Deck 19: The International Financial System

Question 1

The United States abandoned the Bretton Woods system of exchange rates in

A)the 1920s.
B)the 1940s.
C)the 1970s.
D)the 1990s.

Answer 1

the 1970s.

Question 2

If currencies around the world are based on the gold standard,and Japan raises the amount of gold for which the yen will trade,then holding all else constant

A)the yen will depreciate against the dollar.
B)the yen will appreciate against the dollar.
C)the value of the yen relative to the dollar will stay constant.
D)U.S.exports to Japan will decrease.

Answer 2

the yen will appreciate against the dollar.

Question 3

When the value of a currency is determined mostly by demand and supply,but with occasional government intervention,the exchange rate system is defined as

A)fixed.
B)floating.
C)managed float.
D)Bretton Woods.

Answer 3

managed float.

Question 4

The gold standard is an example of

A)a floating exchange rate system.
B)a managed float exchange rate system.
C)a fixed exchange rate system.
D)a flexible exchange rate system.
E)the Bretton Woods System.

Question 5

China's exchange rate system from 1994 through 2005 is an example of

A)a floating exchange rate system.
B)a managed float exchange rate system.
C)a fixed exchange rate system.
D)a flexible exchange rate system.
E)the Bretton Woods System.

Question 6

The current exchange rate system in the United States is best described as a

A)silver standard.
B)managed float exchange rate system.
C)fixed exchange rate system.
D)gold standard.

Question 7

Why did the United States abandon the gold standard in the 1930s?

A)The government wanted to rapidly expand the money supply in response to the Great Depression.
B)The government wanted to move away from a floating exchange rate system to a fixed exchange rate system.
C)The Treasury Department in the United States found it was cheaper to print paper money instead of gold coins.
D)New sources of gold were discovered,so the price of gold plummeted,dramatically reducing the value of the dollar.

Question 8

Suppose an economy's exchange rate system is the gold standard and vast tracks of gold are discovered,as is what happened in the United States in 1849.If the economy is at full employment,what should this discovery do?

A)It should raise the money supply but have no impact on the price level.
B)It should raise the money supply and cause inflation.
C)It should raise the money supply and cause disinflation.
D)It should lower the money supply and cause deflation.
E)it should not change the money supply.

Question 9

The Bretton Woods exchange rate system was a

A)floating exchange rate system.
B)managed float exchange rate system.
C)fixed exchange rate system.
D)flexible exchange rate system.

Question 10

The exchange rate system agreed to in 1944,in which the U.S.government agreed to buy or sell gold at a fixed price of $35 per ounce,is referred to as

A)the gold standard.
B)the Bretton Woods System.
C)a floating currency standard.
D)a flexible exchange rate system.

Question 11

If a country's currency is determined only by the demand and supply for that country's currency,the country is said to have a

A)floating exchange rate.
B)fixed exchange rate.
C)gold standard.
D)managed float.

Question 12

When the value of a currency is determined ________,the exchange rate system is defined as managed float.

A)only by supply and demand
B)by its issuing government
C)mostly by supply and demand,but with occasional government intervention
D)by its issuing government,with occasional readjustments in value

Question 13

Under which exchange rate system was a dollar redeemable for gold only if the dollar was presented by a foreign central bank?

A)the gold standard
B)a managed float exchange rate system
C)the Bretton Woods System
D)a fiat system

Question 14

During what period of time did the United States most consistently adhere to the gold standard?

A)from the nineteenth century until the 1930s
B)from the eighteenth century until the nineteenth century
C)from 1914 until 1929
D)from 1944 until 1980

Question 15

From the nineteenth century until the 1930s,the United states most consistently adhered to

A)the gold standard.
B)the Bretton Woods system.
C)a freely-floating exchange rate.
D)a managed-float exchange rate system.

Question 16

In the United States today,how much gold will the Federal Reserve give you in exchange for $1?

A)none
B)$1 worth of gold (based on the market price of an ounce of gold at the time you exchange the $1)
C)1 ounce of gold
D)1/35th of an ounce of gold

Question 17

Under the Bretton Woods exchange rate system,set up in 1944,which of the following was true?

A)Americans could sell their dollars to the American government in exchange for gold.
B)Americans could sell their dollars to the American government in exchange for silver.
C)Americans could sell their dollars to foreign central banks in exchange for gold.
D)Foreign central banks could sell their dollars to the American government in exchange for gold.

