Deck 11: The International Monetary System

Question 1

Adopting a pegged exchange rate regime increases the inflationary pressures in a country.

Answer 1

False
Explanation: Evidence shows that adopting a pegged exchange rate regime moderates inflationary pressures in a country.

Question 2

In the 1990s, most of the borrowing by the companies who invested in Asian countries had been in local currencies.

Answer 2

False
Explanation: The companies that had made the investments in Asia, in 1990s, were under huge debt burdens and they were finding it difficult to service. Much of the borrowing had been in U.S. dollars, as opposed to local currencies.

Question 3

Gold was declared as the formal reserve asset in the Jamaica agreement of 1976.

Answer 3

False
Explanation: In the Jamaica agreement, gold was abandoned as a reserve asset. The IMF returned its gold reserves to members at the current market price, placing the proceeds in a trust fund to help poor nations.

Question 4

The quality of investments declined significantly in the Asian countries during the 1990s.

Question 5

The gold standard called for fixed exchange rates against the U.S. dollar.

Question 6

The current system of foreign exchange is a mixed system of government intervention and speculative activity.

Question 7

Fixed exchange rates lead to speculation and uncertainty in the value of currencies.

Question 8

Implementing a fixed exchange rate regime increases the price inflation in countries.

Question 9

Market forces have produced a stable dollar exchange rate under a floating exchange rate regime.

Question 10

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

Question 11

World Bank offers low-interest loans to risky customers whose credit rating is often poor.

Question 12

The International Monetary Fund made pegging the Mexican peso to the dollar, a condition for lending money to the Mexican government in the 1980s.

Question 13

Government projects were a factor behind the investment boom in most Southeast Asian economies.

Question 14

Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong.

Question 15

Firms should not utilize the forward exchange market when they are faced with uncertainty about the future value of currencies.

Question 16

The fixed exchange rate system established at Bretton Woods failed due to speculative pressures on the U.S. dollar.

Question 17

Interest rates adjust automatically under a strict currency board system.

Question 18

The International Monetary Fund's original function was to provide a pool of money from which members could borrow in the short term.

Question 19

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 20

The agreement reached at Bretton Woods established the International Monetary Fund (IMF) and the World Bank.

Question 21

Advocates of a _____ argue that removal of the obligation to maintain exchange rate parity would restore monetary control to a government.

A) fixed exchange rate regime
B) dirty-float system
C) floating exchange rate regime
D) pegged exchange rate regime

Question 22

_____ limits the ability of the government to print money and, thereby, create inflationary pressures.

A) A dirty-float system
B) A managed-float system
C) The European Monetary System
D) A currency board system

Question 23

The _____ refers to the institutional arrangements that govern exchange rates.

A) World Bank
B) international monetary system
C) currency exchange
D) gold standard

Question 24

A _____ means the value of a currency is fixed relative to a reference currency.

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

Question 25

When a country tries to hold the value of their currency within some range against an important reference currency such as the U.S. dollar without adopting a formal pegged rate, it is referred to as a _____.

A) gold standard
B) pegged float
C) dirty float
D) currency peg

Question 26

A _____ is a situation in which a country cannot service its foreign debt obligations.

A) currency crisis
B) banking crisis
C) foreign debt crisis
D) moral crisis

Question 27

International Monetary Fund members were _____ in the Jamaica agreement.

A) not permitted to sell their own gold reserves
B) permitted to sell their own gold reserves, but only at the price set by IMF
C) required to hold their gold reserves in escrow
D) permitted to sell their own gold reserves at the market price

Question 28

Supporters of floating exchange rates:

A) argue that floating rates help adjust trade imbalances.
B) argue that floating rates lead to a more stable world monetary system.
C) claim that trade deficits are determined by the balance between savings and investment in a country.
D) claim that trade deficits are not determined by the external value of currency.

Question 29

A country is said to be in balance-of-trade equilibrium when:

A) the income its residents earn from exports is equal to the money its residents pay to other countries for imports.
B) it produces all the goods needed for domestic consumption.
C) the income its residents earn from imports is equal to the money its residents pay to other countries for exports.
D) it produces all the goods needed for exportation.

Question 30

An effective business strategy to reduce economic exposure is to contract out high value-added manufacturing.

