Deck 10: The International Monetary System

Question 1

If a country tries to hold the value of its currency within some range against an important reference currency,the country has a dirty float system.

Answer 1

True

Question 2

A pegged rate means that the value of a 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.

Answer 2

True

Question 3

It was claimed that the strength of the gold standard was that it contained a powerful mechanism for achieving balance-of-trade equilibrium.

Answer 3

True

Question 4

With the exception of Great Britain,most of the world's major trading nations,including the United States,Germany,and Japan had adopted the gold standard by 1880.

Question 5

The World Bank is responsible for maintaining order in the international monetary system.

Question 6

Under the Jamaica Agreement,floating exchange rates were declared acceptable,and gold was abandoned as a reserve asset.

Question 7

Under the Bretton Woods system,only the dollar,the pound,and the yen were convertible to gold.

Question 8

The strength of the Bretton Woods system was that it could work even if its key currency,the U.S.dollar,was under speculative attack.

Question 9

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

Question 10

Many of the world's developing nations peg their currencies,primarily to the dollar or the yen.

Question 11

In 1997,the currencies of several Asian nations including South Korea,Indonesia,and Thailand lost between 50 percent between 80 percent of the value against the U.S.dollar over the period of a few months.

Question 12

The so-called Group of Five major industrial countries includes Great Britain,the United States,Japan,Switzerland,and Germany.

Question 13

The institutional arrangements that govern exchange rates are referred to as the international monetary system.

Question 14

The World Bank's initial mission was to lend money to Third World nations.

Question 15

The Bretton Woods system called for a system of floating exchange rates.

Question 16

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

Question 17

The gold standard called for a fixed exchange rate system against the U.S.dollar.

Question 18

Devaluations of up to 10 percent were permitted under the Bretton Woods system.

Question 19

Since 1973,exchange rates have been relatively stable thanks to the floating exchange rate system currently in place.

Question 20

The Plaza Accord,signed in 1985,suggested that it would be desirable for most major currencies to fall relative to the U.S.dollar.

Question 21

Under a currency board system,a country commits itself to converting its currency on demand into another currency at a fixed exchange rate.

Question 22

High relative price inflation,a widening current account deficit,excessive expansion of domestic borrowing,and asset price inflation are all underlying causes of banking or foreign debt crises.

Question 23

One criticism of the IMF's policy prescriptions is that its "one-size-fits-all" approach to microeconomic policy is inappropriate for many countries.

Question 24

Under a strict currency board system,interest rates rise until investors eventually find holding the local currency attractive again.

Question 25

Speculative buying and selling of currencies can create very volatile movements in exchange rates.

Question 26

The financial crisis that erupted across Southeast Asia during the fall of 1997 emerged as the biggest challenge to date for the IMF.

Question 27

The Louvre Accord pledged to support the stability of exchange rates around their 1987 levels by intervening in the foreign exchange markets when necessary to buy and sell currency.

Question 28

An MNE can build strategic flexibility and reduce economic exposure by contracting out manufacturing.

Question 29

IMF loan packages typically include conditions such as cuts in public spending,higher interest rates,and tight monetary policy.

Question 30

The IMF can force countries to adopt the policies required to correct economic mismanagement.

Question 31

While a government may commit to taking corrective action in return for an IMF loan,internal political problems may make it difficult for a government to act on that commitment.

Question 32

When a country cannot service its foreign debt obligations,a banking crisis has occurred.

Question 33

MNEs can hedge against currency fluctuations by dispersing production to different locations around the globe.

Question 34

A pure free float is one in which exchange rates are determined by market forces.

Question 35

Evidence shows that adopting a pegged exchange rate regime increases inflationary pressures in a country.

Question 36

In 2007,about a quarter of the IMF's members had an exchange rate policy that allowed their currency to float freely.

Question 37

A foreign debt crisis refers to a loss of confidence in the banking system that leads to a run on banks.

Question 38

If local inflation rates remain lower than the inflation rate in the country to which the currency is pegged,the currencies of countries with currency boards can become uncompetitive and overvalued.

Question 39

The Asian meltdown began in mid-1997 in Japan when it became clear that several key Japanese financial institutions were on the verge of default.

Question 40

Under a fixed exchange rate regime,countries were limited in their ability to use monetary policy to expand or contract their economies.

