Question 1

A parallel or black market often arises as a result of which of the following?

Accepted Answer

Exchange controls refer to government policies that limit the amount of foreign currency that individuals or businesses can purchase or hold. This can lead to a parallel or black market in which individuals and businesses conduct foreign currency transactions outside of the official channels in order to obtain the currency they need. This is because the official channels may not provide enough currency or may offer a less favorable exchange rate.

Question 2

Suppose the Japanese government pegs the yen to the U.S. dollar. What could the Japanese central bank do to prevent depreciation of the yen against the dollar in the foreign exchange market?

Accepted Answer

If the Japanese government pegs the yen to the U.S. dollar, it means that they have committed to maintaining a fixed exchange rate between the two currencies. To prevent depreciation of the yen against the dollar in the foreign exchange market, the Japanese central bank could intervene by buying yen and selling dollars in the foreign exchange market. This would increase the demand for yen and decrease the supply of dollars, thereby strengthening the value of the yen relative to the dollar. Lowering interest rates or printing new currency notes would not directly address the issue of exchange rate depreciation. Increasing official reserve holdings by buying dollars in the foreign exchange market could also be effective, but buying yen and selling dollars directly targets the exchange rate and is thus the best choice.

Question 3

The government policy dictating that all foreign exchange proceeds must be turned over to the country's monetary authority is referred to as capital controls.

Accepted Answer

Capital controls refer to measures taken by governments to regulate the flow of foreign capital in and out of the domestic economy, not specifically to policies about turning over foreign exchange proceeds to the monetary authority.

Question 4

If a country with a fixed exchange rate is continuously losing foreign reserves, speculators will:

Accepted Answer

When a country with a fixed exchange rate is losing foreign reserves, it means that there is an excess demand for foreign currency. Speculators will take advantage of this situation by selling the country's currency (which is losing value) and buying foreign currency (which is gaining value). This will put further downward pressure on the country's currency and exacerbate the situation.

Question 5

Which of the following is currently a main function of the International Monetary Fund (IMF)?

Accepted Answer

Currently, one of the main functions of the International Monetary Fund (IMF) is to loan reserves to countries that are attempting to finance temporary payments deficits. This helps stabilize global financial markets and prevent economic crises. The IMF also provides policy advice and technical assistance to member countries.

Question 6

Which of the following statements is NOT accurate?

Accepted Answer

The answer of Which of the following statements is NOT...

Question 7

Which of the following is true of capital controls?

Accepted Answer

The answer of Which of the following is true of...

Question 8

For a country with a fixed exchange rate that is running continuous overall payments surpluses:

Accepted Answer

A country with a fixed exchange rate system and continuous overall payments surpluses will accumulate foreign reserves, not run out. If the currency is revalued, the value of foreign reserves held by the monetary authority in terms of the domestic currency will decrease, potentially leading to losses.

Question 9

An exchange rate regime in which the government intervenes in the market to influence the market-determined exchange rate can be called either a dirty float or a managed float.

Accepted Answer

Both terms, dirty float and managed float, can be used to describe an exchange rate regime in which the government intervenes in the market to influence the market-determined exchange rate. However, dirty float usually implies a greater degree of government intervention and manipulation, often through indirect measures such as changes in trade policies or capital controls. Managed float, on the other hand, suggests a more hands-off approach to exchange rate management, in which the government may intervene to smooth out fluctuations or address market imbalances but generally allows market forces to determine exchange rates.

Question 10

Which of the following activities does the International Monetary Fund engage in?

Accepted Answer

The answer of Which of the following activities does the...

Question 11

Which of the following best describes a situation in which a country buys domestic currency in order to defend a pegged exchange rate, and also uses a policy in the domestic economy in to prevent the domestic money supply from changing?

