Question 1

What term recognizes that in addition to private sector market forces, exchange rates are also affected by central banks buying or selling currencies on the foreign-exchange market?

Accepted Answer

Managed float is a system in which exchange rates are mostly determined by market forces, but central banks occasionally intervene by buying or selling currencies to influence exchange rates. This differs from a fixed exchange rate system (par value) or a completely flexible exchange rate system (flexibility). Special drawing rights are a form of international reserve assets created by the International Monetary Fund.

Question 2

What occurred at the Louvre Accord?

Accepted Answer

At the Louvre Accord in 1987, central banks agreed to stabilize the value of the U.S. dollar after its sharp appreciation in the early 1980s. Therefore, choice B is the correct answer. The other choices are incorrect as they do not accurately reflect what occurred at the Louvre Accord.

Question 3

What decision was made at the Smithsonian Conference in 1971?

Accepted Answer

The Smithsonian Conference in 1971 resulted in the restoration of the fixed exchange rate system, which had previously collapsed in 1971 due to speculative pressures on the US dollar. The conference involved countries agreeing to revalue their currencies against the US dollar, with the US agreeing to devalue its currency in return. This decision aimed to stabilize exchange rates and avoid competitive devaluations among countries.

Question 4

The balance of payments is useful to international business people for all of the following reasons except ________.

Accepted Answer

The answer of The balance of payments is useful to...

Question 5

The ________ was created to manage currency relationships within the EU.

Accepted Answer

The European Monetary System was established in 1979 to manage currency relationships within the EU. It consisted of a grid of fixed exchange rate parities between member currencies and a system of intervention and support mechanisms to maintain these parities.

Question 6

The ________ is a double-entry bookkeeping system designed to measure and record all economic transactions between residents of one country and residents of all countries during a particular time period.

Accepted Answer

The balance of payments is a system used for recording all economic transactions between a country and other countries during a specific time period. It is a double-entry bookkeeping system that displays a country's receipts and payments from international trade, investment, services, and other items. Options A, B, and D are incorrect because they do not accurately describe the balance of payments. Managerial accounting relates to internal financial management, International accounting deals with accounting standards across different countries, and Global Books is not a recognized term in accounting.

Question 7

Which agreement resulted in each country adopting its own exchange rate system?

Accepted Answer

The Jamaica Agreement of 1976 resulted in each country adopting its own exchange rate system, as opposed to the fixed exchange rate system established under the Bretton Woods and Smithsonian Agreements. The Genoa Agreement of 1922 focused on restoring currencies to pre-war values, and did not establish a new exchange rate system.

Question 8

Under a managed float ________.

Accepted Answer

Under a managed float, central banks have the authority to intervene in the foreign exchange market to influence the value of their currency. This includes buying and selling their own currency to affect supply and demand, as well as setting interest rates. Therefore, managed float systems involve both private and government forces affecting currency values.

Question 9

Under a floating exchange rate system, what determines the exchange rate for each currency?

Accepted Answer

Under a floating exchange rate system, the exchange rate for each currency is determined by supply and demand in the foreign exchange market. As demand for a currency rises, its value increases in relation to other currencies, and vice versa. This allows the exchange rate to fluctuate based on various economic factors such as inflation, interest rates, and trade balances.

Question 10

Which of the following is calculated daily as a weighted average of the market value of four major currencies?

Accepted Answer

Special drawing rights (SDRs) are calculated daily as a weighted average of the market value of four major currencies - the US dollar, euro, Japanese yen, and British pound sterling.

Question 11

The ________ records the purchases and sales of assets between residents of one country and those of another country.

Accepted Answer

The capital account records the purchases and sales of assets between residents of one country and those of another country, including investments in real estate, stocks, bonds, and businesses.

Question 12

What resulted from the Smithsonian Conference?

Accepted Answer

The Smithsonian Agreement, reached in December 1971, resulted in the devaluation of the U.S. dollar as a measure to address the international monetary crisis.

Question 13

Which of the following is not one of the major accounts in the BOP accounting system?

Accepted Answer

The major accounts in the BOP accounting system are the current account, capital account, and official reserves account. The debt account is not a major account in the BOP accounting system.

Question 14

The ________ records the levels of gold, convertible currencies, special drawing rights, and reserve positions at the IMF held by a national government.

Accepted Answer

The official reserves account records the levels of gold, convertible currencies, special drawing rights, and reserve positions at the IMF held by a national government. The current account records the balance of trade, income, and transfer payments, while the capital account records capital transfers and the acquisition and disposal of non-produced, non-financial assets. The debt account is not a commonly used term in international finance.

Question 15

Which currency played a central role in the Bretton Woods system?

Accepted Answer

The U.S. dollar played a central role in the Bretton Woods system as it was designated as the world's reserve currency, and other countries fixed their exchange rates to the U.S. dollar.

Question 16

The ________ records exports and imports of goods and services, investment income, and gifts.

Accepted Answer

The current account is the part of the balance of payments that records exports and imports of goods and services, investment income, and gifts. The capital account records capital transfers and the acquisition or disposal of non-produced, non-financial assets. The debt account is not a part of the balance of payments. The official reserves account records changes in official reserves, such as gold and foreign currency holdings.

Question 17

Special drawing rights, SDRs, are sometimes called ________.

Accepted Answer

SDRs are a type of reserve asset created by the International Monetary Fund (IMF). They are not physical currency, but rather a form of bookkeeping entry that represents a certain value of a basket of major world currencies. Some have referred to them as "paper gold" because they can be used to settle international transactions and are seen as a valuable asset by central banks and governments. They are not related to gold-sterling or credit.

Question 18

Under the Jamaica Agreement ________.

Accepted Answer

The Jamaica Agreement allowed countries to adopt any exchange rate system they wished, including floating exchange rates, fixed exchange rates, or a combination of both. It did not require countries to buy or sell their paper currencies for gold, nor did it determine currency values based on supply and demand. The value of the dollar was allowed to fluctuate freely on currency markets regardless of the Jamaica Agreement.

Question 19

The sale of a Mercedes-Benz from Germany to France would be recorded as a merchandise export in the ________ account of Germany's balance of payments.

Accepted Answer

The sale of a Mercedes-Benz from Germany to France would be recorded as a merchandise export since it involves the movement of goods (automobile) from one country (Germany) to another (France). Merchandise exports fall under the current account of the balance of payments, which records transactions related to the trade of goods and services between countries. The capital account records transactions related to financial capital, while the official reserves account records transactions related to the acquisition and sale of assets denominated in foreign currencies, gold, and special drawing rights. The export account is not a separate account in the balance of payments, but rather a component of the current account, which records international trade flows.

Question 20

Dirty float is another term for ________.

Accepted Answer

Dirty float is another term for managed float, which is a floating exchange rate system where the exchange rate is determined mainly by market forces but with occasional government intervention. Flexible float (A) is not the same as dirty float, as it refers to a completely floating exchange rate system without government intervention. Illegal exchange (C) is not a valid choice as it is not a term used in the context of currency exchange rates. Convertible currency (D) refers to a currency that can be easily traded or converted into other currencies, but it is not the same as dirty float.

Quiz 7: The International Monetary System and the Balance of Payments