Question 31

Exchange rates are _____ under a pure "free float" system.

A) completely balanced
B) determined by market forces
C) wildly variable and unpredictable
D) determined by the government

Question 32

The monetary autonomy argument is supported by the advocates of _____.

A) a dirty-float system
B) fixed exchange rates
C) pegged exchange rates
D) floating exchange rates

Question 33

Under a pegged exchange rate regime, a country:

A) commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.
B) will peg the value of its currency to that of a major currency.
C) valuates its currency without attaching it to a reference currency.
D) follows the foreign exchange market to determine the relative value of a currency.

Question 34

A currency crisis occurs when:

A) investors lose confidence in a country's banking system.
B) a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency.
C) authorities hoard large volumes of international currency reserves and sharply decrease interest rates.
D) a speculative attack on the exchange value of a currency results in a sharp appreciation in the value of the currency.

Question 35

The rise in the value of the dollar between 1985 and 1988:

A) gave U.S goods a competitive advantage over others.
B) made imports relatively cheap.
C) gave U.S. goods a comparative advantage over others.
D) made imports expensive.

Question 36

The value of U.S dollar increased between 1980 and 1985:

A) despite running a growing trade deficit.
B) despite exporting substantially more that it imported.
C) because of a growing trade surplus.
D) because the country's status as a world financial leader was becoming apparent.

Question 37

Currencies of countries with currency boards will become uncompetitive and overvalued if:

A) local inflation rates remain higher than the inflation rate in the country to which the currency is pegged.
B) the country to which the currency is pegged experiences a trade deficit.
C) local inflation rates are lower than the inflation rate in the country to which the currency is pegged.
D) the country to which the currency is pegged experiences a trade surplus.

Question 38

International Development Association loans:

A) receive direct funding from the World Bank.
B) must be countersigned by a partnering, wealthy country such as the United States, Japan, or Germany.
C) are funded through subscriptions from wealthy members.
D) receive direct funding from the International Monetary Fund.

Question 39

The amount of a currency needed to purchase one ounce of gold was referred to as the _____.

A) golden rule
B) gold standard
C) pegged gold value
D) gold par value

Question 40

The great virtue claimed for a _____ is that it imposes monetary discipline on a country and leads to low inflation.

A) fixed exchange rate
B) managed-float system
C) pegged exchange rate
D) floating exchange rate

Question 41

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

A) All countries agreed to fix the value of their currency in terms of gold under the agreement.
B) The system accepted Pound as the official reference currency against gold.
C) The agreement established a floating system of monetary exchange.
D) Two multinational institutions, World Economic Forum and WTO, were formed under the agreement.

Question 42

When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a _____ regime.

A) currency board exchange
B) pegged exchange rate
C) fixed exchange rate
D) floating exchange rate

Question 43

Most of the loans issued by the IMF:

A) are conditional loans.
B) are unconditional loans.
C) include a macroeconomic policy that calls for lower interest rates.
D) include a macroeconomic policy that calls for increases in public spending to improve infrastructure in a country.

Question 44

Gold par value refers to the:

A) ratio of the price of gold in a currency to price of gold in U.S. dollars.
B) amount of a currency needed to purchase one ounce of gold.
C) ratio of price of gold in a currency to price of gold in euros.
D) amount of gold required to equal the reference currency that a nation is using.

Question 45

Identify the currency that was convertible to gold under the Bretton Woods system.

A) Pound
B) Yen
C) Euro
D) Dollar

Question 46

A country's trade balance is in surplus when:

A) its exports are more than its imports.
B) it experiences negative inflation.
C) its exports equal the imports.
D) the prices of commodities are low in the country.

Question 47

What will happen if a country increases its money supply rapidly under fixed exchange rate regime?

A) Imports will become less attractive in that country.
B) The country will face negative inflation.
C) Trade deficit would widen in that country.
D) The country's products will become more attractive in world markets.

Question 48

It is difficult if not impossible to get adequate insurance coverage for exchange rates that:

A) will occur in the next few weeks.
B) might occur in the next few months.
C) might occur several years in the future.
D) are likely to occur in the coming days.

