Deck 18: The International Financial System

Question 1

Everything else held constant,if a central bank makes an unsterilized sale of foreign assets,then the domestic money supply will ________ and the domestic currency will ________.

A)increase; appreciate
B)increase; depreciate
C)decrease; appreciate
D)decrease; depreciate

Answer 1

decrease; appreciate

Question 2

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base,everything else held constant.

A)sale; purchase
B)sale; sale
C)purchase; sale
D)purchase; purchase

Answer 2

purchase; sale

Question 3

The account that shows international transactions involving financial transactions (stocks,bonds,bank loans,etc.)is called the

A)trade balance.
B)current account.
C)balance of payments.
D)capital account.

Answer 3

capital account.

Question 4

The difference between merchandise exports and imports is called the ________ balance.

A)current account
B)capital account
C)official reserve transactions
D)trade

Question 5

Everything else held constant,if a central bank makes an unsterilized purchase of foreign assets,then the domestic money supply will ________ and the domestic currency will ________.

A)increase; appreciate
B)increase; depreciate
C)decrease; appreciate
D)decrease; depreciate

Question 6

Everything else held constant,if a central bank makes an unsterilized ________ of foreign assets,then the domestic money supply will decrease and the domestic currency will ________.

A)purchase; appreciate
B)purchase; depreciate
C)sale; appreciate
D)sale; depreciate

Question 7

When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base,it is called

A)an unsterilized foreign exchange intervention.
B)a sterilized foreign exchange intervention.
C)an exchange rate feedback rule.
D)a money neutral foreign exchange intervention.

Question 8

Everything else held constant,if a central bank makes an unsterilized ________ of foreign assets,then the domestic money supply will ________ and the domestic currency will depreciate.

A)purchase; increase
B)purchase; decrease
C)sale; increase
D)sale; decrease

Question 9

Which of the following does not appear in the current account part of the balance of payments?

A)A loan of $1 million from Bank of America to Brazil.
B)Foreign aid to El Salvador.
C)An Air France ticket bought by an American.
D)Income earned by General Motors from its plants abroad.

Question 10

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base,everything else held constant.

A)sale; purchase
B)sale; sale
C)purchase; sale
D)purchase; purchase

Question 11

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called

A)an unsterilized foreign exchange intervention.
B)a sterilized foreign exchange intervention.
C)an exchange rate feedback rule.
D)a money neutral foreign exchange intervention.

Question 12

Everything else held constant,if a central bank makes a sterilized purchase of foreign assets,then the domestic currency will

A)appreciate.
B)depreciate.
C)either appreciate,depreciate,or remain constant.
D)not be affected.

Question 13

Everything else held constant,if a central bank makes an unsterilized ________ of foreign assets,then the domestic money supply will increase and the domestic currency will ________.

A)purchase; appreciate
B)purchase; depreciate
C)sale; appreciate
D)sale; depreciate

Question 14

The account that shows international transactions involving currently produced goods and services is called the

A)trade balance.
B)current account.
C)balance of payments.
D)capital account.

Question 15

If the United States has a current account deficit with England of $1 million,and the Bank of England sells $1 million worth of pounds in the foreign exchange market,then England ________ $1 million of international reserves and its monetary base ________ by $1 million.

A)gains; rises
B)gains; falls
C)loses; rises
D)loses; falls

Question 16

Suppose that the Bank of Japan buys yen-denominated assets with U.S.dollar assets.Everything else held constant,this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S.monetary base.

A)an increase; an increase
B)an increase; a decrease
C)a decrease; an increase
D)a decrease; a decrease

Question 17

Because sterilized interventions mean offsetting open market operations,there is no impact on the monetary base and the money supply,and therefore a sterilized intervention

A)causes the exchange rate to overshoot in the short run.
B)causes the exchange rate to undershoot in the short run.
C)causes the exchange rate to depreciate in the short run,but has no effect on the exchange rate in the long run.
D)has no effect on the exchange rate.

Question 18

Everything else held constant,if a central bank makes an unsterilized ________ of foreign assets,then the domestic money supply will ________ and the domestic currency will appreciate.

A)purchase; increase
B)purchase; decrease
C)sale; increase
D)sale; decrease

Question 19

Everything else held constant,if a central bank makes a sterilized sale of foreign assets,then the domestic currency will

A)appreciate.
B)depreciate.
C)either appreciate,depreciate,or remain constant.
D)not be affected.

Question 20

Suppose that the Bank of Japan buys U.S.dollar assets with yen-denominated assets.Everything else held constant,this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S.monetary base.

A)an increase; an increase
B)an increase; a decrease
C)a decrease; an increase
D)a decrease; a decrease

Question 21

The Bretton Woods agreement created the ________,which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.

A)IMF
B)World Bank
C)Central Settlements Bank
D)Bank of International Settlements

Question 22

If the current account balance shows a surplus,and the capital account also shows a surplus,then the official reserve transactions balance

A)must be positive.
B)must be negative.
C)must be zero.
D)can either be positive,negative,or zero.

