B) the creation of the euro
C) the making of the U.S. dollar inconvertible into gold
D) the making of the U.S. dollar convertible into gold

Question 25

An exchange rate arrange 'with no legal tender' refers to:

A) a situation where the currency of another currency circulates as the sole legal tender
B) a situation where the country belongs to a monetary or currency union
C) money sold on a black market
D) a situation where the currency of another currency circulates as the sole legal tender and a situation . where the country belongs to a monetary or currency union

Question 26

A 'currency board' is:

A) currency sold on an open outcry exchange
B) a currency with its exchange rate fixed by the board of directors of the central bank
C) an arrangement that is based on an explicit legislative commitment to exchange the domestic . currency for a specified foreign currency at a fixed exchange rate
D) a floating exchange rate

Question 27

The benefits of a 'currency board' include:

A) they are an effective means of pegging the exchange rate when a hard peg is required
B) the fact that governments operating currency boards must accept restrictions on the way they conduct policy
C) they can be very effective in countries suffering hyperinflation
D) they are an effective means of pegging the exchange rate when a hard peg is required and they can . be very effective in countries suffering hyperinflation

Question 28

A 'de jure' exchange rate regime is:

A) a classification of the exchange rate regime based on the observed behavior of the exchange rate and its governing authorities
B) a classification of the exchange rate regime based on the announcements made by the IMF
C) an unofficial exchange rate regime
D) a French exchange rate regime

Question 29

The EMS was a system of:

A) fixed but adjustable exchange rates
B) crawling peg
C) managed floating
D) fixed exchange rates

Question 30

Which of the following was NOT a function of the ECU?

A) Serving as the numeraire for the exchange rate mechanism
B) Functioning as a reserve asset
C) Settling international transactions with non-EMS countries
D) A reference point for the divergence indicator

Question 31

Between 1993 and 1999, the EMS, as a system of fixed but adjustable exchange rates, was de facto dead because:

A) the pound was no longer a member currency of the ERM
B) European countries had moved closer to establishing a monetary union
C) Germany no longer had low inflation and interest rates
D) the member currencies were allowed to move within a wide band of plus or minus 15%

Question 32

The EMU was a system of:

A) fixed but adjustable exchange rates
B) crawling peg
C) managed floating
D) fixed exchange rates

Question 33

Euro notes and coins were first introduced in:

A) July 1990
B) December 1995
C) May 1998
D) January 2002

Question 34

The benefits offered by the euro include the following:

A) Currency stability and the operations of the European Central Bank reduce inflation and interest rates
B) Businesses and individuals benefit from reduced transaction costs
C) The single currency produces efficiency gains as it is easier to compare wages and prices across the euro area
D) All of the given answers

Question 35

When the Australian dollar was part of the Sterling Area, the underlying exchange rate arrangement

A) pegging to a basket of currencies
B) free floating
C) managed floating
D) pegging to a single currency

Question 36

Which statement is true?

A)Until December 1971, the Australian dollar was pegged to the U.S. dollar; then it was pegged to the pound; then in September 1974 it was pegged to a basket of currencies; before being floated in December 1983
B)Until December 1971, the Australian dollar was pegged to the pound; then it was pegged to the. U.S. dollar; then in September 1974 it was pegged to a basket of currencies; before being floated in December 1983
C) Until December 1971 the U.S. dollar was pegged to the pound; then it was pegged to the Australian dollar; then in September 1974 it was pegged to a basket of currencies; before being floated in December 1983
D)Until December 1971 the Australian dollar was pegged to a basket of currencies; then it was pegged to the U.S. dollar; then in September 1974 it was pegged to the pound; before being floated in December 1983

Question 37

Which currency was floated in December 1983?

A) Australian dollar
B) N.Z. dollar
C) Canadian dollar
D) U.S. dollar

Question 38

Arguments FOR a flexible exchange rate do NOT include:

A) flexible exchange rates reduce liquidity problems
B) flexible exchange rates are more conducive to policy independence
C) flexible exchange rates allow for smoother adjustments to a country's balance of payments
D) flexible exchange rates are inflationary

Question 39

Arguments FOR a fixed exchange rate do NOT include:

A) fixed exchange rates are more conducive to achieving free international trade
B) fixed exchange rates provide certainty
C) fixed exchange rates are more suitable for small economies
D) fixed exchange rates are more suitable for economies with undiversified export bases

Question 40

What is a 'Tobin' tax?

A) A new tax proposed for Australia payable on all spot transactions involving currency conversion
B) A uniform international tax payable on all forward transactions involving currency conversion
C) A uniform international tax payable on all spot transactions involving currency conversion
D) A new form of death duty