Question 18

When the value of a currency is determined ________,the exchange rate system is defined as a floating exchange rate system.

A)only by supply and demand
B)by its issuing government
C)mostly by supply and demand,but with occasional government intervention
D)by its issuing government,with occasional readjustments in value

Question 19

Under the gold standard,to increase the money supply in the country,the government must

A)simply print more currency.
B)have enough gold to back up the increase in the money supply.
C)buy foreign currencies with dollars to increase foreign currency reserves.
D)increase the value of the country's currency on foreign exchange markets.

Question 20

In what year was the Bretton Woods system of currency exchange set up?

A)1912
B)1924
C)1944
D)1969

Question 21

Under the Bretton Woods exchange rate system,the U.S.government agreed to buy or sell gold at a fixed price of ________ per ounce.

A)$1
B)$35
C)$100
D)$400

Question 22

Expanding,contracting,and managing the money supply is easier for a central bank under the gold standard.

Question 23

If two countries adhere to a gold standard,the exchange rate for their currencies is fixed.

Question 24

Under the Bretton Woods exchange rate system,________ could sell their dollars to the American government in exchange for gold.

A)foreign central banks
B)American citizens
C)foreign citizens
D)all of the above

Question 25

In the United States today,the U.S.dollar is backed by

A)gold.
B)silver.
C)U.S.Treasury securities.
D)none of the above.

Question 26

The ________ system of currency exchange rates was set up in 1944.

A)gold standard
B)Bretton Woods
C)managed float
D)flexible

Question 27

If currencies around the world are based on the gold standard,and the EU lowers the amount of gold for which the euro will trade,then holding all else constant,

A)the euro will depreciate against the dollar.
B)the euro will appreciate against the dollar.
C)the value of the euro relative to the dollar will stay constant.
D)U.S.exports to EU countries will increase.

Question 28

The United States abandoned the ________ because the government wanted to rapidly expand the money supply in response to the Great Depression.

A)gold standard
B)Bretton Woods system
C)managed float
D)floating exchange rate system

Question 29

Under the Bretton Woods system,U.S.dollars were redeemable for ________ only if the dollars were presented by a foreign central bank.

A)silver
B)foreign currency
C)gold
D)U.S.Treasury bonds

Question 30

Under the gold standard,the government must have enough gold to back up any

A)increase in money demand.
B)increase in the money supply.
C)change in its currency's exchange rate.
D)foreign currency deposits in its central bank.

Question 31

The gold in Fort Knox backs all U.S.currency.

Question 32

The current exchange rate system is a managed float exchange rate system.

Question 33

Under a floating exchange rate,the exchange rate

A)will change whenever the price of gold changes.
B)is controlled by central bank intervention.
C)is determined by the interaction of supply of the currency and demand for the currency.
D)is pegged against the euro.

Question 34

U.S.currency continues to be backed by the gold standard to this day.

Question 35

Foreign currency prices of the U.S.dollar are currently determined by a managed float exchange rate system.

Question 36

U.S.dollars can currently be exchanged for gold by foreign central banks,but not by U.S.citizens.

Question 37

The ________ in the United States is best described as a managed float exchange rate system.

A)earliest used exchange rate system
B)current exchange rate system
C)exchange rate system used prior to the Great Depression
D)exchange rate system set up at the end of World War II

Question 38

Exchange rates under the Bretton Woods system were determined by relative supplies of gold held by countries within the system.

Question 39

The fixed exchange rate system set up in the 1940s was the

A)purchasing power parity exchange system.
B)gold standard.
C)Bretton Woods system.
D)European Union euro system.

Question 40

The Bretton Woods system was established in 1944 and remained in place until the early 1970s.

Question 41

You decide to work in Japan for the next 10 years,accumulate some savings,then move back to the United States and convert your savings from yen to dollars.At the time of your move,economists predict that consumers in the United States have reignited their love of Japanese products,especially hybrid cars,and expect that this strong preference for Japanese products will continue for the next decade.How should this influence your decision to work and save in Japan?

