Deck 10: The International Monetary System

Question 1

If the IMF agreed that the country's balance of payments was in "fundamental disequilibrium," the system of adjustable parities allowed for the devaluation of a country's currency by more than 10 percent.

Answer 1

True
Explanation: The system of adjustable parities allowed for the devaluation of a country's currency by more than 10 percent if the IMF agreed that a country's balance of payments was in "fundamental disequilibrium."

Question 2

A floating exchange rate is a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand.

Answer 2

True
Explanation: When the foreign exchange market determines the relative value of a currency,we say that the country is adhering to a floating exchange rate regime.A floating exchange rate is a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand.

Question 3

The Jamaica meeting in 1976 revised the IMF's Articles of Agreement to reflect the new reality of floating exchange rates.

Answer 3

True
Explanation: According to the Jamaica agreement,floating rates were declared acceptable.

Question 4

Under the Bretton Woods agreement,all countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold.

Question 5

A dirty float is called so because 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 6

Under the International Development Association (IDA)scheme,the World Bank raises money through bond sales in the international capital market.

Question 7

Advocates of fixed exchange rates argue that each country should be allowed to choose its own inflation rate.

Question 8

Since the Bretton Woods system of floating exchange rates collapsed in 1973,the world has operated with a fixed exchange rate system.

Question 9

Since March 1973,exchange rates have become much more stable and predictable than they were between 1945 and 1973.

Question 10

In a fixed exchange rate scenario,monetary expansion can lead to inflation,which puts downward pressure on a fixed exchange rate.

Question 11

The dollar fell in value between 1980 and 1985 as the United States was running a large and growing trade deficit,importing substantially more than it exported.

Question 12

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 13

During the Bretton Woods era,countries were not allowed to borrow any funds from the IMF without adhering to specific agreements.

Question 14

The gold standard worked well from the 1870s until the start of World War II in 1939,when it was abandoned.

Question 15

The exchange rates for almost all currencies are determined by the free play of market forces.

Question 16

From mid-2008 through early 2009 the U.S.dollar staged a moderate rally against major currencies,as foreign investors were excited at the possibility of unusually high returns from low-risk U.S.assets.

Question 17

Many of the world's most developed nations peg their currencies,primarily to the dollar or the euro.

Question 18

A fixed exchange rate regime imposes monetary discipline on countries,thereby curtailing price inflation.

Question 19

The Bretton Woods agreement legalized the use of devaluation as a tool of competitive trade policy.

Question 20

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

Question 21

Since the early 1970s,developed countries such as Great Britain and the United States,have financed their deficits by borrowing private money,as opposed to drawing on IMF funds.

Question 22

Financial crises tend to have common underlying macroeconomic causes: low relative price inflation rates,a narrowing current account deficit,and an excessive expansion of domestic borrowing.

Question 23

Approximately 14 percent of the IMF's members allow their currency to float freely.

Question 24

The forward market offers coverage for exchange rate changes for a few years.

Question 25

Pegged exchange rates are popular among many of the world's smaller nations.

Question 26

When the value of a currency is fixed relative to a reference currency,this is referred to as a.

A)variable exchange rate
B)pegged exchange rate
C)linked exchange rate
D)floating exchange rate

Question 27

Exchange rate volatility such as the world experienced during the 1980s and 1990s creates an environment less conducive to international trade and investment than one with more stable exchange rates.

Question 28

In a break from its practices of the past,the IMF waived away the requirement for tight monetary policies and cuts in public spending,when it helped bail Mexico out of the currency crisis in 1995.

Question 29

A complicating factor of the Asian crisis was that by the mid-1990s,although exports were still expanding across the region,imports declined steadily.

Question 30

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

A)International Monetary Fund
B)Global agreement on exchange rates
C)International monetary system
D)Bretton Woods Agreement

Question 31

The current foreign exchange system is a mixed system in which a combination of government intervention and speculative activity can drive the foreign exchange market.

Question 32

Under the arrangement that exists in countries like Hong Kong,the currency board can issue additional domestic notes and coins even if there are no foreign exchange reserves to back it.

Question 33

Many of the states around the Gulf of Arabia have long pegged their currencies to the:

A)dollar.
B)British pound.
C)euro.
D)Saudi riyal.

Question 34

The IMF has become a powerful institution with sufficient checks and balances to ensure accountability.

Question 35

Some countries try to hold the value of their currency within some range against an important reference currency.This is referred to as a:

A)dirty float.
B)free float.
C)pegged float.
D)variable alternative.

