Deck 11: The International Monetary System

Question 1

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

Answer 1

False
Explanation: The system of fixed exchange rates established at Bretton Woods worked well until the late 1960s, when it began to show signs of strain. As the only currency that could be converted into gold, and as the currency that served as the reference point for all others, the dollar occupied a central place in the system.

Question 2

The international monetary system refers to a system to regulate fixed exchange rates before the introduction of the euro.

Answer 2

False
Explanation: The international monetary system refers to the institutional arrangements that govern exchange rates.

Question 3

When the Bretton Woods participants established the World Bank, the need to lend money to third-world nations was foremost in their minds.

Answer 3

False
Explanation: When the Bretton Woods participants established the World Bank, the need to reconstruct the war-torn economies of Europe was foremost in their minds. The bank's initial mission was to help finance the building of Europe's economy by providing low-interest loans.

Question 4

The major problem with the gold standard was that no multinational institution could stop countries from engaging in competitive devaluations.

Question 5

Under a floating exchange rate regime, market forces have produced a volatile dollar exchange rate.

Question 6

According to the Bretton Woods agreement, if a currency became too weak to defend, a devaluation of up to 10 percent would be allowed without any formal approval by the International Monetary Fund.

Question 7

A country is said to be in balance-of-trade equilibrium when the income its residents earn from exports is greater than the money its residents pay to other countries for imports.

Question 8

Under a pegged exchange rate regime, a country will peg the value of its currency to that of a major currency, so that if the reference currency rises in value, its own currency rises too.

Question 9

Under the gold standard, a country in balance-of-trade equilibrium will experience a net inflow of gold from other countries.

Question 10

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 11

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.

Question 12

Since March 1973, currency exchange rates have become less volatile and more predictable than they were between 1945 and 1973.

Question 13

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 14

Under the fixed exchange rate system, the dollar could be devalued only if all countries agreed to simultaneously revalue against the dollar.

Question 15

In a fixed exchange rate system, the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency.

Question 16

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 17

Under the International Bank for Reconstruction and Development scheme, the World Bank offers low-interest loans to risky customers whose credit rating is often poor.

Question 18

Given a common gold standard, the value of any currency in units of any other currency (the exchange rate) was easy to determine.

Question 19

If more dollars are needed to buy an ounce of gold than before, the implication is that the dollar is worth more.

Question 20

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 21

In which kind of exchange rate system are the values of a set of currencies set against each other at some mutually agreed on exchange rate?

A)Clean float
B)Floating
C)Fixed
D)Dirty-float
E)Pegged

Question 22

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

Question 23

The International Monetary Fund can force countries to adopt the policies required to correct economic mismanagement.

Question 24

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 25

In the face of unpredictable exchange rate movements, a firm should pursue strategies that reduce its economic exposure.

Question 26

Which of the following statements is true about the various exchange rate systems?

A)In a fixed exchange rate system, the value of a currency is adjusted according to the day to day market forces.
B)In a clean float, the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency.
C)After the collapse of the Bretton Woods system of floating exchange rates in 1973, the world has operated with a fixed exchange rate system.
D)Under the Bretton Woods system, currency devaluations over 10 percent were allowed only with the approval of the IMF.
E)In dirty float, the exchange rate between a currency and other currencies is relatively fixed against a reference currency exchange rate.

Question 27

Which of the following refers to the institutional arrangements that govern exchange rates?

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 28

Which of the following refers to the gold standard?

A)Pegging currencies to gold and guaranteeing convertibility
B)Conducting international trade by physically exchanging gold
C)The most valuable currency in the world at any given point in time
D)The common global standard of gold quality to be maintained
E)The quality of merchandise to be maintained for it to be exportable

Question 29

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 30

Contracting out manufacturing may be more appropriate for high-value-added manufacturing.

Question 31

The disadvantage of a pegged exchange rate regime is that it aggravates inflationary pressures in a country.

Question 32

It can be very difficult for a small country to maintain a peg against another currency if capital is flowing out of the country and foreign exchange traders are speculating against the currency.

Question 33

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

Question 34

In which kind of exchange rate is the value of the currency 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?

A)Flexible
B)Pegged
C)Real
D)Dirty-float
E)Floating

Question 35

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

Question 36

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 37

Which of the following refers to a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand?

A)Fixed exchange rate
B)Floating exchange rate
C)Forward exchange rate
D)Pegged exchange rate
E)Nominal exchange rate

Question 38

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

Question 39

Which of the following refers to a system under which a country's currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value?

A)Fixed float
B)Clean float
C)Pegged float
D)Dirty float
E)Capital float

Question 40

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 41

Which of the following is true of the International Bank for Reconstruction and Development (IBRD) scheme of the World Bank?

A)Resources to fund IBRD loans are raised through subscriptions from wealthy members.
B)The interest rate charged by the World Bank is higher than the commercial banks' market rate.
C)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 42

Which of the following was the initial mission of the World Bank?

A)Maintaining order in the international monetary system
B)Financing the building of Europe's economy by providing low-interest loans
C)Taking over as the successor to the International Monetary Fund
D)Reviving the gold standard system
E)Enforcement of the floating exchange rate system

Question 43

Which of the following is a great strength of the gold standard?

A)It helped establish the dollar as a predominant vehicle currency.
B)It helped governments raise foreign exchange reserves thereby increasing economic stability.
C)It contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries.
D)It helped reduce inflation to near-zero levels in all countries engaged in international trade.
E)It helped to establish a common currency across the globe to fund international trade.

Question 44

Which of the following was responsible for the World Bank shifting its focus from Europe to third-world nations?

A)The Great Depression
B)The Jamaica agreement
C)World War II
D)The Marshall Plan
E)The Bretton Woods agreement

Question 45

Which of the following was a reason that led to the collapse of the gold standard in 1939?

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)A cycle of competitive currency devaluations by various countries
D)Expansion in the volume of international trade in the wake of the Industrial Revolution
E)The inability of the gold standard to act as a mechanism for achieving balance-of-trade equilibrium by all countries

Question 46

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 47

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 48

Which of the following observations is true of the Bretton Woods agreement?

A)The participating countries were required to exchange their currencies for gold.
B)Devaluation was accepted as a tool of competitive trade policy.
C)The agreement called for a system of floating exchange rates.
D)For weak currencies, devaluation of up to 10 percent was allowed without any formal approval by the International Monetary Fund.
E)A fixed exchange rate system was deemed impractical.

Question 49

Under a fixed exchange rate regime, what would be the result if a country rapidly increased its money supply by printing 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 50

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 51

Without currency devaluation, a country in "fundamental disequilibrium" would experience:

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

Question 52

What was the effect of the Marshall Plan?

A)The United States lent money directly to European nations to help them rebuild their economies.
B)Member countries of the International Monetary Fund were free to engage in competitive currency devaluations.
C)The World Bank lent funds to reconstruct the war-torn economies of Europe.
D)The United States lent money to third-world nations to support their public-sector projects.
E)The World Bank lent money to the International Monetary Fund so that it could finance deficit-laden countries.

Question 53

Which of the following statements is true about the gold standard?

A)Given a common gold standard, the value of any currency in units of any other currency was easy to determine.
B)Establishing a gold standard seemed impractical as the volume of international trade expanded in the wake of the Industrial Revolution.
C)A drawback of the gold standard was that it failed to provide a mechanism for achieving balance-of-trade equilibrium by all countries.
D)Under the gold standard, when a country has a trade deficit, there will be a net flow of gold from the other countries to that country.
E)The gold standard refers to the use of gold coins as a medium of exchange between countries involved in international trade.

Question 54

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 55

An aspect of the Bretton Woods agreement was a commitment not to use:

A)the system of fixed exchange rates.
B)devaluation as a weapon of competitive trade policy.
C)gold as a measure to fix the value of currencies.
D)funds from the International Monetary Fund and the World Bank.
E)the U.S. dollar as a reference currency.

Question 56

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 57

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 58

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 59

Which of the following is a reason for the emergence of the gold standard?

