Question 1

Explain how a pegged exchange-rate system works.Why would a country choose to follow this system?

Accepted Answer

The answer of Explain how a pegged exchange-rate system works.Why...

Question 2

A government with a currency board is legally bound to hold an amount of foreign currency that is at least equal to the amount of domestic currency.

Accepted Answer

This is a defining feature of a currency board system. The government must hold foreign reserves to back the domestic currency issued, ensuring that the exchange rate remains fixed.

Question 3

The ________ limited the fluctuations of European Union members' currencies within a specified trading range.

Accepted Answer

The exchange rate mechanism (ERM) limited the fluctuations of European Union members' currencies within a specified trading range, usually 2.25% above or below an agreedupon central rate. This system was used from 1979 to 1999 as a way to stabilize exchange rates and prepare countries for the eventual adoption of the euro.

Question 4

The ________ called for large-scale reduction of the debt owed by poorer nations,the exchange of old loans for new low-interest loans,and the making of debt instruments that would be tradable on world financial markets.

Accepted Answer

The Brady Plan, also known as the "International debt strategy," proposed by US Secretary of Treasury Nicholas Brady in 1989, called for large-scale reduction of the debt owed by poorer nations, the exchange of old loans for new low-interest loans, and the making of debt instruments that would be tradable on world financial markets. The plan aimed to provide relief to countries struggling with high levels of debt to promote economic growth and stability. Therefore, option A is the correct answer. The other options mentioned are historic agreements that address global monetary policies, but not debt relief for impoverished nations.

Question 5

Today's international monetary system remains in large part a managed float system.

Accepted Answer

The international monetary system is a combination of both floating exchange rate systems and managed exchange rate systems, but overall it is considered to be a managed float system. This means that exchange rates are determined by market supply and demand, but central banks and other authorities can intervene to influence the exchange rate.

Question 6

The ________ was an agreement among the G7 nations that the dollar was appropriately valued and that they would intervene in currency markets to maintain its current market value.

Accepted Answer

The Louvre Accord was an agreement reached in 1987 among the G7 nations (Canada, France, Germany, Italy, Japan, United Kingdom, and the United States) to intervene in currency markets in order to stabilize the value of the US dollar against other major currencies. This was done because the dollar had been weakening and there was concern that its decline could lead to a destabilization of the global financial system. The agreement was named after the location of the meeting where it was signed – the Louvre Museum in Paris.

Question 7

A ________ is a monetary regime that is based on an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.

Accepted Answer

A currency board is a monetary regime in which a country's central bank has an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. This commitment is typically backed by a guarantee to hold reserves in the foreign currency. This arrangement is intended to provide stability to a country's currency and to promote international trade and investment. Currency options, currency speculation, and currency arbitrage are all related to currency exchange, but they do not involve a formal commitment to fixed exchange rates.

Quiz 10: International Monetary System