Question 1

Which of the following statements is true about a currency board system?

Accepted Answer

Under a currency board arrangement, additional domestic notes and coins can be issued only when there are foreign exchange reserves to back it. This limits the ability of the government to print money and, thereby, create inflationary pressures. Under a strict currency board system, interest rates adjust automatically.

Question 2

Which of the following holds true for a pegged exchange rate system?

Accepted Answer

Under a pegged exchange rate regime, a country will peg the value of its currency to that of a major currency so that, for example, as the U.S. dollar rises in value, its own currency rises too. For a pegged exchange rate to impose monetary discipline on a country, the country whose currency is chosen for the peg must also pursue sound monetary policy.

Question 3

Which one of the following refers to an exchange rate system under which a country's exchange rate is allowed to fluctuate against other currencies within a target zone?

Accepted Answer

Governments around the world pursue a number of different exchange rate policies. Some countries have adopted a system under which their exchange rate is allowed to fluctuate against other currencies within a target zone (an adjustable peg system).

Question 4

The International Monetary Fund has been criticized for:

Accepted Answer

A criticism of the International Monetary Fund is that its rescue efforts are exacerbating a problem known to economists as moral hazard. Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong.

Question 5

All International Monetary Fund (IMF) loan packages come with conditions attached. Which of the following is prevented due to these policies of the IMF?

Accepted Answer

All International Monetary Fund (IMF) loan packages come with conditions attached. Until very recently, the IMF has insisted on a combination of tight macroeconomic policies, including cuts in public spending, higher interest rates, and tight monetary policy. It has also often pushed for the deregulation of sectors formerly protected from domestic and foreign competition, privatization of state-owned assets, and better financial reporting from the banking sector. These policies are designed to cool overheated economies by reining in inflation and reducing government spending and debt.

Question 6

Which of the following arises when people behave recklessly because they know they will be saved if things go wrong?

Accepted Answer

A criticism of the International Monetary Fund is that its rescue efforts are exacerbating a problem known to economists as moral hazard. Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong.

Question 7

Which of the following is a reason why Great Britain and the United States could finance their deficits by borrowing private money since the early 1970s?

Accepted Answer

Since the early 1970s, the rapid development of global capital markets has allowed developed countries such as Great Britain and the United States to finance their deficits by borrowing private money, as opposed to drawing on International Monetary Fund grants.

Question 8

Adopting which kind of an exchange rate regime moderates inflationary pressures in a country?

Accepted Answer

Evidence shows that adopting a pegged exchange rate regime moderates inflationary pressures in a country. An International Monetary Fund study concluded that countries with pegged exchange rates had an average annual inflation rate of 8 percent, compared with 14 percent for intermediate regimes and 16 percent for floating regimes.

Question 9

Which of the following is a drawback of the currency board system?

Accepted Answer

Currency boards have their drawbacks. If local inflation rates remain higher than the inflation rate in the country to which the currency is pegged, the currencies of countries with currency boards can become uncompetitive and overvalued.

Question 10

According to the critics of the International Monetary Fund (IMF), how should the problem of moral hazard exhibited by banks be resolved?

Accepted Answer

Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong. Critics point out that many Japanese and Western banks were far too willing to lend large amounts of capital to overleveraged Asian companies during the boom years of the 1990s. Critics argue that the banks should now be forced to pay the price for their rash lending policies, even if that means some banks must close.

Question 11

Which of the following is an implication of a currency crisis?

Accepted Answer

A currency crisis occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate.

Question 12

In the context of the 1997 Asian crisis, how did the International Monetary Fund's "one-size-fits-all" approach to macroeconomic policy affect South Korea?

Accepted Answer

One criticism is that the International Monetary Fund's traditional policy prescriptions represent a "one-size-fits-all" approach to macroeconomic policy that is inappropriate for many countries. In South Korea, for example, the government had been running a budget surplus for years, and inflation was low at about 5 percent. South Korea had the second strongest financial position of any country in the Organization for Economic Cooperation and Development. Despite this, critics say, the International Monetary Fund insisted on applying the same policies that it applies to countries suffering from high inflation. Increasing interest rates made it even more difficult for companies to service their already excessive short-term debt obligations, and critics used this as evidence to argue that the cure prescribed by the IMF may actually increase the probability of widespread corporate defaults, not reduce them.

Question 13

Which of the following is a common underlying macroeconomic cause of financial crises?