Question 23

Under the Bretton Woods system,the organization assigned the task of making loans to countries that were experiencing balance of payments difficulties is known as the

A)World Bank.
B)International Development Association.
C)International Monetary Fund.
D)Federal Reserve System.

Question 24

When gold production was low in the 1870s and 1880s,the money supply grew ________ causing ________.

A)rapidly; inflation
B)rapidly; disinflation
C)slowly; deflation
D)slowly; disinflation

Question 25

Capital ________ are American purchases of foreign assets,and capital ________ are foreign purchases of American assets.

A)inflows; outflows
B)inflows; inflows
C)outflows; outflows
D)outflows; inflows

Question 26

Under a fixed exchange rate regime,if the domestic currency is initially undervalued,that is,above par,the central bank must intervene to sell the ________ currency by purchasing ________ assets.

A)domestic; foreign
B)domestic; domestic
C)foreign; foreign
D)foreign; domestic

Question 27

A current account surplus indicates that America is ________ its claims on foreign wealth,while a deficit indicates that this country is ________ its claims on foreign wealth.

A)reducing; reducing
B)reducing; increasing
C)increasing; reducing
D)increasing; increasing

Question 28

Because it provides some indication of what is happening to U.S.claims on foreign wealth and the demand for imports and exports,the ________ is closely followed by economists wanting information on the future movement of exchange rates.

A)trade balance
B)capital account
C)current account balance
D)statistical discrepancy

Question 29

Under a gold standard in which one dollar could be turned in to the U.S.Treasury and exchanged for 1/20th of an ounce of gold and one German mark could be exchanged for 1/100th of an ounce of gold,an exchange rate of ________ marks to the dollar would stimulate a flow of gold from the United States to Germany.

A)7
B)6
C)5
D)4

Question 30

The net amount of international reserves that move between governments to finance international transactions is called the ________ balance.

A)capital account
B)current account
C)trade
D)official reserve transactions

Question 31

The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been known as the

A)General Agreement on Tariffs and Trade.
B)Bretton Woods system.
C)International Settlement Fund.
D)Balance of Payments Compliance Accord.

Question 32

Economists closely follow the current account balance because they believe it can provide information on the future movement of

A)interest rates.
B)gold flows.
C)exchange rates.
D)special drawing rights.

Question 33

Under a fixed exchange rate regime,if the domestic currency is initially ________,that is,________ par,the central bank must intervene to purchase the domestic currency by selling foreign assets.

A)overvalued; below
B)overvalued; above
C)undervalued; below
D)undervalued; above

Question 34

Under a fixed exchange rate regime,if the domestic currency is initially ________,that is,________ par,the central bank must intervene to sell the domestic currency by purchasing foreign assets.

A)overvalued; below
B)overvalued; above
C)undervalued; below
D)undervalued; above

Question 35

The World Bank is an international organization that:

A)promotes the growth of trade by setting rules for how tariffs and quotas are set by countries.
B)makes loans to countries to finance projects such as dams and roads.
C)makes loans to countries with balance of payment difficulties.
D)helps developing countries that have been having difficulties in repaying their loans to come to terms with lenders in the West.

Question 36

Under a fixed exchange rate regime,if a central bank must intervene to purchase the ________ currency by selling ________ assets,then,like an open market sale,this action reduces the monetary base and the money supply,causing the interest rate on domestic assets to rise.

A)domestic; foreign
B)domestic; domestic
C)foreign; foreign
D)foreign; domestic

Question 37

Under a fixed exchange rate regime,if the domestic currency is initially overvalued,that is,below par,the central bank must intervene to purchase the ________ currency by selling ________ assets.

A)domestic; foreign
B)domestic; domestic
C)foreign; foreign
D)foreign; domestic

Question 38

Which of the following appears in the capital account part of the balance of payments?

A)A gift to an American from his English aunt.
B)A purchase by the Honda corporation of a U.S.Treasury bill.
C)A purchase by the Bank of England of a U.S.Treasury bill.
D)Income earned by the Honda corporation on its automobile plant in Ohio.

Question 39

Of the following,the one that appears in the current account of the balance of payments is

A)an Italian investor's purchase of IBM stock.
B)income earned by U.S.subsidiaries of Barclay's Bank of London.
C)a loan by a Swiss bank to an American corporation.
D)a purchase of a British Treasury bond by the Fed.

Question 40

Under the Bretton Woods system,the United States was designated as the

A)reserve-currency country.
B)fixed-rate country.
C)par-standard country.
D)dollar-standard country.

Question 41

Because the United States was the reserve-currency country under the Bretton Woods system,it could run large balance of payments ________ without ________ significant amounts of international reserves.

A)deficits; losing
B)deficits; gaining
C)surpluses; losing
D)surpluses; gaining

Question 42

Under a fixed exchange rate regime,if a country's central bank runs out of international reserves,it cannot keep its currency from

A)depreciating.
B)appreciating.
C)deflating.
D)inflating.

