Question 1

Of the following,which is NOT a trade-off that must be dealt with in any exchange rate regime?

Accepted Answer

The trade-offs listed in options A and B are related to the choice of exchange rate regime and reflect the fundamental tension between the need for policy coordination among countries and the desire for domestic policy autonomy. Option C, on the other hand, is not a trade-off as it simply represents a choice between two currencies and does not involve any strategic or policy considerations.

Question 2

Dollarization is the use of the U.S.dollar as the official currency of the country.List and explain the arguments for and against dollarization.Provide example/s of countries that used the dollar as its official currency.

Accepted Answer

The answer of Dollarization is the use of the U.S.dollar...

Question 3

The ability of a country to profit from its ability to print money is known as:

Accepted Answer

Seignorage refers to the profits that a government can make by printing money that has a higher value than the cost of printing it. This can be a significant source of revenue for a government, but it can also lead to inflation if too much money is printed. Profiteering is generally considered an unethical practice of taking advantage of a situation to make excessive profits. Dollarization refers to the use of a foreign currency, such as the US dollar, as the official currency in a country instead of the country's own currency. Inflation refers to a general increase in prices and decrease in the value of money in an economy over time.

Question 4

Bretton Woods required less in the way of cooperation among countries than did the gold standard.

Accepted Answer

The Bretton Woods system required more cooperation among countries, as it established fixed exchange rates between currencies and required countries to maintain their exchange rates within a narrow margin. Countries also had to coordinate their monetary policies and participate in an International Monetary Fund to assist with balance of payments problems. In contrast, the gold standard allowed for more unilateral actions by individual countries to control their own currencies and gold reserves.

Question 5

List and explain three benefits the euro would generate for the states participating in the European Economic and Monetary Union.

Accepted Answer

The answer of List and explain three benefits the euro...

Question 6

Regime structures like the gold standard required no cooperative policies among countries,only the assurance that all would abide by the "rules of the game."

Accepted Answer

The gold standard was a system in which countries linked their currencies to gold, and the exchange rates were determined by the amount of gold held by each country's central bank. This did not require countries to coordinate their policies, but rather to stick to the agreed-upon rules of the system.

Question 7

Beginning in 1991 Argentina conducted its monetary policy through a currency board.In January 2002,Argentina abandoned the currency board and allowed its currency to float against other currencies.The country took this step because:

Accepted Answer

The Argentine government lost the ability to maintain the pegged relationship as investors and traders perceived a lack of equality between the Argentine Peso and the U.S. dollar. This led to the abandonment of the currency board and the floatation of the Argentine Peso. The other options presented are not accurate as there is no evidence to suggest that the Peso's strength or a free trade agreement with the US played a role in the decision to abandon the currency board.

Question 8

The following are examples of degrees of internationalization of an international currency EXCEPT:

Accepted Answer

Option C is incorrect because it repeats the second degree of internationalization, which is already stated in option B. The correct degrees of internationalization are first degree (readily accessible for trade), second degree (used for international investment), and third degree (reserve currency).

Question 9

A currency board exists when a country's central bank commits to back its money supply entirely with foreign reserves at all times.

Accepted Answer

A currency board is a monetary system that requires a country's central bank to maintain a fixed exchange rate between its currency and another specified currency, and to hold enough foreign reserves to fully back the domestic currency in circulation. This ensures that there is a strict limit to the amount of money that can be issued by the central bank, and that the value of the currency remains stable.

Question 10

In January 2000 Ecuador officially replaced its national currency,the Ecuadorian sucre,with the U.S.dollar.This practice is known as:

Accepted Answer

The practice of officially replacing a national currency with the U.S. dollar is known as dollarization.

Question 11

In January 2002,the Argentine Peso changed in value from Peso1.00/$ to Peso1.40/$,thus,the Argentine Peso ________ against the U.S.dollar.

Accepted Answer

When a currency's value increases against another currency, it is said to have strengthened. On the other hand, when a currency's value decreases against another currency, it is considered to have weakened. Therefore, since the Argentine Peso changed in value from Peso1.00/$ to Peso1.40/$, it weakened against the U.S. dollar.

Question 12

Which of the following is NOT an argument against dollarization?

Accepted Answer

The argument in favor of dollarization is that it removes currency volatility against the dollar, so this cannot be an argument against it. A, C, and D are all common arguments against dollarization.

Question 13

Dollarization is a common solution for countries suffering from currency revaluation.

Accepted Answer

Dollarization is typically adopted by countries facing hyperinflation or severe devaluation of their currency, not revaluation.

Question 14

The European Central Bank is a strong and independent central bank that has completely replaced the individual central banks of the countries that use the euro as their currency.

Accepted Answer

The European Central Bank (ECB) is indeed a strong and independent central bank, but it has not completely replaced the individual central banks of the countries that use the euro. These national central banks operate alongside the ECB as part of the Eurosystem, each with its own roles and responsibilities.

Question 15

You have been hired as a consultant to the central bank for a country that has for many years suffered from repeated currency crises and depends heavily on the U.S.financial and product markets.Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the United States?

Accepted Answer

The answer of You have been hired as a consultant...

Question 16

The members of the EU do have relative freedom to set their own fiscal policies- government spending,taxation,and the creation of government surpluses or deficits.They are expected to keep deficit spending within limits.

Accepted Answer

This is true. While EU countries do have some restrictions on their fiscal policies, they still have relative freedom to set their own government spending, taxation, and deficits or surpluses. They are expected to keep their deficit spending within certain limits, but overall they do have some flexibility in their fiscal policies.

Question 17

A currency board exists when a country's central bank commits to back a fraction of its money base with foreign reserves at all times.

Accepted Answer

A currency board exists when a country's central bank commits to back its entire money base with foreign reserves at all times, not just a fraction.

Question 18

All exchange rate regimes must deal with the trade-off between rules and discretion as well as between cooperation and independence.

Accepted Answer

This statement is true as all exchange rate regimes require a balance between strict rules and flexibility or discretion, as well as between working together through cooperation and maintaining independent decision-making power.

Question 19

The People's Republic of China has two official currencies,the Chinese renminbi (RMB)and the yuan (CNY).

Accepted Answer

The People's Republic of China has one official currency, the renminbi (RMB), and the yuan (CNY) is the primary unit of the renminbi, not a separate currency.

Question 20

Which of the following factors make it difficult for emerging market economies to choose a specific currency regime?

Accepted Answer

All of the factors listed in A, B, and C make it difficult for emerging market economies to choose a specific currency regime. Weak fiscal, financial, and monetary institutions can make it harder to implement and maintain a currency regime, while the tendency for commerce to allow currency substitution and the denomination of liabilities in dollars can limit the emerging market's control over its own currency. Additionally, the vulnerability to sudden stoppages of outside capital flows can create instability and uncertainty for an emerging market's chosen currency regime.

Quiz 2: The International Monetary System