Question 49

A country is said to be in balance-of-trade equilibrium when:

A) it has the potential to produce all goods that its residents want without engaging in foreign trade.
B) the income its residents earn from exports is equal to the money its residents pay for imports.
C) the country import all goods that its residents want by engaging in foreign trade.
D) it has the potential to balance the production and procurement of the basic amenities that it needs.

Question 50

In the 1990s, most of the borrowing by the companies who invested in Asian countries had been in _____.

A) Japanese yen
B) local currencies
C) Chinese yuan
D) U.S. dollars

Question 51

The agreement reached at Bretton Woods established the _____.

A) International Monetary Fund
B) World Economic Forum
C) United Nations
D) International Atomic Energy Agency

Question 52

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

A) Gold standard was adopted only by the smaller nations of the world.
B) Currencies were pegged to gold under the gold standard.
C) Convertibility to gold was not guaranteed under the gold standard.
D) Gold standard was not helpful in maintaining balance-of-trade equilibrium.

Question 53

Which of the following is a disadvantage of using a rigid policy of fixed exchange rates?

A) It is likely to create high unemployment in some cases.
B) It will lead to inflationary economies across the world.
C) It is likely to bring about trade wars between nations.
D) It will instigate competitive devaluations and intense competition.

Question 54

Which of the following is an advantage of using the gold standard?

A) The standard makes sure that goods are not priced out from markets due to inflation.
B) The standard does not require a commitment from nations to maintain its currency's value.
C) The standard effectively prevents the devaluation of currencies across the world.
D) The standard contains a powerful mechanism for achieving balance-of-trade equilibrium by all countries.

Question 55

The World Bank was established at the at Bretton Woods conference to:

A) establish an international monetary system.
B) promote general economic development.
C) establish gold standard across the world.
D) fund the initiatives of the United Nations.

Question 56

A dirty float refers to a situation in which:

A) a set of currencies are fixed against each other at some mutually agreed on exchange rate.
B) many countries join hands to form a monetary system and an exchange rate.
C) more than one foreign currency is used as the formal reference for a country's currency.
D) a country tries to hold its currency against an important reference currency without a formal pegged rate.

Question 57

A pegged exchange rate means that the value of a currency is:

A) fixed against other currencies based on an agreement.
B) not determined by free market forces.
C) fixed relative to a reference currency.
D) independent of the valuations of other currencies.

Question 58

The Asian economic crisis and the global financial of 2008-2009 crisis were caused by _____.

A) high inflation rates
B) excessive debt
C) low inflation rates
D) a huge trade surplus

Question 59

The international monetary system refers to the institutional arrangements that govern _____.

A) microeconomic parameters
B) exchange rates
C) gross domestic produce
D) foreign direct investment

Question 60

After World War II, the world's major industrial nations arranged their currencies against each other at a mutually agreed on exchange rate. This is an example of a _____ system.

A) fixed exchange rate
B) dirty float exchange
C) pegged exchange rate
D) floating exchange rate

Question 61

Which of the following statements is true of pegged exchange rates?

A) A pegged exchange rate allows a country's currency to be determined by market forces.
B) A pegged exchange rate weakens the monetary discipline of a country.
C) Pegged exchange rates are popular among many of the world's smaller nations.
D) Adopting a pegged exchange rate regime increases inflationary pressures in a country.

Question 62

Which of the following is the reason why the current foreign-exchange system is sometimes thought of as a managed-float system?

A) The exchange rates of a currency are determined by market forces.
B) Governments intervene frequently in the foreign exchange market.
C) Major currencies are allowed to freely float against each other.
D) Countries use a reference currency to estimate the value of their currencies.

Question 63

Which of the following is the exchange rate policy where the government intervenes in the exchange rate system only in a limited way?

A) Managed-float
B) Fixed peg
C) Free-float
D) Currency board

Question 64

Which of the following is an exchange rate policy where the exchange rate is determined completely by market forces?

A) Managed float
B) Fixed peg
C) Free float
D) Currency board

Question 65

_____ exchange rates were declared as acceptable in the Jamaica agreement of the International Monetary Fund.

A) Pegged
B) Fixed
C) Floating
D) Gold standard

Question 66

Moral hazard arises when people behave recklessly because:

A) of the restrictions that exist in a country's monetary policy.
B) of the restrictions that IMF has imposed on them.
C) they know they will be saved if things go wrong.
D) they face financial difficulties arising out of external factors.