Accepted Answer

Financial crises tend to have common underlying macroeconomic causes: high relative price inflation rates, a widening current account deficit, excessive expansion of domestic borrowing, high government deficits and asset price inflation (such as sharp increases in stock and property prices).

Question 14

How does a country that introduces a currency board make its commitment to converting its domestic currency on demand into another currency at a fixed exchange rate credible?

Accepted Answer

A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate. To make this commitment credible, the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100 percent of the domestic currency issued.

Question 15

Jade, a working professional, began driving rashly ever since she got her car insured against damage. She believed that the insurance claim would cover her in case of any accidents. What does Jade's behavior display?

Accepted Answer

A criticism of the International Monetary Fund is that its rescue efforts are exacerbating a problem known to economists as moral hazard. Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong.

Question 16

What can a country introduce if it wants to commit itself to converting its domestic currency on demand into another currency at a fixed exchange rate?

Accepted Answer

A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate. To make this commitment credible, the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100 percent of the domestic currency issued.

Question 17

Which of the following is true of a banking crisis?

Accepted Answer

A banking crisis refers to a loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits. Currency crises, banking crises, and foreign debt crises tend to have common underlying macroeconomic causes: high relative price inflation rates, a widening current account deficit, excessive expansion of domestic borrowing, high government deficits, and asset price inflation (such as sharp increases in stock and property prices).

Question 18

Critics of floating exchange rates claim that trade deficits are determined by the:

Accepted Answer

Those in favor of floating exchange rates argue that floating rates help adjust trade imbalances. Critics question the closeness of the link between the exchange rate and the trade balance. They claim trade deficits are determined by the balance between savings and investment in a country, not by the external value of its currency.

Question 19

According to the agreement reached between the International Monetary Fund and the South Korean government in 1997, in return for funding, the South Koreans were required to:

Accepted Answer

With its economy on the verge of collapse, the South Korean government requested $20 billion in standby loans from the IMF on November 21, 1997. On December 3, 1997, the IMF and South Korean government reached a deal to lend $55 billion to the country. And in return, the IMF said South Korea would comply with its commitments to the World Trade Organization to eliminate trade-related subsidies and restrictive import licensing and would streamline its import certification procedures, all of which should open the South Korean economy to greater foreign competition.

Question 20

Most of the International Monetary Fund's loan activities since the mid-1970s have been targeted toward developing nations typically because:

Accepted Answer

The International Monetary Fund's data suggest that developing nations were more than twice as likely to experience currency and banking crises as developed nations. It is not surprising, therefore, that most of the International Monetary Fund's loan activities since the mid-1970s have been targeted toward developing nations.

Quiz 11: The International Monetary System

Which of the following statements is true about a currency board system?

Which of the following holds true for a pegged exchange rate system?

Which one of the following refers to an exchange rate system under which a country's exchange rate is allowed to fluctuate against other currencies within a target zone?

The International Monetary Fund has been criticized for:

All International Monetary Fund (IMF) loan packages come with conditions attached. Which of the following is prevented due to these policies of the IMF?

Which of the following arises when people behave recklessly because they know they will be saved if things go wrong?

Which of the following is a reason why Great Britain and the United States could finance their deficits by borrowing private money since the early 1970s?

Adopting which kind of an exchange rate regime moderates inflationary pressures in a country?

Which of the following is a drawback of the currency board system?

According to the critics of the International Monetary Fund (IMF) , how should the problem of moral hazard exhibited by banks be resolved?

Which of the following is an implication of a currency crisis?

In the context of the 1997 Asian crisis, how did the International Monetary Fund's "one-size-fits-all" approach to macroeconomic policy affect South Korea?

Which of the following is a common underlying macroeconomic cause of financial crises?

How does a country that introduces a currency board make its commitment to converting its domestic currency on demand into another currency at a fixed exchange rate credible?

Jade, a working professional, began driving rashly ever since she got her car insured against damage. She believed that the insurance claim would cover her in case of any accidents. What does Jade's behavior display?

What can a country introduce if it wants to commit itself to converting its domestic currency on demand into another currency at a fixed exchange rate?

Which of the following is true of a banking crisis?

Critics of floating exchange rates claim that trade deficits are determined by the:

According to the agreement reached between the International Monetary Fund and the South Korean government in 1997, in return for funding, the South Koreans were required to:

Most of the International Monetary Fund's loan activities since the mid-1970s have been targeted toward developing nations typically because: