Deck 4: Currency Systems and Valuation

Question 1

Whether the Smithsonian Agreement was a reason for subsequent developments or not,the Smithsonian Agreement was followed by:

A)significant growth in international trade and the signing of several important international trading agreements.
B)destructive trade wars that threatened the stability of most of the world's strongest currencies.
C)the reorganization of the IMF.
D)new capital controls that were intended to moderate large swings in currency values.

Answer 1

significant growth in international trade and the signing of several important international trading agreements.

Question 2

The values of currencies that freely floating are determined by:

A)central banks.
B)currency boards.
C)market forces.
D)the gold standard.

Answer 2

market forces.

Question 3

In a currency system where one country can issue its currency only against reserves of a specified foreign currency,the system is a:

A)pegged system.
B)floating system.
C)currency board arrangement.
D)fixed peg arrangement.

Answer 3

currency board arrangement.

Question 4

The European Monetary Union was intended to:

A)increase the strength of European currencies and prepare for the adoption of the euro as the European currency.
B)establish the gold standard in Europe and make the euro the international currency of choice.
C)make exchange rates uniform and reduce inflation.
D)stabilize exchange rates,control inflation,and integrate economic performance among member nations.

Question 5

A currency system where small adjustments to value of the currency are made at preset points or in response to specific macroeconomic indicators is a:

A)currency board system.
B)crawling peg system.
C)managed float system.
D)independent float system.

Question 6

As a result of its balance of payments deficit in the 1960's and the effect on its currency:

A)the United States was able to sell all of its gold holdings at the established price of USD 35 per ounce.
B)the United States was no longer able to sell its gold holdings at the established price of USD 35 per ounce.
C)the USD ceased to be the key international currency that it was under the Bretton Woods Agreement.
D)the IMF had to make temporary loans to the United States.

Question 7

The mint parity rate is determined by:

A)comparing the amount of gold necessary to buy the same number of units of two different currencies.
B)determining the cost of minting a certain number of coins representing a certain currency.
C)comparing the gold standard rate of a currency with its exchange rate.
D)comparing the exchange rate changes of a currency over a period of time.

Question 8

We now understand that _____________________ is (are)the most important factor in global economic growth.

A)free trade agreements
B)the work of the IMF
C)free movement of capital
D)minimal restrictions on immigration

Question 9

In the 1960's the United States had a large balance of payments deficit due in large part to:

A)the fact that the USD fixed at 35 per ounce of gold was undervalued.
B)the fact that the USD fixed at 35 per ounce was overvalued.
C)the value of the USD relative to gold was fluctuating.
D)speculators buying and selling USD at rates other than the established rate of USD 35 per ounce of gold.

Question 10

In a fixed currency system:

A)the value of the currency is "fixed" in that its value is determined by some anchor,usually another currency.
B)a definite value of the currency is established.
C)the total amount of a currency that can be issued is established and cannot be changed without action by the central bank.
D)the value of the currency is directly linked to the price of gold.

Question 11

Taxes and other restrictions on the movement of capital between nations are:

A)capital controls and have a negative effect on the stabilization of currency values.
B)capital controls and were encouraged by the Bretton Woods Agreement.
C)the creation of the IMF and are intended to stabilize currency values.
D)trade restrictions that are controlled by the IMF.

Question 12

When a currency strengthens against other currencies,a central bank:

A)may sell gold to counter that appreciation in the currency's value.
B)will buy its currency in hopes of avoiding losses.
C)will sell its currency in hopes of making a profit.
D)may buy gold to counter that appreciation in the currency's value.

Question 13

As the Bretton Woods Agreement was being abandoned and new approaches to dealing with currency valuations were being sought,the economies of the United States and other major countries were weakening.This weakening was evidenced by:

A)higher exports,higher inflation and rising currency values.
B)declining currency values,an outflow of gold and higher interest rates.
C)lower imports,higher exports and stable currency values.
D)higher imports,higher inflation and outflow of a nation's currency.

Question 14

In a currency board arrangement:

A)the currency board can adjust either of the two currencies involved.
B)the currency board determines the exchange rate.
C)the two currencies involved float independently of each other.
D)the two currencies involved maintain a fixed exchange rate.

Question 15

As a result of the Bretton Woods Agreement,the USD:

A)was devalued and the value of the USD was set at 35 per ounce of gold.
B)was adopted as the currency of exchange for the IMF.
C)became the key international currency and the value of the USD was established at 35 per ounce of gold.
D)was established as the currency to which the value of all other currencies would be linked.

Question 16

The event that revived the gold standard as the basis for currency valuations in many parts of the world was:

A)Bretton Woods Agreement.
B)World War II.
C)the creation of the International Monetary Fund.
D)the creation of the United Nations.