Accepted Answer

This situation is called sterilized intervention, where a country buys domestic currency to maintain a pegged exchange rate while using a policy (such as open market operations) to prevent the domestic money supply from changing. This is done to avoid inflationary or deflationary pressures in the domestic economy that could arise from changes in the money supply.

Question 12

The pre-1914 gold standard imposed pressure to adjust mostly on countries that experienced:

Accepted Answer

The pre-1914 gold standard required countries to settle their international transactions with gold, which meant that countries running settlement balance deficits had to export gold in order to settle their debts. As a result, these countries experienced pressure to adjust their economies in order to reduce their deficits and maintain their gold reserves.

Question 13

Suppose under a gold standard the price of gold in the United States is $450 per ounce and the price of gold in the United Kingdom is 200£ per ounce. The exchange rate is thus:

Accepted Answer

The price of gold in the United States is $450 per ounce, and the price of gold in the United Kingdom is 200£ per ounce. So, 1 ounce of gold can be bought for $450 in the United States or for 200£ in the United Kingdom. Therefore, 1£ = $450/200 = $2.25.

Question 14

Which of the following is NOT one of the rules for a gold standard?

Accepted Answer

Capital controls are not a rule for a gold standard. The other options are all rules for a gold standard: fixing the value of a currency in terms of gold, unrestricted flow of gold between countries, and holding gold reserves in a direct relationship to the currency issued.

Question 15

Faced with increasing outflows of gold in the late 1960's and early 1970s, the United States:

Accepted Answer

In 1971, the United States suspended the convertibility of dollars into gold, effectively ending the Bretton Woods system that had governed international monetary policy since 1944. This decision was made in response to increasing outflows of gold as foreign central banks lost confidence in the value of the U.S. dollar. By suspending convertibility, the U.S. government removed the constraint that had previously limited its ability to run large deficits without losing its gold reserves.

Question 16

If a country with a fixed exchange rate faces a fundamental disequilibrium because it has a large, ongoing surplus in it official settlements balance, which of the following policies can it employ to try to achieve external balance?

Accepted Answer

If the country has a fixed exchange rate, it cannot adjust its exchange rate to achieve external balance. Imposing import barriers could reduce imports and improve the balance of trade, but it would also reduce exports and potentially harm economic growth. Raising interest rates could attract foreign investment and reduce the surplus in the official settlements balance, but it could also harm domestic investment and consumption. Obtaining a loan from the IMF would provide temporary relief, but it would not address the underlying balance of payments problem. Allowing the exchange rate to float would allow the market to determine the exchange rate, which could result in a depreciation of the currency, making exports more competitive and reducing the surplus in the official settlements balance. Therefore, the best choice is C.

Question 17

Today, no country fixes its currency to gold.

Accepted Answer

This is true. There are no longer any countries that fix the value of their currency directly to gold, as the global financial system has moved towards more flexible exchange rates. The last major currency to be fully backed by gold, the Swiss franc, abandoned the gold standard in 2000.

Question 18

One disadvantage of the pre-1914 gold standard was that:

Accepted Answer

The gold standard primarily placed adjustment pressures on countries with payment deficits, requiring them to reduce their money supply and potentially leading to deflation and economic slowdown, while countries with surpluses faced no similar pressure to adjust their economic policies.

Question 19

Which one of the following is NOT a way for a country to defend its fixed exchange rate?

Accepted Answer

Promoting real appreciation of the country's currency is not a way to defend a fixed exchange rate, as it would cause the currency to appreciate and potentially break the peg. The other options (intervening in the foreign exchange market, altering domestic interest rates, and imposing exchange controls) are common methods for defending a fixed exchange rate.

Question 20

The central feature of the Bretton Woods system was:

Accepted Answer

The Bretton Woods system, established in 1944, used an adjustable pegged exchange rate regime, in which countries could adjust their exchange rates within a narrow band around a fixed rate. This system was intended to promote stability and avoid competitive currency devaluations.

Quiz 20: Government Policies Toward the Foreign Exchange Market