Question 1

In response to the overvalued dollar in the early 1970s, the German Bundesbank bought ________ and sold ________ to keep the exchange rate fixed, gaining international reserves.

Accepted Answer

To maintain a fixed exchange rate, the German Bundesbank bought dollars and sold marks. This action was aimed at preventing the mark from appreciating too much against the dollar, thereby increasing their international reserves in the process.

Question 2

An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for ________ traded goods to what is found in the ________ country.

Accepted Answer

Exchange-rate targeting ties the inflation rate for internationally traded goods to what is found in the anchor country, which helps keep inflation under control. Therefore, option C, internationally as an anchor, is the best choice.

Question 3

The German central bank gained international reserves in the early 1970s because it sold ________ to prevent mark ________.

Accepted Answer

The German central bank sold marks to prevent the mark from appreciating. By selling its own currency, it increased the supply of marks in the foreign exchange market, which helped to keep its value lower relative to other currencies.

Question 4

If a central bank does not want to see its currency ________ in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby ________ its currency.

Accepted Answer

The answer of If a central bank does not want...

Question 5

Critics of the IMF contend that its lending in the Mexican crisis, which was used to bail out foreign ________, set the stage for the ________ crisis because these ________ expected to be bailed out if things went wrong.

Accepted Answer

Critics of the IMF argue that its lending in the Mexican crisis in the 1990s, which was used to bail out foreign lenders, set the stage for the East Asian crisis in 1997 because these lenders expected to be bailed out if things went wrong. Therefore, option B correctly identifies the lenders as those who were bailed out and who later expected similar treatment in East Asia.

Question 6

In response to the overvalued dollar in the early 1970s, the German Bundesbank bought dollars and sold marks to keep the exchange rate fixed, gaining international reserves. The huge purchase of international reserves meant that the German monetary base began to ________, leading to ________ growth in the German money supply.

Accepted Answer

When the Bundesbank bought dollars and sold marks to maintain the currency peg, it accumulated international reserves. This increased the monetary base of Germany, which then led to rapid growth in the money supply. Therefore, the correct answer is D.

Question 7

If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency.

Accepted Answer

A contractionary monetary policy involves raising the domestic interest rate, which encourages investors to hold the currency to earn higher returns, thereby increasing demand for the currency and strengthening its value.

Question 8

Under an exchange-rate targeting rule for monetary policy, a crawling peg ________.

Accepted Answer

Under a crawling peg, the domestic currency is allowed to depreciate at a predetermined rate against the anchor currency, allowing inflation in the pegging country to be higher than that of the anchor country. This allows the pegging country to maintain a competitive exchange rate and support its exports.

Question 9

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of its currency leads to ________ international reserves which ________ the monetary base.

Accepted Answer

Selling its currency on the foreign exchange market leads to lower international reserves for the central bank. In order to maintain the same level of monetary base, the central bank must purchase domestic currency which increases the supply of domestic currency in circulation, leading to an increase in domestic inflation.

Question 10

In the early 1970s, the United States ran large balance of payments ________, causing an ________ dollar and an ________ German mark.

Accepted Answer

In the early 1970s, the United States experienced large balance of payments deficits, which typically leads to a depreciation of the national currency, making the dollar overvalued in this context. Conversely, this situation would make foreign currencies, like the German mark, undervalued relative to the dollar.

Question 11

Since the abandonment of the Bretton Woods system, balance of payments considerations have become ________ important, and exchange rate considerations ________ important in the conduct of monetary policy.

Accepted Answer

Since the abandonment of the Bretton Woods system, balance of payments considerations have become less important, and exchange rate considerations more important in the conduct of monetary policy. This is because the Bretton Woods system fixed exchange rates among its member countries, limiting the flexibility of monetary policy in response to balance of payments imbalances. With floating exchange rates, countries have more autonomy in monetary policy, making exchange rate considerations more central.

Question 12

An advantage of an international lender of last resort is its ability to prevent ________, in which a successful speculative attack on one currency leads to attacks on others.

Accepted Answer

An international lender of last resort can mitigate contagion effects in financial markets by providing a safety net to prevent a widespread crisis. Contagion occurs when a crisis in one country or currency spreads to others, leading to a domino effect of cascading defaults and financial instability.

Question 13

A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting.

Accepted Answer

This type of monetary policy strategy is specifically focused on maintaining a fixed exchange rate between a country's currency and a larger currency with low inflation. It is sometimes referred to as a "pegged" exchange rate regime.

Question 14

If a central bank does not want to see its currency ________ in value, it may pursue contractionary monetary policy to raise the domestic interest rate, thereby ________ its currency.

Accepted Answer

Contractionary monetary policy, which involves raising interest rates, makes a currency more attractive to investors due to higher returns, thereby strengthening the currency. This approach is used to prevent the currency from falling in value.

