Deck 11: The International Monetary System

Question 1

A pegged exchange rate means the value of a currency is fixed relative to a reference currency.

Answer 1

True
Explanation: A pegged exchange rate means the value of the currency is fixed relative to a reference currency, such as the U.S. dollar, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

Question 2

The rise in the value of the dollar gave U.S goods a competitive advantage over others between 1985 and 1988.

Answer 2

False
Explanation: Rise in dollar will make U.S. goods less competitive. The rise in the dollar priced U.S. goods out of foreign markets and made imports relatively cheap.

Question 3

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

Answer 3

True
Explanation: World Bank offers low-interest loans to risky customers whose credit rating is often poor, such as the governments of underdeveloped nations.

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

The monetary autonomy argument is supported by the advocates of fixed exchange rates.

Question 9

Supporters of floating exchange rates claim that trade deficits are determined by the balance between savings and investment in a country.

Question 10

IMF members were permitted to sell their own gold reserves at the market price in the Jamaica agreement.

Question 11

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

Question 12

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

Question 13

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

Question 14

A country is said to be in balance-of-trade equilibrium when it produces all the goods needed for domestic consumption.

Question 15

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

Question 16

IDA loans receive direct funding from the World Bank.

Question 17

The amount of a currency needed to purchase one ounce of gold was referred to as the gold par value under the gold standard.

Question 18

A dirty float occurs when a country uses pegged exchange rates to value its currency.

Question 19

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

Question 20

The value of U.S dollar increased between 1980 and 1985 despite running a growing trade deficit.

Question 21

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

Question 22

A currency crisis occurs when investors lose confidence in a country's banking system.

Question 23

Interest rates adjust automatically under a strict currency board system.

Question 24

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

Question 25

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

Question 26

The Asian economic crisis was caused by high inflation rates.

Question 27

A currency board system limits the ability of the government to print money and,thereby,create inflationary pressures.

Question 28

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

Question 29

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

Question 30

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

Question 31

Most of the loans issued by the IMF are unconditional loans.

Question 32

Exchange rates are determined by the government under a pure "free float" system.

Question 33

A country valuates its currency without attaching it to a reference currency under the pegged exchange rate regime.

Question 34

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

Question 35

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

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

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

Question 38

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

Question 39

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

Question 40

Currencies of countries with currency boards will become uncompetitive and overvalued if local inflation rates are lower than the inflation rate in the country to which the currency is pegged.

Question 41

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 42

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

A) IMF members were permitted to use 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.

Question 43

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 44

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 45

_____ exchange rates were declared as acceptable in the Jamaica agreement of IMF.

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

Question 46

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

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

Question 47

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 48

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 49

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 50

Which of the following is a function of World Bank?

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

Question 51

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 52

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 53

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 54

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 55

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) It contains a powerful mechanism for achieving balance-of-trade equilibrium by all countries.

Question 56

Gold par value refers to the _____.

A) ratio of 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 57

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 58

After World War II,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 59

The agreement reached at Bretton Woods established _____.

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

Question 60

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 61

Increasingly the _____ has been acting as macroeconomic police of the world economy,insisting that countries seeking significant borrowings adopt certain macroeconomic policies.

A) ECOSOC
B) IMF
C) UN
D) World Bank

Question 62

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 63

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 64

Which of the following observations is true of the current system of foreign exchange market?

A) Most of the currencies can be converted to gold in the current system of foreign exchange.
B) The current system is driven by fixed exchange rates.
C) Currencies float freely against others in the current system.
D) The current system is a combination of government intervention and speculative activity.

Question 65

Contracting out manufacturing allows companies to reduce economic exposure because _____.

A) having multiple suppliers attracts subsidies from government
B) it reduces the pressure on them to maintain a trade surplus
C) it allows companies to shift suppliers from country to country
D) quality issues are insignificant when manufacturing is contracted to others

Question 66

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 67

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 68

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 69

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 70

Which of the following is a common criticism against IMF?

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 71

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 72

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 73

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 74

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 75

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 76

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 77

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 78

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 79

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 80

Which of the following will help a company hedge against currency fluctuations?

A) Finding a large supplier to supply all the raw materials
B) In-house manufacturing of raw materials
C) Basing business in a single country
D) Dispersing production to different geographic locations