A)You should be discouraged as the growing U.S.preference for Japanese goods should increase the value of the yen to the dollar and decrease the value of your savings when converted to dollars.
B)You should be discouraged as the growing U.S.preference for Japanese goods should decrease the value of the yen to the dollar and decrease the value of your savings when converted to dollars.
C)You should be encouraged as the growing U.S.preference for Japanese goods should decrease the value of the yen to the dollar and raise the value of your savings when converted to dollars.
D)You should be encouraged as the growing U.S.preference for Japanese goods should increase the value of the yen to the dollar and raise the value of your savings when converted to dollars.

Question 42

Purchasing power parity is the theory that,in the long run,exchange rates should be at a level such that equivalent amounts of any country's currency

A)will equalize nominal interest rates across countries.
B)are valued inversely relative to the size of its GDP.
C)should earn the same real rate of return.
D)allow one to buy the same amount of goods and services.

Question 43

Fluctuating exchange rates can alter a multinational firm's profits and losses.German company Bayer produces products in Germany and sells them in the United States.If the dollar depreciates against the euro,then Bayer's sales in the United States should ________ because it will take ________ U.S.dollars to purchase the German-made products.

A)rise; more
B)rise; fewer
C)fall; more
D)fall; fewer

Question 44

In 2011,a number of Canadians purchased homes in Arizona.Which of the following would not be a logical explanation for this?

A)The value of the Canadian dollar relative to the U.S.dollar increased during this time.
B)The U.S.dollar depreciated during this time.
C)The Canadian dollar appreciated during this time.
D)The U.S.dollar appreciated relative to the Canadian dollar during this time.

Question 45

What is the difference between a fixed exchange rate system and a managed float exchange rate system?

Question 46

An increase in the value of the U.S.dollar will

A)reduce Canadian demand for winter homes in Florida.
B)increase Canadian demand for winter homes in Florida.
C)reduce the cost of homes in Florida for Canadian buyers.
D)increase the cost of homes in Florida for American buyers.

Question 47

How were exchange rates determined under the gold standard? How did the Bretton Woods system differ from the gold standard?

Question 48

The currency adopted by most countries in Western Europe is referred to as the

A)euro.
B)Eurodollar.
C)yen.
D)pound.

Question 49

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar,purchasing power parity predicts that

A)the dollar will appreciate as the demand for dollars falls in the long run.
B)the dollar will appreciate in the long run as the demand for the dollars rises.
C)the dollar will depreciate as the demand for dollars falls in the long run.
D)the dollar will depreciate as the supply of dollars rises in the long run.

Question 50

The current exchange rate system has which of the following characteristics?

A)The United States allows the dollar to float against other major currencies.
B)All developing countries allow their currencies to float against the dollar and other major currencies.
C)The countries of the European Union have adopted the gold standard.
D)Several developing countries in Asia have adopted the Bretton Woods system.
E)The current global foreign exchange system is a fixed system.

Question 51

If the exchange rate between the U.S.dollar and the Indian rupee (rupees per dollar)is greater than the relative purchasing power between the two countries,which of the following would be true?

A)There are opportunities for profit by purchasing goods in India and then selling them in the United States.
B)Purchasing power parity predicts that the value of the dollar will rise as traders take advantage of arbitrage opportunities.
C)Purchasing power parity predicts that the dollar is undervalued as traders take advantage of arbitrage opportunities.
D)There are no arbitrage opportunities for which traders can take advantage.

Question 52

From the beginning of 1973 until June 2017,the value of the dollar has ________ relative to the Canadian dollar and ________ relative to the Japanese yen.

A)appreciated; appreciated
B)appreciated; depreciated
C)depreciated; appreciated
D)depreciated; depreciated

Question 53

Which of the following is not one of the four main determinants of exchange rates in the long run?

A)relative price levels across countries
B)relative rates of productivity growth across countries
C)preferences for domestic and foreign goods across countries
D)speculating in currency markets

Question 54

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar,what is the dollar cost of a Big Mac in Brazil?

A)$0.89
B)$2.25
C)$4.50
D)$8.00

Question 55

What are the three main exchange rate systems,and how do they operate?

Question 56

What is the connection between the gold held at the Fort Knox Bullion Depository in Kentucky and the U.S.money supply?

Question 57

If one U.S.dollar could be exchanged for one Canadian dollar in 1970,and one U.S.dollar can now be exchanged for 1.13 Canadian dollars,which of the following is true?