Question 67

Under a currency board system:

A) inflation rates are maintained at high level.
B) countries issue domestic notes at will.
C) interest rates remain constant.
D) government lacks the ability to set interest rates.

Question 68

Those in favor of floating exchange rate claim that ____.

A) uncertainty in monetary markets dampens the growth of international trade
B) inflation is beneficial to a country if it is controlled closely
C) trade imbalances can be adjusted by using floating exchange rates
D) governments can have rigid control over monetary markets by using floating rates

Question 69

Which of the following arguments is in favor of floating exchange rates?

A) A country's ability to expand or contract its money supply should be limited by the need to maintain exchange rate parity.
B) Maintaining balance of trade equilibrium is not in the best interest of a country.
C) Countries can isolate themselves from uncertainties when they trade using a mutually agreed on exchange rate.
D) Governments can restore monetary control by removing the obligation to maintain exchange rate parity.

Question 70

Under a _____ exchange rate regime, a country will attach the value of its currency to that of a major currency.

A) managed-float
B) pegged
C) free-float
D) currency board

Question 71

Which of the following arguments strengthen the idea of floating exchange rates?

A) External agencies should not interfere in the monetary policies of a country.
B) Trade deficits can be corrected through changes in exchange rates.
C) Changes in exchange rates will not impact the trade balance in a country.
D) Governments should act in ways to minimize the uncertainty in monetary markets.

Question 72

A country that introduces a currency board commits itself to converting its domestic currency on demand into:

A) another currency at a fixed exchange rate.
B) gold or silver at a fixed exchange rate.
C) gold or silver at a floating exchange rate.
D) another currency at a floating exchange rate.

Question 73

Which of the following is a function of World Bank?

A) Implementing a rigid fixed exchange rate regime
B) Promoting the gold standard across the world
C) Lending money to governments for development
D) Implementing a flexible fixed exchange rate regime

Question 74

A currency crisis occurs due to:

A) the loss of confidence in a country's banking system.
B) heavy foreign debt obligations.
C) high levels of trade deficit.
D) a speculative attack on the exchange value.

Question 75

Which of the following arguments is against the use of fixed exchange rates?

A) Monetary discipline is the most important determinant of a strong economy.
B) Each country has the freedom to choose its own inflation rate.
C) Market speculation can cause fluctuations in exchange rates.
D) Governments are likely to expand the monetary supply far too rapidly due to political pressures.

Question 76

The United States had large and growing trade deficit between 1980 and 1985. Despite this, the value of U.S. dollar rose during this period. Which of the following is a factor that caused this occurrence?

A) United States attracted heavy inflows of capital from foreign investors during this period.
B) Banks in the United States offered low interest rates to investors during this period.
C) Markets across the world witnessed strong economies during this period.
D) Developed countries in Europe maintained trade equilibrium and supplied goods to underdeveloped countries.

Question 77

Which of the following is a common criticism against the International Monetary Fund?

A) IMF lacks any real mechanism for accountability.
B) It is hesitant to help banks when they are in crisis.
C) IMF has not intervened to resolve the Asian crisis.
D) It did not try to resolve the Mexican currency crisis.

Question 78

The monetary autonomy argument holds that:

A) each country should be allowed to choose its own inflation rate.
B) inflation is beneficial to a country's economy and growth.
C) inflation is detrimental to a country's economy and growth.
D) countries should restrict inflation based on the global standards.

Question 79

Which of the following is a factor that initiated the collapse of the fixed exchange rate system?

A) Worsening of Great Britain's balance of trade
B) Recession in third world countries
C) Price inflation in Europe
D) Worsening of U.S. foreign trade position

Question 80

Which of the following changes were made to the International Monetary Fund's Articles of Agreement in the Jamaica agreement?

A) IMF members were permitted to use the U.S. dollar as the convertible currency.
B) Gold was declared as a formal reserve asset for IMF members.
C) IMF members were permitted to sell their gold reserves at the market price.
D) IMF members were restricted from entering the foreign exchange market.