Deck 11: The International Monetary System

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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 5

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 6

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 7

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 8

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

Question 9

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 10

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

Question 11

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

Question 12

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

Question 13

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 14

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 15

As the volume of international trade expanded in the wake of the Industrial Revolution,shipping large quantities of gold around the world to finance international trade became impractical.

Question 16

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

Question 17

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 18

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

Question 19

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 20

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

Question 21

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

Question 22

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

Question 23

A _____ 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.

A) flexible exchange rate
B) pegged exchange rate
C) real exchange rate
D) dirty float exchange rate
E) floating exchange rate

Question 24

At times,elements of currency,banking,and debt crises may be present simultaneously in a region.

Question 25

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

Question 26

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 27

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

Question 28

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 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 marks

Question 30

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

Question 31

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 32

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

Question 33

A benefit of the International Monetary Fund is that it does not have a mechanism for accountability.

Question 34

All International Monetary Fund loan packages come with conditions attached.

Question 35

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

Question 36

Under the Bretton Woods system,if a country developed a permanent deficit in its balance of trade,it would require the International Monetary Fund to agree to a currency devaluation.

Question 37

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 38

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

Question 39

_____ 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) Flexible exchange rate
D) Pegged exchange rate
E) Nominal exchange rate

Question 40

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 41

According to the Bretton Woods agreement of 1944,which was the only currency that remained convertible into gold?

A) U.S. dollar
B) British pound
C) Japanese yen
D) German deutsche mark
E) Chinese yuan

Question 42

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 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 43

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

A) European Free Trade Association
B) European Monetary System
C) international monetary system
D) International Finance Corporation
E) European Federation of Accountants

Question 44

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 45

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 46

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 47

The values of a set of currencies are set against each other at some mutually agreed on exchange rate in a _____ exchange rate system.

A) clean float
B) floating
C) fixed
D) dirty float
E) pegged

Question 48

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 49

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 50

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 51

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 52

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 53

The 1944 Bretton Woods system called for _____ exchange rates against the U.S.dollar.

A) flexible
B) floating
C) fixed
D) dirty float
E) pegged

Question 54

_____ 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 55

In the 1930s,confidence in the _____ was shattered because countries were devaluing their currencies at will in order to boost exports.

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

Question 56

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 57

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 58

A country is said to be in _____ 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) a banking crisis
E) free trade area

Question 59

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) According to the Bretton Woods system, the value of most currencies in terms of U.S. dollars was allowed to change only under a specific set of circumstances.
E) In dirty float, the exchange rate between a currency and other currencies is relatively fixed against a reference currency exchange rate.

Question 60

According to the _____ in 1944,all countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold.

A) Bretton Woods agreement
B) Washington Consensus
C) World Bank treaty
D) Group of Five treaty
E) United Nations agreement

Question 61

Which of the following statements is true about the role of the International Monetary Fund?

A) It never interfered in the monetary and fiscal conditions of its member countries.
B) It was authorized to approve currency devaluations of only up to 10 percent.
C) It required member countries to adhere to specific agreements irrespective of the amount of funds the countries borrowed.
D) It lent money under the International Bank for Reconstruction and Development (IBRD) scheme and a second scheme which is overseen by the International Development Association (IDA).
E) It helped deficit-laden countries bring down inflation rates by providing short-term foreign currency loans.

Question 62

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 63

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 64

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 65

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.This resulted in _____.

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

Question 66

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 67

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 68

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 U.S. to finance its welfare programs.

Question 69

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 than1 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 70

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 it to developed countries.
C) A pool of gold and currencies contributed by its members provides the resources for the 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 71

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 72

In 1971,U.S.trade figures showed that for the first time since 1945,the United States was importing more than it was exporting.This set off massive purchases of _____ in the foreign market by speculators.

A) U.S. dollars
B) German deutsche marks
C) British pounds
D) Japanese yen
E) Chinese yuan

Question 73

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 74

In January 1976,the _____ 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 75

Which of the following is being used after the collapse of the fixed exchange rate system established at Bretton Woods?

A) Clean float exchange rate system
B) Managed-float system
C) Pegged exchange rate system
D) Gold standard system
E) Dirty float system

Question 76

The architects of the Bretton Woods agreement wanted to avoid high unemployment,so they built limited flexibility into the fixed exchange rate system.Which of the following is a major feature of the International Monetary Fund (IMF)Articles of Agreement that fostered this flexibility?

A) Competitive currency devaluations
B) Lending facilities
C) Communist ideologies
D) Floating exchange rates
E) Unrestricted authority to print currency

Question 77

The system of adjustable parities allowed for the devaluation of a country's currency by more than 10 percent if the International Monetary Fund (IMF)agreed that a:

A) country was in a trade surplus with the other member countries.
B) country's balance of payments was in "fundamental disequilibrium."
C) country had achieved balance-of-trade equilibrium.
D) country's imports were lower than its exports.
E) country was facing price inflation.

Question 78

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 79

Which of the following is true according to the provisions 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) Money was lent to European countries under the International Bank for Reconstruction and Development scheme and the International Development Association scheme.
E) The World Bank lent money to the International Monetary Fund so that it could finance deficit-laden countries.

Question 80

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 10 percent tax would be charged on U.S. exports.
D) The dollar was no longer convertible into gold.
E) German deutsche marks would be the new reference currency.