Question 41

In a _____ exchange rate system,the value of a set of currencies is fixed against each other at some mutually agreed on exchange rate.

A)pegged
B)dirty
C)fixed
D)direct

Question 42

When a country pegs its currencies to gold and guarantees convertibility,the country is following the:

A)gold standard.
B)Bretton Woods system.
C)fixed exchange system.
D)floating exchange rate system.

Question 43

In 1976,the _____ formalized the floating exchange rate system that followed the collapse of fixed exchange rate system.

A)gold standard
B)Plaza Accord
C)Jamaica Agreement
D)Louvre Accord

Question 44

The institutional arrangement that governs exchange rates is known as the:

A)financial control system.
B)international monetary system.
C)international monetary fund.
D)international financial regime.

Question 45

When the foreign exchange market determines the relative value of a currency,we say that the currency is adhering to a(n):

A)volatile exchange rate.
B)pegged exchange rate.
C)floating exchange rate.
D)fixed exchange rate.

Question 46

Under the Bretton Woods,all countries fixed the value of their currency in terms of:

A)the British pound.
B)the euro.
C)the U.S.dollar.
D)gold.

Question 47

The amount of a currency need to purchase one ounce of gold under the gold standard was known as the:

A)gold par value.
B)gold standard.
C)fixed gold rate.
D)pegged rate.

Question 48

The main elements of the 1976 Jamaica agreement include all of the following except:

A)floating rates were declared unacceptable.
B)gold was abandoned as a reserve asset.
C)total annual IMF quotas were increased to $41 billion.
D)IMF members were permitted to sell their own gold reserves at the market price.

Question 49

The great strength claimed for the gold standard was that it contained a powerful mechanism for achieving _____ by all countries.

A)balance-of-trade equilibrium
B)economic stability
C)interest rate parity
D)equal tariff levels

Question 50

When the income a country's residents earn from exports is equal to the money its residents pay to other countries for imports,the country is said to:

A)be in current account equilibrium.
B)be in capital account equilibrium.
C)be in balance-of-trade equilibrium.
D)have a managed float.

Question 51

The gold standard had its origin in the use of _____ as a medium of exchange,unit of account,and store of value.

A)the U.S.dollar
B)the British pound
C)paper currency
D)gold coins

Question 52

Under the gold standard,the U.S.dollar could be converted into _____ grains of fine gold.

A)10.1
B)17.3
C)23.33
D)480

Question 53

When the central bank of a country intervenes in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency,the country is said to be following a _____ system.

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

Question 54

The Bretton Woods agreement differed from the gold standard in that it:

A)incorporated both discipline and flexibility.
B)was a floating rate system.
C)was based on the British pound.
D)was a rigid system of fixed exchange rates.

Question 55

Bretton Woods set a restriction of _____ percent for devaluations of currency,if a currency became too weak to defend,without permission from the IMF.

A)5
B)10
C)15
D)20

Question 56

The Bretton Woods IMF Articles of Agreement,tried to impose discipline by adopting a _____ exchange rate system that was seen as a mechanism for controlling inflation and imposing economic discipline on countries.

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

Question 57

Most economists trace the breakup of the Bretton Woods fixed exchange rate system,in 1973,to the:

A)rise of communism in Eastern Europe.
B)economic integration movement sweeping Western Europe.
C)macroeconomic policy package in the U.S.during 1965 to 1968.
D)increase in inflation and the worsening of the British foreign trade position.

Question 58

The Bretton Woods Agreement could only work if the U.S.had:

A)high inflation and no balance-of-payments deficit.
B)low inflation and no balance-of-payments deficit.
C)low inflation and a current account deficit.
D)high inflation and a capital account surplus.

Question 59

The International bank for Reconstruction and Development is also known as the:

A)IMF.
B)World Bank.
C)European Central Bank.
D)International Development Agency.

Question 60

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

A)pegged exchange rate
B)dynamic exchange rate
C)floating exchange rate
D)fixed exchange rate

Question 61

Under a pegged exchange rate regime,a country will peg the value of its currency to _____ so that its own currency rises too.