Question 17

One of the major provisions of the Bretton Woods Agreement,which eventually contributed to the end of the gold standard was:

A)the provision that allowed the United States to unilaterally change the value of the USD in terms of gold.
B)that silver could be substituted for gold as the reference for the value of currencies.
C)that the IMF could adjust the conversion rate of USD into gold periodically.
D)that USD would be converted into the equivalent amount of gold for an entity that requested it.

Question 18

The reintroduction of the gold standard was intended to accomplish two objectives:

A)make the work of the IMF possible and stabilize currency values.
B)make currencies freely convertible into other currencies and stabilize currency values.
C)create the IMF and make it possible for Germany to pay war reparations.
D)allow European countries to finance rebuilding after World War II and stabilize currency values.

Question 19

In response to the weakening of its economy as the Bretton Woods Agreement was breaking down and new approaches to stabilization of currency values was taking place,the United States:

A)announced that it would no longer convert the USD to gold and it imposed a tax on imports.
B)experimented with trying to have its currency float so that the currency markets would determine its value.
C)sought to acquire more gold to reinforce the stability of its economy.
D)sought to sell its gold reserves since gold was selling on the international markets at more than USD 35 per ounce.

Question 20

The first step in making the euro the single currency of Europe was:

A)taking steps to make all of the currencies in use in Europe have equal value.
B)linking the value of all currencies in Europe to the USD.
C)the institution of several policies including the freeing of capital flow among member states.
D)obtaining the approval of the International Monetary Fund.

Question 21

If potential purchasers of a currency are very sensitive to changes in the value of that currency,that currency is said to have:

A)low demand elasticity.
B)high demand elasticity.
C)low demand.
D)high demand.

Question 22

Currency equilibrium is more academic than real because:

A)the concept of currency equilibrium was developed by an theoretical economist and has never been observed in practice.
B)when a currency approaches equilibrium,governments act to avoid currency equilibrium.
C)supply and demand constantly react to market forces so that the amount demanded and the amount supplied of a currency are almost never the same.
D)some currencies are pegged and some currencies are free floating so that react to market forces differently.

Question 23

The equilibrium value of a currency is the value:

A)at which the amount of the currency that is demanded will equal the amount of the currency that is supplied.
B)at which the currency is most often found.
C)of the currency that has been maintained for at least 30 days.
D)at which the country issuing the currency will issue additional currency.

Question 24

Widespread speculation that a currency's value will change significantly in the near future can cause:

A)the currency value to decrease precipitously.
B)short-term investors to lose confidence in the currency.
C)long-term investors to lose confidence in the currency.
D)the currency value to increase precipitously.

Question 25

For the country using another country's currency for domestic transactions,the result is usually:

A)that the country whose currency is being used formally requests that it's currency not be used.
B)the country whose currency is being used encourages the use of its currency because it increases demand for and the value of the currency.
C)the currency markets stop making the currency of the country that is being used available to the country that is using that currency.
D)that the country's citizen end up holding substantial assets denominated in the currency of the other country that is being used.

Question 26

The graph of demand for a currency is a line that slopes down to the right,which indicates that demand:

A)increases as the value of the currency increases.
B)increases as the units of currency bought increases.
C)decreases as the value of the currency increases.
D)decreases as the units of the currency bought decreases.

Question 27

The value of a foreign currency is:

A)stable,since values are determined by the marketplace.
B)not subject to determination except at the specific time at which a transaction in the currency occurs.
C)subject to change depending on whether it is a pegged or floating currency.
D)subject to change and determined by forces of supply and demand.

Question 28

In pegged currency systems,the country fixes its currency value to the value of some other stable currency and:

A)does not interfere with the value of its currency unless it determines that the currency to which its currency is pegged is not performing as expected.
B)only acts to affect the value of its currency if the value of its currency decreases significantly.
C)allows its currency value to fluctuate in a narrow band around the fixed value and then takes steps to maintain its currency's value within that band.
D)only acts to affect the value of its currency if the value of its currency increases significantly.

Question 29

Generally,supply of a currency is:

A)directly related to the value of the currency.
B)indirectly related to the value of the currency.
C)inversely related to the value of the currency.
D)not related to the value of the currency.

Question 30

The currency system of the euro-area nations should be considered:

A)a floating currency system.
B)a crawling per system.
C)a managed float system.
D)a currency board arrangements.

Question 31

Demand for a foreign currency is generated by:

A)government policies.
B)the sources from which the currency can be obtained.
C)requirements of MNCs and foreign travel.
D)events within the country whose currency is being considered.