A)The U.S.dollar lost value against the Canadian dollar.
B)The Canadian dollar lost value against the U.S.dollar.
C)The Canadian dollar gained value against the U.S.dollar.
D)Both A and C are true.

Question 58

If the purchasing power of a dollar is greater than the purchasing power of the yen,purchasing power parity would predict that

A)in the short run,exchange rates will move to equalize the purchasing power of the dollar and the yen.
B)in the long run,exchange rates will move to equalize the purchasing power of the dollar and the yen.
C)in the long run,interest rates will move to equalize the purchasing power of the dollar and the yen.
D)in the short run,interest rates will move to equalize the purchasing power of the dollar and the yen.

Question 59

Ariel is a Canadian citizen who works in Montreal,Canada and owns a winter home in Palm Beach,Florida.When Ariel spends the winters in Palm Beach,an increase in the value of the Canadian dollar relative to the U.S.dollar should

A)help Ariel as each Canadian dollar of her salary is now worth more U.S.dollars.
B)hurt Ariel as each Canadian dollar of her salary is now worth less U.S.dollars.
C)hurt Ariel as it is now more expensive to live in Palm Beach since the Canadian dollar appreciation.
D)help Ariel as it is now less expensive to live in Canada since the Canadian dollar appreciation.

Question 60

Which of the following is most important in explaining exchange rate fluctuations in the short run?

A)relative price levels across countries
B)preferences for domestic and foreign goods
C)interest rates
D)relative rates of productivity growth across countries

Question 61

Countries that use the euro as their currency face similar concerns as countries did during the years of the gold standard in that each are (were)

A)unable to conduct monetary policy.
B)unable to conduct fiscal policy.
C)using currency which is backed by gold.
D)using a floating currency.

Question 62

If relative purchasing power between the United States and Argentina is 3.22 pesos per dollar,under which circumstances would we say that the dollar is "overvalued"?

A)if the actual exchange rate between the dollar and the Argentinean peso is 3.22 pesos per dollar
B)if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar
C)if the actual exchange rate between the dollar and the Argentinean peso is 0.22 pesos per dollar
D)if the actual exchange rate between the dollar and the Argentinean peso is 3 pesos per dollar

Question 63

Figure 19-1
Refer to Figure 19-1.Which of the following would cause the change depicted in the figure above?

A)European productivity rises relative to American productivity.
B)Americans increase their preferences for goods produced in the EU relative to American goods.
C)The U.S.removes a quota on wristwatches from the European Union.
D)The price level of goods produced in the EU increases relative to the price level of goods produced in the United States.

Question 64

If the average productivity of American firms is rising more quickly than the average productivity of Indian firms,which of the following would you expect to see? (India's currency is the rupee.)

A)an increase in the value of the rupee relative to the dollar
B)a decrease in the prices of Indian products
C)a decrease in the quantity demanded of Indian products relative to American products
D)an increase in the quantity demanded of Indian products relative to American products

Question 65

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar,purchasing power parity predicts that

A)the dollar is undervalued.
B)the dollar is overvalued.
C)the real is undervalued.
D)both B and C are correct.

Question 66

How will the exchange rate (foreign currency per dollar)respond to an increase in the relative rate of productivity growth in the United States in the long run?

A)Exchange rates will rise.
B)Exchange rates will fall.
C)Exchange rates will be unaffected by changes in the relative rate of productivity growth in the United States,both in the short run and in the long run.
D)The exchange rate will be affected in the short run,but not in the long run.

Question 67

If the U.S.government places tariffs on imports from countries that have been accused of deliberately undervaluing their currencies,the price of these imports will ________ and the demand for the undervalued currency will ________.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 68

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

A)Some goods and services produced in any country are not traded internationally.
B)Consumer preferences for goods and services across countries are very similar.
C)Most countries do not impose barriers to trade.
D)Most countries have free markets with little,if any,government regulation.

Question 69

Figure 19-1
Refer to Figure 19-1.Which of the following would cause the change depicted in the figure above?

A)U.S.productivity falls relative to European productivity.
B)Americans increase their preferences for goods produced in the EU relative to American goods.
C)The United States imposes a quota on wine from the European Union.
D)The price level of goods produced in the EU decreases relative to the price level of goods produced in the United States.

