Question 1

An ECU was ________.

Accepted Answer

ECU stands for European Currency Unit, which was a monetary unit created by the European Monetary System.

Question 2

A capital ________ can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks, which helps trigger a ________.

Accepted Answer

An inflow of capital can lead to a lending boom and excessive risk-taking among banks, which can trigger a financial crisis in an emerging-market country. This is because the sudden increase in capital inflow can cause the currency to appreciate, making exports less competitive and reducing economic growth. Additionally, when the capital inflow eventually reverses, the sudden outflow of funds can cause a liquidity crisis and currency devaluation, further exacerbating the financial instability.

Question 3

How would the Bank of Canada operate in a fixed exchange rate regime when the dollar is overvalued and undervalued? What are the effects on international reserves?

Accepted Answer

The answer of How would the Bank of Canada operate...

Question 4

Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system. What alternative policies are available to eliminate the overvaluation of the exchange rate?

Accepted Answer

The answer of Explain and demonstrate graphically the situation of...

Question 5

Which of the following is true?

Accepted Answer

Special drawing rights were created as a paper substitute for gold and are not tied to any specific currency or commodity. They are used as a supplement to international reserves held by countries and are issued by the International Monetary Fund (IMF).

Question 6

Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves.

Accepted Answer

When the British pound depreciated below its lower limit against the German mark, the Bank of England was required to buy pounds and sell marks to support the pound's value, which resulted in a loss of international reserves.

Question 7

Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves.

Accepted Answer

When the German mark depreciated below its lower limit against the British pound, the German central bank was required to buy marks and sell pounds to support the mark, which would result in a loss of international reserves.

Question 8

A case for capital inflow controls can be made because capital inflows ________.

Accepted Answer

Capital inflows can cause a lending boom and lead to excessive risk taking, which can then result in financial instability and crises. Therefore, a case can be made for implementing capital inflow controls to prevent these negative effects. The other options are not necessarily true or accurate.

Question 9

In the 1990s, this agency has acted like an international lender of last resort to cope with financial instability.

Accepted Answer

The International Monetary Fund (IMF) has acted as an international lender of last resort in the 1990s, providing financial assistance to countries experiencing instability and economic crises.

Question 10

Between May and July 1997, concerns about the large current account deficit in Thailand and the weakness in the Thai financial system caused speculators to suspect that Thailand might be forced to ________.

Accepted Answer

The concerns about the current account deficit and weakness in the financial system led to speculators suspecting that Thailand might be forced to devalue its currency.

Question 11

An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.

Accepted Answer

An international lender of last resort creates a moral hazard problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs. This expectation can lead to riskier behavior by banks and create a situation where they are more likely to take on excessive risk because they believe they will be bailed out if things go wrong.

Question 12

What is the gold standard? What are the pros and cons of this system?

Accepted Answer

The answer of What is the gold standard? What are...

Question 13

In September 1992, the Bundesbank attempted to keep the mark from appreciating relative to the British pound, but it failed because participants in the foreign exchange market came to expect the ________.

Accepted Answer

Participants in the foreign exchange market expected the appreciation of the mark, which made it difficult for the Bundesbank to keep the mark from appreciating relative to the British pound.

Question 14

Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

Accepted Answer

The answer of Assume that a fixed exchange rate is...

Question 15

The East Asia currency crisis in 1997 started in ________.

Accepted Answer

The East Asia currency crisis of 1997 started in Thailand, where the government was forced to devalue its currency due to economic instability and high levels of debt. This sparked a chain reaction throughout the region, causing other currencies to plummet and leading to a widespread financial crisis. While other countries, including South Korea and the Philippines, were also affected by the crisis, it originated in Thailand.

Question 16

Which of the following is not a disadvantage of controls on capital outflows?

Accepted Answer

Controls on capital outflows can lead to excessive risk-taking by domestic banks as they search for yield in a more restricted financial environment. This is not considered a disadvantage of such controls.

Question 17

A capital ________ can promote financial instability in an emerging-market country because it is what forces a country to ________ its currency.

Accepted Answer

A capital outflow can promote financial instability in an emerging-market country because it is what forces a country to devalue its currency. This is because when capital leaves a country, it reduces the demand for that country's currency, leading to a decrease in its value.

Question 18

Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves.

Accepted Answer

C) marks; pounds; gaining. When the German mark depreciated below its lower limit against the British pound, the Bank of England needed to buy marks and sell pounds to support the mark. This action would increase the Bank of England's holdings of foreign currency (marks), thereby increasing its international reserves.

Question 19

Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves.

Accepted Answer

When the British pound depreciated below its lower limit against the German mark, the German central bank was required to buy pounds (to support the pound's exchange rate) and sell marks (to maintain the mark's exchange rate). This means that the German central bank would be gaining international reserves as they would be acquiring more pounds and selling their own currency. Choice B accurately describes this process.

Question 20

An international lender of last resort creates a serious moral hazard problem because ________ and other ________ of banking institutions expect that they will be protected if a crisis occurs.

Accepted Answer

Deposit insurance and other guarantees provided by an international lender of last resort lead depositors and creditors to believe that their funds are safe even in times of crisis, which encourages risky behavior by banks and other financial institutions. This is known as moral hazard.

Quiz 19: The International Financial System

An ECU was ________.

A capital can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks, which helps trigger a .

How would the Bank of Canada operate in a fixed exchange rate regime when the dollar is overvalued and undervalued? What are the effects on international reserves?

Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system. What alternative policies are available to eliminate the overvaluation of the exchange rate?

Which of the following is true?

Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the Bank of England was required to buy and sell , thereby international reserves.

Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the German central bank was required to buy and sell , thereby international reserves.

A case for capital inflow controls can be made because capital inflows ________.

In the 1990s, this agency has acted like an international lender of last resort to cope with financial instability.

Between May and July 1997, concerns about the large current account deficit in Thailand and the weakness in the Thai financial system caused speculators to suspect that Thailand might be forced to ________.

An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.

What is the gold standard? What are the pros and cons of this system?

In September 1992, the Bundesbank attempted to keep the mark from appreciating relative to the British pound, but it failed because participants in the foreign exchange market came to expect the ________.

Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

The East Asia currency crisis in 1997 started in ________.

Which of the following is not a disadvantage of controls on capital outflows?

A capital can promote financial instability in an emerging-market country because it is what forces a country to its currency.

Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the Bank of England was required to buy and sell , thereby international reserves.

Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the German central bank was required to buy and sell , thereby international reserves.

An international lender of last resort creates a serious moral hazard problem because and other of banking institutions expect that they will be protected if a crisis occurs.