Question 32

When entities purchase assets denominated in foreign currencies,those entities are:

A)decreasing the supply of the foreign currency because they are using the foreign currency to purchase the assets.
B)not affecting the supply of the foreign currency involved because there is a finite supply of any currency.
C)creating a supply of the foreign currency because they are paying for those purchases in the foreign currency.
D)not affecting the supply of foreign currency because the supply of a currency can only be changed by the central bank that controls the currency.

Question 33

Countries most likely to use a pegged currency system are those that:

A)have a small economy with a dominant trading partner with a stable currency.
B)have highly structured labor markets and monetary policies.
C)offer attractive investment opportunities for foreign entities.
D)seek as little outside interference from the rest of the world as possible.

Question 34

When a country pegs the value of its currency to the value of some other currency,that country:

A)formally agrees not to adopt economic policies that are inconsistent with those of the country to which the currency is pegged.
B)by necessity has to follow the macroeconomic policies of the country to which the currency is pegged.
C)is free to adopt its own economic policy without regard to the economic policies of the country to which the currency is pegged.
D)is free to adopt its own economic policies but is required to consult with the country to which the currency is pegged.

Question 35

A disadvantage of using a pegged currency system is that:

A)the country whose currency is pegged must decide on its own economic policies.
B)the country whose currency is pegged does not have the option of adopting economic policies different from those of the country to which the currency is pegged.
C)the cost of maintaining the peg is substantial and must be paid by those transacting business in the country whose currency is pegged.
D)international currency markets shun currency whose value is pegged to another currency.

Question 36

In an independent floating currency system,official intervention is:

A)intended to moderate changes in the exchange rate rather than to set the exchange rate.
B)not allowed because the value of the currency is to be set by market forces.
C)taken only to maintain the predetermined exchange rate.
D)allowed only indirectly as through changing official interest rates.

Question 37

Demand for a currency is ______________ related to the value of that currency.

A)inversely
B)directly
C)not
D)only slightly

Question 38

The traditional view of currency values focuses on:

A)aggregate supply and demand in all transactions in which the currency is used.
B)the current account in a country's balance of payments.
C)how long the currency has been in existence and the long term trends in the value of the currency.
D)volatility of the currency on international currency markets.

Question 39

For a floating currency system to be effective:

A)the currency markets must be subject to significant regulation and the central bank must be willing to take action when predetermined indicators suggest action is necessary.
B)the currency market must be diversified and must not be dominated by any specific currency.
C)there must be effective market and monetary infrastructures and the currency market must be large and liquid.
D)the central bank of the nation must have cooperative agreements with the central banks of other nations that allow those other central banks to take actions to stabilize the subject currency.

Question 40

The graph of supply of a currency shows:

A)a line that is essentially horizontal indicating that supply of a currency is not closely related to value of the currency.
B)a line that is essentially vertical indicating that the supply of a currency is controlled by the government issuing the currency.
C)a line that slopes downward from left to right indicating that the supply of a currency decreases as the value of the currency increases.
D)a line that slopes upward from left to right indicating that the higher the value of the currency,the greater the supply of that currency.

Question 41

What economic justification is there for regional currencies such as the euro?

Question 42

How do price levels in a country affect the value of that country's currency?

Question 43

A country with relatively high interest rates will attract foreign investment which will:

A)increase the value of the currency in that country.
B)decrease the value of the currency in that country.
C)not affect the value of the currency in that country.
D)increase the value of all foreign currencies.

Question 44

If a country has high productivity,it can expect:

A)high demand for its goods and high demand for the foreign currency most often used to purchase its goods.
B)level demand for its goods,but high demand for its currency.
C)level demand for its goods,and high demand for the foreign currency most often used to purchase its goods.
D)high demand for the goods it produces and high demand for its currency.

Question 45

What was the classical gold standard and why is it not observed today?

Question 46

How does a floating currency system allow a country more flexibility in dealing with its economic system?

Question 47

What is the difference between nominal and real rates of interest?

Question 48

A change in prices not the result of product improvement is called inflation and is generally considered to be a negative economic development,but:

A)downward changes in prices,or deflation,is a positive economic development and can offset inflation.
B)inflation is not uniform across all product categories,so inflation may negatively affect only certain product categories.
C)inflation generally does not last long and is self-correcting,so monetary authorities do not consider inflation to be a concern for currency values.
D)but inflation affects all product categories,so prices of products relative to each other do not change.

Question 49

Gross Domestic Product measures:

A)economic activity in a country in terms of goods and services produced within that country in a specific period of time.
B)inflation and currency value.
C)the percentage change in currency value over a stated period of time.
D)productivity of a country over a stated period of time.

Question 50

Preference for foreign goods rather than domestic goods:

A)increases demand for both foreign currency and domestic currency.
B)increases demand for foreign currencies and decreases demand for the domestic currency.
C)decreases demand for both foreign currency and domestic currency.
D)increases demand for domestic currency and decreases demand for foreign currency.