Question 1

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 its own currency, which decreases the monetary base. This action can lead to higher unemployment due to tighter monetary conditions.

Question 2

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

The Bretton Woods system had fixed exchange rates, meaning that countries had to adjust their balance of payments to maintain the exchange rate. However, since the abandonment of this system, exchange rate fluctuations have become more important in the conduct of monetary policy. As a result, balance of payments considerations have become less important. Thus, D is the correct answer.

Question 3

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

When a central bank sells its currency to prevent appreciation, it reduces the supply of money in circulation, which in turn reduces the level of international reserves as well. This reduction in the monetary base can limit the scope for credit creation, causing banks to raise interest rates to maintain a stable lending environment, which can contribute to inflationary pressures. Therefore, a sale of its currency can lead to higher international reserves at first but eventually, the reduction in money supply can lead to inflation if not managed effectively.

Question 4

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

The purchase of international reserves by the German Bundesbank led to an increase in the German monetary base, which in turn led to rapid growth in the German money supply. Therefore, the correct choice is D.

Question 5

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 interest rates, which would increase demand for the currency as investors seek to earn higher returns. This would help strengthen the currency and prevent it from falling in value. An expansionary monetary policy, on the other hand, involves lowering interest rates which would make the currency less attractive to investors and potentially lead to a decline in its value.

Question 6

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 the fixed exchange rate, the German Bundesbank bought dollars and sold marks. This action was aimed at preventing the dollar from depreciating further against the mark, thereby increasing their international reserves in dollars.

Question 7

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

Accepted Answer

A crawling peg allows the domestic currency to depreciate at a steady rate so that inflation in the pegging country can be higher than that of the anchor country. This is done to maintain competitiveness in trade and to stimulate exports. The crawling peg is a type of exchange-rate targeting rule for monetary policy but it does not fix the domestic currency to a commodity or the value of another country's currency.

Question 8

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 the inflation rate found in an anchor country, usually the United States. This helps to keep inflation under control and stabilize prices. Therefore, the correct choice is C) internationally; anchor.

Question 9

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 financial crisis from one country to another due to interconnectedness of financial markets. However, it also creates moral hazard as the creditors may take excessive risks knowing that they will be bailed out by the lender of last resort.

Question 10

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

Accepted Answer

The answer of The German central bank gained international reserves...

Question 11

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 the domestic currency from appreciating, it needs to sell its currency in exchange for foreign currency, thereby increasing its international reserves. This increases the monetary base, which in turn increases the risk of higher inflation. Therefore, the correct choice is to acquire international reserves by selling its currency, which is option D.

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 prevent contagion, which is when a successful speculative attack on one currency leads to attacks on others. This is because the lender can provide support and stability to the affected countries, thereby reducing the likelihood of a widespread crisis. Adverse selection refers to the problem of asymmetric information, where one party has more information than the other. Moral hazard refers to the tendency for people to take more risks when they are insured or protected from the consequences of their actions. Currency virus is not a commonly used term in economics.

Question 13

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, is typically used to reduce inflation and can lead to an appreciation of the currency. Higher interest rates attract foreign investors looking for higher returns, thus increasing demand for the currency and strengthening its value.

Question 14

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 International Monetary Fund (IMF) argue that its lending during the Mexican crisis in the 1990s to bail out foreign lenders set the precedent and expectation for future bailouts, which may have contributed to the East Asian financial crisis in 1997-1998. Therefore, the correct answer is B, which identifies lenders as the entities that expected to be bailed out in case of crisis.

Question 15

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 ran large balance of payments deficits, meaning they were importing more than they were exporting. This caused an overvalued dollar (since there was high demand for dollars to pay for all these imports) and an undervalued German mark (since there was low demand for marks since Germans were buying fewer American exports). Therefore, choice B is the correct answer.

Question 16

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

The reference to the lending in the crisis that set the stage for another crisis rules out options A and B. Additionally, the excessive risk taking mentioned fits with what happened in the East Asian crisis, making option D the best choice.

Question 17

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 18

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 would implement an expansionary monetary policy. This means lowering interest rates to make lending and borrowing cheaper, encouraging investment and increasing the money supply. This will make the currency less attractive, as investments will yield lower returns, and the increased money supply will cause inflation, further reducing the currency's value.

Question 19

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 strategy is known as exchange-rate targeting, where the focus is on maintaining a fixed exchange rate with a low inflation country.

Question 20

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, which can stimulate domestic inflation.

Quiz 20: The International Financial System

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.

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.

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.

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.

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.

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

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.

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.

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 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.

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.

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.

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.

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

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.

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.

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.

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.

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.