Question 70

If the GDP deflator in the United States is 114,and the GDP deflator in Ukraine is 142,which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)

A)The demand for the dollar will rise since the dollar is undervalued.
B)The demand for the dollar will fall since the dollar is overvalued.
C)The supply of the dollar will fall since the dollar is undervalued.
D)No prediction regarding changes in the demand or supply of the dollar can be made without information on the exchange rate between the United States and Ukraine.

Question 71

Suppose the GDP deflator in the United States is 125 and the GDP deflator in Japan is 100.Also assume the United States has trade barriers on Japanese goods in the form of quotas.What does this imply about the exchange rate of yen per dollar under the theory of purchasing power parity in the long run?

A)The exchange rate of yen per dollar will be equal to 1.25.
B)The exchange rate of yen per dollar will be greater than 0.8.
C)The exchange rate of yen per dollar will be equal to 0.8.
D)The exchange rate of yen per dollar will be less than 0.8.

Question 72

Because the value of the euro is determined by factors that affect the entire euro zone,during the recession of 2007-2009,individual countries using the euro

A)were unable to have their exchange rates depreciate.
B)were more insulated from unemployment increases than most countries.
C)experienced a greater increase in exports than did most countries.
D)were able to use expansionary monetary policy to lessen the impact of the recession.

Question 73

If,at the current exchange rate between the dollar and the Norwegian kroner of 5.78 kroner per dollar,the dollar is "overvalued," how do you expect demand and supply in the foreign exchange markets to respond?

A)The demand for the dollar will rise,while the supply of the kroner will fall.
B)The demand for the dollar will fall,while the supply of the kroner will rise.
C)The supply of the dollar will rise,while the demand for the kroner will fall.
D)The supply of the dollar will rise,while the demand for the kroner will rise.

Question 74

Figure 19-1
Refer to Figure 19-1.Which of the following would cause the change depicted in the figure above?

A)U.S.productivity rises relative to European productivity.
B)Europeans decrease their preferences for U.S.goods relative to European goods.
C)The European Union increases its quotas on U.S.-produced wine.
D)an increase in the price level of U.S.goods relative to European goods

Question 75

If inflation in Russia is higher than it is in the United States

A)the purchasing power of the ruble in buying Russian goods will rise relative to the dollar.
B)the value of the dollar will rise in the long run.
C)the value of the ruble will rise in the long run.
D)Both A and C are correct.

Question 76

The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory.In January 2017,the Economist reported that the average price of a Big Mac in the U.S.was $4.93.In Sweden,the average price of a Big Mac at that time was 48 kronor.What is the "implied exchange rate" between Swedish kronor and U.S.dollars?

A)0.10 kronor per dollar
B)2.37 kronor per dollar
C)9.74 kronor per dollar
D)52.93 kronor per dollar

Question 77

If the GDP deflator in the United States is 114,and the GDP deflator in Ukraine is 142,which of the following exchange rates would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the hryvnia.)

A)0.80 hryvnias per dollar
B)1.25 hryvnias per dollar
C)2.80 hryvnias per dollar
D)28 hryvnias per dollar

Question 78

If the implied exchange rate between Big Mac prices in the United States and Poland is 2.13 zlotys per dollar,but the actual exchange rate between the United States and Poland is 3.16 zlotys per dollar,which of the following would you expect to see?

A)an appreciation of the dollar
B)an increase in the demand for zlotys
C)an increase in the demand for dollars
D)Both A and C are correct.

Question 79

If the purchasing power of the dollar is greater than the purchasing power of the euro,purchasing power parity predicts that the exchange rate will

A)increase if the exchange rate is greater than 1 euro per dollar.
B)decrease if the exchange rate is less than 1 euro per dollar.
C)be equal to the relative purchasing power across the currencies in the long run.
D)not fluctuate and stay constant in the long run.

Question 80

Figure 19-2
Refer to Figure 19-2.Which of the following would cause the change depicted in the figure above?

A)Lack of investment in infrastructure causes U.S.productivity to fall relative to Chinese productivity.
B)Tainted cat food from China causes U.S.consumers to decrease their preferences for Chinese goods relative to U.S.goods.
C)A new trade agreement with China results in the United States removing all tariffs on clothing imported from China.
D)The Chinese increase their preferences for goods produced in the United States.