Question 36

One criticism of the IMF is that its traditional policy prescriptions represent "one-size-fits-all" approach to macroeconomic policy that is inappropriate for many countries.

Question 37

One of the ways of building strategic flexibility and reducing economic exposure involves contracting out manufacturing.This kind of strategy may be suited for low-value-added manufacturing than high-value-added manufacturing.

Question 38

When the foreign exchange market determines the relative value of a currency,the country is said to adhere to a _____ exchange rate regime.

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

Question 39

Before the Asian crisis of 1997,the nature of exports from Southeast Asian countries had shifted from semiconductors and consumer electronics to basic materials and products such as textiles.

Question 40

In response to the global financial crisis of 2008-2009,the IMF began to urge countries to adopt policies that included fiscal stimulus and monetary easing.

Question 41

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

A)permanent exchange rate system.
B)floating exchange rate system.
C)fixed exchange rate system.
D)dirty float system.

Question 42

According to the Bretton Woods agreement of 1944,which currency remained convertible to gold?

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

Question 43

The ____ was 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)European Community

Question 44

Which of the following is associated with the Bretton Woods system?

A)Pegged exchange rates
B)Floating exchange rates
C)Fixed exchange rates
D)Dirty float

Question 45

Which of the following was a major international institution established by the Bretton Woods conference?

A)General Agreement on Tariffs and Trade
B)European monetary system
C)World Trade Organization
D)International Monetary Fund

Question 46

The Bretton Woods conference of 1944 established the basic framework for the:

A)World Trade Organization.
B)post-World War II international monetary system.
C)General Agreement on Tariffs and Trade.
D)floating exchange rate system.

Question 47

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

A)fixed exchange system
B)gold standard
C)currency boards
D)Bretton Woods system

Question 48

Under the gold standard,the amount of currency needed to purchase one ounce of gold was referred to as the gold _____ value.

A)standard
B)monetary
C)legal
D)par

Question 49

Which of the following was a major international institution created by the Bretton Woods conference?

A)General Agreement on Tariffs and Trade
B)European monetary system
C)World Trade Organization
D)World Bank

Question 50

The aim of the Bretton Woods agreement,of which the ____ was the main custodian,was to try to avoid a repetition of the financial chaos of the previous years through a combination of discipline and flexibility.

A)World Bank
B)WTO
C)IMF
D)GATT

Question 51

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

A)All countries participating were required to exchange their currencies for gold.
B)Devaluation was accepted as a tool of competitive trade policy.
C)All participating countries agreed to try to maintain the value of their currencies within 10 percent of the par value by buying or selling currencies as needed.
D)Devaluation of up to 10 percent would be allowed without any formal approval by the IMF.

Question 52

Which of the following is a way in which a fixed exchange rate regime imposes discipline?

A)The need to maintain a fixed rate puts a brake on competitive devaluations.
B)It imposes fiscal discipline on countries,thereby reducing market activity.
C)It increases demand for products and services thereby increasing productivity.
D)It imposes monetary discipline by making governments set exchange rates.

Question 53

Which of the following was the objective of establishing the World Bank?

A)Become the lender of last resort to reserve banks
B)Promote general economic development
C)Maintain stability in the international monetary system
D)Regulate exchange rates of member nations

Question 54

When is a country said to be in balance-of-trade equilibrium?

A)When it does not have a trade deficit
B)When the income its residents earn from exports is less than the money its residents pay to other countries for imports
C)When the current account of its balance of payments is in balance
D)When the income its residents earn from exports is greater than the money its residents pay to other countries for imports

Question 55

Which of the following is a great strength claimed for 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 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.

Question 56

Which of the following is the most accurate description of 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)Trading gold for other valuable commodities

Question 57

Which of the following is 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 exchange rate
B)Free float
C)Pegged float
D)Dirty float

Question 58

Which of the following was the objective of establishing the International Monetary Fund (IMF)?

A)Maintain order in the international monetary system
B)Promote general economic development
C)Provide loans to the World Bank
D)Help finance the building of Europe's economy by providing low-interest loans

Question 59

The gold standard was abandoned in:

A)1870.
B)1889.
C)1914.
D)1924.

Question 60

Which of the following is the policy adopted by the Chinese since 2005?

