Question 1

A devaluation is an action taken by the international monetary fund.

Accepted Answer

A devaluation is not an action taken by the International Monetary Fund. Devaluation is the deliberate downward adjustment of the value of a currency against another currency or a basket of currencies, usually by a central bank or government. The International Monetary Fund may provide loans or guidance to countries experiencing economic difficulties, but they do not directly devalue currencies.

Question 2

The monetary authority in each country that regulates the money supply, issues currency, and manages the exchange rate of the nation's currency relative to other currencies is called the World Bank.

Accepted Answer

The monetary authority in each country is typically called the central bank, not the World Bank. The World Bank is an international organization that provides loans and financial assistance to developing countries.

Question 3

In most high-inflation nations, interest rates are increasing while the purchasing power of the national currency is plummeting.

Accepted Answer

In high-inflation nations, central banks often raise interest rates to try to curb inflation. However, even with higher interest rates, the purchasing power of the national currency still tends to decline due to the overall devaluation of the currency caused by inflation.

Question 4

In a short essay, describe the underlying reasons for inflation. Provide an example of a nation that faced a high rate of inflation.

Accepted Answer

The answer of In a short essay, describe the underlying...

Question 5

The Bretton Woods Agreement most likely influenced the current trend towards international free trade when member countries agreed to ________.

Accepted Answer

The answer of The Bretton Woods Agreement most likely influenced...

Question 6

Which of the following best characterizes the functions of the World Bank?

Accepted Answer

The World Bank provides loans and technical assistance to developing countries in order to promote economic growth and reduce poverty. While the World Bank monitors economic trends and offers some financial assistance to small businesses, these functions are not the primary focus of the organization. The World Bank also does not initiate trading for impoverished nations. Therefore, B is the best choice that characterizes the functions of the World Bank.

Question 7

The Central Bank is an international agency that provides loans and technical assistance to low-and middle-income countries, with the goal of reducing poverty.

Accepted Answer

The Central Bank is a national institution responsible for managing a country's currency, money supply, and interest rates, not an international agency like the World Bank, which provides loans and assistance to reduce poverty.

Question 8

Which of the following statements is true of a dirty float?

Accepted Answer

A dirty float is a system in which a country's exchange rate is allowed to fluctuate according to the forces of supply and demand in the foreign exchange market, with occasional central bank intervention to prevent excessive volatility. This allows the exchange rate to adjust to market conditions, but also provides some stability through occasional intervention by the central bank. Beneficial exchange rates offered in trade with certain nations and fixed exchange rates set and maintained by the World Bank are not characteristics of a dirty float. Currency values may be influenced by the U.S. dollar, but this is not a defining feature of a dirty float.

Question 9

An increase in a nation's rate of inflation is caused by an oversupply of money and this eventually leads to a decrease in the value of the nation's currency.

Accepted Answer

An oversupply of money causes more money to be in circulation, leading to increased demand for goods and services, which leads to higher prices and inflation. As the value of the currency decreases due to inflation, it becomes less valuable in the global market.

Question 10

Explain the belief that a persistent trade deficit is harmful to the national economy. Why was the Bretton Woods Agreement initiated and why was it terminated?

Accepted Answer

The answer of Explain the belief that a persistent trade...

Question 11

Which of the following is characteristic of the fixed exchange rate system?

Accepted Answer

A fixed exchange rate system sets the value of a currency relative to the value of another currency or a basket of currencies. Supply and demand forces do not play a role in determining the exchange rate under this system. Advanced economies may or may not use fixed exchange rates, and a fixed exchange rate system typically does not allow for much monetary policy flexibility.

Question 12

The purpose of the Bretton Woods Agreement was to ________.

Accepted Answer

The Bretton Woods Agreement, signed in 1944, established a system for fixing exchange rates between major international currencies. The US dollar was designated as the "reserve currency," and all other currencies were fixed to it at a specific exchange rate. This system lasted until 1971 when the US dollar was devalued, and the agreement was effectively ended.

Question 13

The official price of gold is used to determine the value of all major currencies in the exchange rate system used for international trade today.

Accepted Answer

The official price of gold is no longer used to determine the value of currencies. The exchange rate system is now determined by market forces of supply and demand.

Question 14

The International Monetary Fund was created through the Bretton Woods Agreement as a way to monitor the foreign exchange systems and lend money to developing economies.

Accepted Answer

This statement is true. The Bretton Woods Agreement was signed in 1944, resulting in the creation of institutions such as the International Monetary Fund (IMF) and the World Bank, with the aim of promoting international economic cooperation and stability. The IMF's original purpose was to oversee the implementation of the agreed-upon foreign exchange system and to provide loans to countries experiencing balance of payments difficulties.

Question 15

Explain how a nation's economic growth is measured and what stimulates economic growth. What is the central bank, and how does it affect economic growth?

Accepted Answer

The answer of Explain how a nation's economic growth is...

Question 16

The Bretton Woods Agreement was brought into existence in the late 1960s when the U.S. needed to finance government programs and the Vietnam War.

Accepted Answer

The Bretton Woods Agreement was actually established in 1944, well before the late 1960s when the U.S. was involved in the Vietnam War. The agreement was created to set up a new international monetary system after World War II.

Question 17

The floating exchange rate system is victim to maximum governmental intervention.

Accepted Answer

In a floating exchange rate system, the value of a currency is determined by the market forces of supply and demand, with minimal governmental intervention compared to fixed or pegged exchange rate systems where the government actively tries to maintain the currency value at a certain level.

Question 18

Which of the following is the most likely underlying reason for the demise of the Bretton Woods system?

Accepted Answer

The most likely underlying reason for the demise of the Bretton Woods system was the US trade deficits. The US was printing more dollars than it had in gold reserves, causing a devaluation of the US dollar and putting pressure on other countries who had pegged their currencies to the US dollar. This led to a breakdown of the fixed exchange rate system and the eventual collapse of Bretton Woods. The creation of the EU, gold depreciation, and WTO restrictions may have had some impact, but they were not the primary reason for the system's demise.

Question 19

Momentum trading occurs when investors buy stocks whose prices have been falling and sell stocks whose prices have been rising.

Accepted Answer

Momentum trading is the opposite of this statement - investors buy stocks that have been rising in price and sell stocks that have been falling in price in the hopes that the trend will continue.

Question 20

The floating exchange rate system is also called a pegged exchange rate system.

Accepted Answer

The floating exchange rate system and the pegged exchange rate system are two different systems. In a floating exchange rate system, the value of a currency is determined by the market forces of supply and demand, whereas in a pegged exchange rate system, the value of a currency is fixed to another currency or a basket of currencies.

Quiz 9: The International Monetary and Financial Environment