Question 1

Subprime loans are loans that are issued at an interest rate below the prime rate.

Accepted Answer

Subprime loans are loans to poor credit risks, and carry higher interest rates than prime.

Question 2

The world's financial markets are becoming increasingly segmented as large international commercial banks achieve more and more economic power.

Accepted Answer

They are becoming increasingly integrated (that is, less segmented).

Question 3

Factors contributing to market segmentation include each of the following EXCEPT

Accepted Answer

All of the choices listed (informational barriers, regulatory and institutional interference, the immobility of human labor, and transaction costs) are factors that contribute to market segmentation.

Question 4

Prices in the world's financial markets are becoming increasingly segmented as local political forces work to dismantle many of the world's largest countries, such as those of the former Soviet Union.

Accepted Answer

Markets are becoming more integrated (less segmented). Indeed, the breakup of the Soviet Union hastened the integration of these emerging markets into the rest of the world.

Question 5

The "trade balance" of the IMF's Balance-of-Payments Statistics is the net balance (exports minus imports) on merchandise trade.

Accepted Answer

The trade balance in the IMF's Balance-of-Payments Statistics is indeed the net balance on merchandise trade, calculated as exports minus imports.

Question 6

IMF loans to troubled economies are unlikely to change the behaviors of investors, because investors can assess the risks of moral hazard for themselves.

Accepted Answer

The expectation of an IMF bailout creates a moral hazard, in that it changes the expectations and hence the behaviors of lenders, borrowers, and governments.

Question 7

The "financial account" of the IMF's Balance-of-Payments Statistics measures the total financial wealth of citizens in each reporting country.

Accepted Answer

The financial account measures cross-border transactions associated with changes in ownership of financial assets and liabilities.

Question 8

In a fixed exchange rate system, governments stand ready to buy and sell currency at official exchange rates.

Accepted Answer

In a fixed exchange rate system, governments maintain a fixed exchange rate by buying and selling their own currency at the official exchange rate. This is also known as currency intervention.

Question 9

The International Monetary Fund's principal mission is to provide funds for economic development in developing economies.

Accepted Answer

The IMF's role is to help countries defend their currencies against temporary balance-of-payments imbalances and to promote cross-border trade.

Question 10

Liquidity refers to the ease with which an asset can be exchanged for another asset of equal value.

Accepted Answer

Liquidity is indeed defined as the ease with which an asset can be exchanged for another asset of equal value.

Question 11

The international monetary system refers to the global network of governmental and commercial institutions within which currency exchange rates are determined.

Accepted Answer

The definition of international monetary system is accurate and describes a true statement.

Question 12

The Basel Accord established the International Monetary Fund and the World Bank.

Accepted Answer

These institutions were established by the Bretton Woods Agreement of 1946.

Question 13

Special Drawing Rights (SDRs) are distributed to commercial banks within the European Union (EU) in proportion to that member's proportion of EU trade.

Accepted Answer

SDRs are IMF bookkeeping units of account that are traded only between central banks.

Question 14

Markets are integrated when an asset sells for the same price wherever it is traded.

Accepted Answer

If an asset sells for the same price wherever it is traded, then it is said to be trading in an integrated market. This means that there are no price differences between different markets, and that arbitrage opportunities do not exist. Integrated markets are efficient, as prices reflect all available information and are not influenced by local conditions or market peculiarities.

Question 15

The "trade balance" of the IMF's Balance-of-Payments Statistics measures gross exports of goods and services.

Accepted Answer

The trade balance is the net balance on merchandise trade.

Question 16

"The snake" refers to the serpentine path that exchange rates have followed since the introduction of the euro in 2002.

Accepted Answer

It refers to the band within which the currencies of the European Monetary System traded.

Question 17

Decreases in currency values within a fixed rate system are called devaluations.

Accepted Answer

Devaluations refer to deliberate decreases in the value of a currency within a fixed rate system. This can be done by the government or central bank to make exports cheaper and more competitive or to reduce the value of foreign debt. In contrast, when currency values decrease in a floating exchange rate system, it is referred to as a depreciation.

Question 18

The ______ of the IMF's Balance-of-Payments Statistics measures whether a particular country is a net importer or exporter of manufactured goods.

Accepted Answer

The trade balance is a component of the current account in the IMF's Balance-of-Payments Statistics, and it specifically measures the difference between a country's exports and imports of goods. Therefore, it can provide information on whether a country is a net importer or exporter of manufactured goods.

Question 19

Moral hazard is the risk that the existence of a contract will change the behaviors of parties to the contract.

Accepted Answer

Moral hazard refers to the potential for one party to take risks because they know that the other party will bear the costs of those risks. This can arise when contracts are in place, as parties may alter their behavior to take advantage of the contractual terms or protections. Therefore, the statement is true.

Question 20

Decreases in currency values within a floating rate system are called devaluations.

Accepted Answer

A decrease in a currency value in a floating rate system is called a depreciation.

Quiz 2: World Trade and the International Monetary System