A)Pegged exchange rate
B)Clean float
C)Dirty float
D)Fixed exchange rate

Question 61

Which term 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)Noncompeting

Question 62

In 1997,the currencies of South Korea,Indonesia,Malaysia,and Thailand _____ of their value against the U.S.dollar in a few months.

A)gained between 50 percent and 80 percent
B)lost between 50 percent and 80 percent
C)gained between 10 percent and 20 percent
D)lost between 10 percent and 20 percent

Question 63

The system of adjustable parities allowed for the devaluation of a country's currency by more than _____ percent if the IMF agreed that a country's balance of payments was in "fundamental disequilibrium."

A)2
B)10
C)5
D)1

Question 64

Which of the following is true of IMF lending facilities?

A)IMF supervision of a country's macroeconomic policies was not envisaged whatever be the extent of drawings.
B)Most IMF loans were for periods of 10-15 years to help members tide over balance-of-payments deficits.
C)Member countries were not allowed to borrow any amount from the IMF without adhering to any specific agreements.
D)IMF funds were meant to buy time for countries to bring down their inflation rates and reduce their balance-of-payments deficits.

Question 65

What was considered an Achilles' heel of the Bretton Woods system?

A)It could be wrecked by heavy borrowings from the World Bank and IMF.
B)It could not work if the U.S.dollar was under speculative attack.
C)It could not help countries in a situation of fundamental disequilibrium.
D)It forced monetary discipline on participating nations.

Question 66

The Jamaica meeting in January 1976 revised the IMF's Articles of Agreement to reflect the new reality of:

A)fixed exchange rates.
B)gold standard.
C)the dollar peg.
D)floating exchange rates.

Question 67

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:

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

Question 68

Which of the following was responsible for shifting the focus of the World Bank from Europe to Third World nations?

A)Truman doctrine
B)Berlin blockade
C)Korean war
D)Marshall Plan

Question 69

Which of the following was a main element of the Jamaica agreement of 1976?

A)The International Monetary Fund was established.
B)Floating rates were declared acceptable.
C)Total annual IMF quotas were decreased.
D)The U.S.dollar became the new reserve asset.

Question 70

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

A)Clean float system
B)Managed-float system
C)Currency board system
D)Gold standard

Question 71

What is the official name for the World Bank?

A)International Bank for Reconstruction and Development (IBRD)
B)International Development Association (IDA)
C)International Monetary Agency (IMA)
D)Bank for International Settlements (BIS)

Question 72

The architects of the Bretton Woods agreement wanted to avoid high unemployment,so they built limited flexibility into the system.Which of the following was a major feature of the IMF Articles of Agreement that fostered this flexibility?

A)Balance-of-trade equilibrium
B)Adjustable parities
C)Free trade
D)Interest rate adjustment

Question 73

Most economists trace the breakup of the fixed exchange rate system to the:

A)U.S.macroeconomic policy package of 1965-1968.
B)Formation of the European Community in the late 1950s.
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.

Question 74

Which of the following is true of the IBRD scheme of the World Bank?

A)Resources to fund IBRD loans are raised through subscriptions from wealthy members.
B)IBRD loans go only to the poorest countries.
C)Borrowers pay the bank's cost of funds plus a margin for expenses.
D)Borrowers have 50 years to repay at an interest rate of 1 percent a year.

Question 75

the:

A)U.S.planned to call for a second Bretton Woods conference.
B)U.S.would no longer support the World Bank.
C)U.S.planned to devalue its currency by 20 percent.
D)dollar was no longer convertible into golD.

Question 76

Which of the following was abandoned as a reserve asset according to the Jamaica agreement?

A)Silver
B)U.S.dollar
C)Gold
D)A basket of vehicle currencies

Question 77

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 50 years to repay at an interest rate of 1 percent a year.
C)Borrowers pay rates slightly lower than commercial banks' market rate.
D)Loans are offered to governments of all underdeveloped nations.

Question 78

What was the initial mission of the World Bank?

A)Maintain order in the international monetary system
B)Promote general economic development in Third World nations
C)Provide loans to the International Monetary Fund
D)Help finance the building of Europe's economy through low-interest loans

Question 79

Which of the following partly helps explain the rise in the value of the dollar between 1980 and 1985 despite a large trade deficit?

A)Political stability and peace 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

Question 80

Between 1965 and 1968,President Lyndon Johnson backed an increase in U.S.government spending that was financed by:

A)sales of gold reserves.
B)IMF loans.
C)an increase in the money supply.
D)an increase in taxes.