Question 15

If a central bank does not want to see its currency rise in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby weakening its currency.

Accepted Answer

If a central bank wants to weaken its currency, it will pursue expansionary monetary policy, which involves lowering the domestic interest rate. This will make borrowing cheaper, increase the money supply, and weaken the currency by making it less attractive to foreign investors.

Question 16

An advantage of an international lender of last resort is its ability to prevent ________, in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of ________ if creditors expect to be protected if a crisis occurs.

Accepted Answer

An international lender of last resort can prevent contagion, which is the spread of a crisis from one currency to others due to a successful speculative attack. However, there is the problem of moral hazard if creditors expect to be protected if a crisis occurs, leading to risky behavior and more crises in the future. Option B, C, and D are incorrect as they mix up the terms or do not accurately describe the advantages and disadvantages of an international lender of last resort.

Question 17

If a central bank does not want to allow the domestic currency to depreciate, it will ________ international reserves by purchasing its currency, thereby ________ the monetary base and increasing the risk of higher unemployment.

Accepted Answer

When a central bank wants to prevent its domestic currency from depreciating, it sells international reserves to buy back its own currency. This action decreases the monetary base because it is essentially removing currency from circulation, which can lead to higher unemployment due to tighter monetary conditions.

Question 18

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of foreign currencies leads to ________ international reserves which ________ the monetary base.

Accepted Answer

When a central bank purchases foreign currencies to prevent its own currency from appreciating, it increases its international reserves. This action, in turn, increases the monetary base, potentially leading to domestic inflation.

Question 19

If a central bank does not want to allow the domestic currency to appreciate, it will ________ international reserves by selling its currency, thereby ________ the monetary base and increasing the risk of higher inflation.

Accepted Answer

If a central bank wants to prevent appreciation of the domestic currency, it will need to sell its currency on the foreign exchange market in exchange for foreign currency. This will increase foreign exchange reserves, which are a component of international reserves. By selling its currency, the central bank will decrease the monetary base since it is reducing the amount of money in circulation. This reduction in the monetary base increases the risk of higher inflation, as it makes it more difficult for the central bank to control the money supply.

Question 20

Critics of the IMF contend that its lending in the ________ crisis, which was used to bail out foreign lenders, set the stage for the ________ crisis because these lenders expected to be bailed out if things went wrong and thus provided funds that were used to fuel excessive risk taking.

Accepted Answer

Critics of the IMF argue that its lending in the Mexican crisis, which was used to bail out foreign lenders, set the stage for the East Asian crisis because these lenders expected to be bailed out if things went wrong and thus provided funds that were used to fuel excessive risk taking.

Quiz 19: The International Financial System

In response to the overvalued dollar in the early 1970s, the German Bundesbank bought and sold to keep the exchange rate fixed, gaining international reserves.

An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for traded goods to what is found in the country.

The German central bank gained international reserves in the early 1970s because it sold to prevent mark .

If a central bank does not want to see its currency in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby its currency.

Critics of the IMF contend that its lending in the Mexican crisis, which was used to bail out foreign , set the stage for the crisis because these expected to be bailed out if things went wrong.

If a central bank does not want to see its currency fall in value, it may pursue monetary policy to the domestic interest rate, thereby strengthening its currency.

Under an exchange-rate targeting rule for monetary policy, a crawling peg ________.

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the of its currency leads to international reserves which the monetary base.

In the early 1970s, the United States ran large balance of payments , causing an dollar and an German mark.

Since the abandonment of the Bretton Woods system, balance of payments considerations have become important, and exchange rate considerations important in the conduct of monetary policy.

An advantage of an international lender of last resort is its ability to prevent ________, in which a successful speculative attack on one currency leads to attacks on others.

A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting.

If a central bank does not want to see its currency in value, it may pursue contractionary monetary policy to raise the domestic interest rate, thereby its currency.

If a central bank does not want to see its currency rise in value, it may pursue monetary policy to the domestic interest rate, thereby weakening its currency.

An advantage of an international lender of last resort is its ability to prevent , in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of if creditors expect to be protected if a crisis occurs.

If a central bank does not want to allow the domestic currency to depreciate, it will international reserves by purchasing its currency, thereby the monetary base and increasing the risk of higher unemployment.

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the of foreign currencies leads to international reserves which the monetary base.

If a central bank does not want to allow the domestic currency to appreciate, it will international reserves by selling its currency, thereby the monetary base and increasing the risk of higher inflation.

Critics of the IMF contend that its lending in the crisis, which was used to bail out foreign lenders, set the stage for the crisis because these lenders expected to be bailed out if things went wrong and thus provided funds that were used to fuel excessive risk taking.