A)its domestic inflation rate
B)that of a major currency
C)its interest rates
D)its foreign exchange reserves

Question 62

The IMF has been criticized because of all of the following reasons except:

A)it has a "one-size-fits-all" approach to macroeconomic policy is inappropriate for many countries.
B)its rescue efforts are exacerbating a problem known to economists as moral hazard.
C)it has become too powerful for an institution that lacks any real mechanism for accountability.
D)its lax macroeconomic policies in the Asian crisis were not well suited to countries suffering from a private sector debt crisis with deflationary undertones.

Question 63

In 1997,the IMF agreed to provide the Thai government with $17.2 billion in loans to help its shattered economy.While doing so,IMF imposed all of the following restrictions except:

A)the government was to increase taxes.
B)public spending needed to be cut.
C)several state-owned businesses were to be privatized.
D)interest rates were to be reduced.

Question 64

When a country commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate,the country has adopted a _____ system of exchange rates.

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

Question 65

The use of the forward market and swaps to protect against foreign exchange risk has increased markedly since:

A)the breakdown of the gold standard.
B)the collapse of the Bretton Woods system in 1973.
C)the end of the Plaza Accord.
D)the Louvre Accord ended in 1968.

Question 66

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

A)A debt situation
B)Moral hazard
C)A conflict of interest
D)Policy failure

Question 67

A fixed exchange rate regime:

A)modeled along the lines of the Bretton Woods system will not work.
B)allows each country to choose its own inflation rate.
C)is characterized by speculation that adds to the uncertainty surrounding future currency movements.
D)leads to a situation where governments under political pressures expand monetary supply too rapidly,causing unacceptably high price inflation.

Question 68

Because of the long-term implications of volatile exchange rates,firms should:

A)use the forward market because it is a perfect predictor of future exchange rates.
B)get complete insurance coverage for exchange rates that might occur several years in the future.
C)pursue strategies that reduce economic exposure.
D)avoid transactions that involve foreign currencies.

Question 69

Pegged exchange rates are popular among many of the world's:

A)highly developed nations.
B)richest nations.
C)smaller nations.
D)large economies.

Question 70

A banking crisis:

A)is a situation in which consumer spending patterns significantly affect a country's balance of payments,thereby affecting its currency.
B)is a situation in which a country cannot service its debt obligations.
C)refers to a loss of confidence in the banking system that leads to a run on banks,as individuals withdraw their deposits.
D)occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency.

Question 71

The _____ suggested that it would be desirable for most major currencies to appreciate relative to the dollar,and signatories pledged to intervene in the foreign exchange markets,selling dollars,to achieve this objective.

A)Louvre Accord
B)Plaza Accord
C)Bretton Woods Agreement
D)gold standard

Question 72

The 1995 Mexican currency crisis and the 1997 Asian financial crisis were the result of all of the following except:

A)excessive foreign borrowings.
B)a weak or poorly regulated banking system.
C)high inflation rates.
D)high balance-of-trade surplus.

Question 73

Under the _____ of 1987,the Group of Five agreed that exchange rates had realigned sufficiently from earlier levels and pledged to support the stability of exchange rates around their current levels by intervening in the foreign exchange market when necessary.

A)Plaza Accord
B)Jamaica Agreement
C)Louvre Accord
D)Bretton Woods Agreement

Question 74

According to some analysts,under a _____ regime,countries are limited in their ability to use monetary policy to expand or contract their economies by the need to maintain exchange rate parity.

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

Question 75

Under a strict currency board system,interest rates:

A)adjust automatically.
B)are constant.
C)decline consistently.
D)rarely move.

Question 76

When a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of a currency,a(n)_____ has occurred.

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

Question 77

The great virtue claimed for a pegged exchange rate is that it:

A)imposes monetary discipline on a country.
B)leads to high inflation.
C)leads to devaluation.
D)increases fluctuations in exchange rates.

Question 78

In 2006,about a quarter of the IMF members had a(n)_____ exchange rate policy.

A)fixed peg
B)currency board
C)free float
D)adjustable peg

Question 79

A foreign debt crisis:

A)is a situation in which consumer spending patterns significantly affect a country's balance of payments,thereby affecting its currency.
B)is a situation in which a country cannot service its debt obligations.
C)refers to a loss of confidence in the banking system that leads to a run on banks,as individuals withdraw their deposits.
D)occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency.

Question 80

A managed-float system is also known as a:

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