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 60

Which of the following describes a country when the income its residents earn from exports is equal to the money its residents pay to other countries for imports?

A)A currency crisis
B)Balance-of-trade equilibrium
C)Balance-of-payments deficit
D)Balance-of-trade surplus
E)Fiscal deficit

Question 61

Which of the following is true of monetary contraction in a fixed exchange rate system?

A)It requires 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

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

A)U.S. macroeconomic policy package of 1965-1968.
B)inflexibility of the fixed exchange rate system that led to high unemployment.
C)Marshall Plan, under which the United States lent money heavily to European nations.
D)failure of the International Monetary Fund to impose monetary discipline.
E)increased taxes in the United States to finance its welfare programs.

Question 63

Which of the following observations about the International Development Association (IDA) scheme of the World Bank is true?

A)Money is raised through bond sales in the international capital market.
B)Borrowers have up to 50 years to repay at an interest rate of less than 1 percent a year.
C)IDA loans go only to European countries.
D)Grants and interest-free loans are denied to governments of underdeveloped nations.
E)The bank offers loans only to customers with a satisfactory credit rating.

Question 64

Which of the following explains the rise of the dollar against most major currencies in the late 1990s, even though the United States was still running a significant balance-of-payments deficit?

A)Reduced government intervention in the foreign exchange market
B)Increased foreign investments in U.S. financial assets
C)Low real interest rates in the United States compared to the rest of the world
D)Increased exports as opposed to imports
E)Increased communism in the United States

Question 65

Under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, this would require the:

A)country to import more than it exports.
B)country to make its exports more expensive.
C)International Monetary Fund to agree to a currency devaluation.
D)government to expand monetary supply in the economy.
E)government to undertake activities that led to exchange rate appreciation.

Question 66

In comparison to a floating exchange rate regime, a fixed exchange rate system is characterized by:

A)smoother trade balance adjustments.
B)increased destabilizing effects of exchange rate speculation.
C)greater autonomy in terms of monetary policy.
D)higher monetary discipline.
E)greater exchange rate uncertainty and volatility.

Question 67

Which of the following is a characteristic of the floating exchange rate regime?

A)It allows for automatic trade balance adjustments.
B)The use of monetary policy by the government is restricted.
C)It allows for greater monetary discipline.
D)It limits the destabilizing effects of exchange rate speculation.
E)It eliminates volatility and uncertainty associated with exchange rates.

Question 68

Which of the following was abandoned as 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)Membership to the International Monetary Fund
E)Granting International Monetary Fund loans to less developed countries

Question 69

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 an increase in the money supply, resulting in:

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

Question 70

Which of the following was the weakness of the Bretton Woods system?

A)It could be wrecked by heavy borrowings from the World Bank and the International Monetary Fund.
B)It could not work if the U.S. dollar was under speculative attack.
C)The inflexibility of the system resulted in high unemployment.
D)It forced fiscal and monetary discipline on participating nations.
E)It allowed the countries to engage in competitive currency devaluations.

Question 71

Which of the following statements is true about the changes in the world monetary system since March 1973?

A)The value of the U.S. dollar has never seen a fall ever since.
B)Exchange rates have become much more volatile.
C)Exchange rates have 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 72

Which of the following was an announcement made by U.S. President Nixon to enable the devaluation of the dollar during the increase in inflation in 1971 in the United States?

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 73

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 74

From mid-2008 through early 2009, the value of the dollar moderately increased against major currencies, despite the fact that the American economy was suffering from a serious financial crisis. Which of the following was a reason for 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 to reduce.

Question 75

Which of the following is an argument for a fixed exchange rate system?

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 76

In January 1976, which one of the followed 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 77

Which of the following is one of the reasons for the rapid rise in the value of the dollar between 1980 and 1985 despite a large trade deficit?

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 78

Which of the following is an argument for a floating exchange rate 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)Removal of the obligation to maintain exchange rate parity destroys a government's monetary control.
E)Trade deficits can be determined by the balance between savings and investment in a country, not by the external value of its currency.

Question 79

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 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 vis-à-vis the U.S. dollar.
E)governments did not regulate the buying and selling of currency.