Question 43

When the domestic currency is initially overvalued in a fixed exchange rate regime,the central bank must intervene in the foreign exchange market to ________ the domestic currency,thereby allowing the money supply to ________.

A)purchase; decline
B)sell; decline
C)purchase; increase
D)sell; increase

Question 44

Under a fixed exchange rate regime,a country that depletes its international reserves in an attempt to keep its currency from ________ will be forced to ________ its currency.

A)depreciating; revalue
B)depreciating; devalue
C)appreciating; revalue
D)appreciating; devalue

Question 45

Under a fixed exchange rate regime,if a country has an ________ exchange rate,then its central bank's attempt to keep its currency from depreciating will result in a ________ of international reserves.

A)undervalued; gain
B)undervalued; loss
C)overvalued; gain
D)overvalued; loss

Question 46

Under a fixed exchange rate regime,a central bank that does not want to acquire international reserves to keep its currency from ________ will decide to ________ its currency.

A)depreciating; revalue
B)depreciating; devalue
C)appreciating; revalue
D)appreciating; devalue

Question 47

Under a fixed exchange rate system,countries that ran large,persistent balance of payments deficits would ________ international reserves,thereby pressuring them into ________ their exchange rate.

A)gain; devaluing
B)gain; revaluing
C)lose; devaluing
D)lose; revaluing

Question 48

When the domestic currency is initially undervalued in a fixed exchange rate regime,the central bank must intervene in the foreign exchange market to ________ the domestic currency,thereby allowing the money supply to ________.

A)purchase; decline
B)sell; decline
C)purchase; increase
D)sell; increase

Question 49

Under a fixed exchange rate regime,if a country has an ________ exchange rate,then its central bank's attempt to keep its currency from appreciating will result in a ________ of international reserves.

A)undervalued; gain
B)undervalued; loss
C)overvalued; gain
D)overvalued; loss

Question 50

To keep from running out of international reserves under the Bretton Woods system,a country had to implement ________ monetary policy to ________ its currency.

A)expansionary; strengthen
B)expansionary; weaken
C)contractionary; strengthen
D)contractionary; weaken

Question 51

Under a fixed exchange rate regime,if a central bank must intervene to purchase the domestic currency by selling foreign assets,then,like an open market sale,this action ________ the monetary base and the money supply,causing the interest rate on domestic assets to ________.

A)increases; rise
B)increases; fall
C)reduces; rise
D)reduces; fall

Question 52

To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves,the ________ would loan ________ countries international reserves contributed by other members.

A)IMF; deficit
B)IMF; surplus
C)World Bank; deficit
D)World Bank; surplus

Question 53

Under the Bretton Woods system,when a country adopted an expansionary monetary policy,thereby causing a balance of payments ________,the country would eventually be forced to implement ________ monetary policy.

A)deficit; expansionary
B)deficit; contractionary
C)surplus; expansionary
D)surplus; contractionary

Question 54

The Bretton Woods system broke down in the early 1970s for all but one of the following reasons:

A)deficit countries losing international reserves were not willing to devalue their currencies.
B)surplus countries were not willing to revalue their currencies upwards.
C)surplus countries were not willing to pursue more expansionary policies.
D)the United States had been pursuing an inflationary monetary policy to reduce domestic unemployment.

Question 55

The Bretton Woods system was one in which central banks

A)bought and sold their own currencies to keep their exchange rates fixed.
B)agreed not to intervene in the foreign exchange market to maintain a fixed exchange rate regime that had existed prior to World War I.
C)agreed to limit domestic money growth to the average of the five largest industrial nations.
D)agreed to limit domestic money growth to the average of the seven largest industrial nations.

Question 56

A balance of payments ________ is associated with a loss of international reserves,while a balance of payments ________ is associated with a gain.

A)surplus; surplus
B)surplus; deficit
C)deficit; surplus
D)deficit; deficit

Question 57

A balance of payments deficit is associated with a ________ of international reserves,while a balance of payments surplus is associated with a ________.

A)loss; loss
B)loss; gain
C)gain; loss
D)gain; gain

Question 58

Under a fixed exchange rate regime,if a country has an overvalued exchange rate,then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves.

A)depreciating; gain
B)depreciating; loss
C)appreciating; gain
D)appreciating; loss

Question 59

Under a fixed exchange rate regime,if a country has an undervalued exchange rate,then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves.

A)depreciating; gain
B)depreciating; loss
C)appreciating; gain
D)appreciating; loss

Question 60

Under a fixed exchange rate system,countries that ran large,persistent balance of payments surpluses would ________ international reserves,thereby pressuring them into ________ their exchange rate.

A)gain; devaluing
B)gain; revaluing
C)lose; devaluing
D)lose; revaluing

Question 61

Under the Bretton Woods system,if IMF loans were insufficient to prevent ________ of a currency,then the country was allowed to devalue its currency by setting a new,________ exchange rate.

A)depreciation; lower
B)depreciation; higher
C)appreciation; lower
D)appreciation; higher

Question 62

Under the Bretton Woods system,the IMF could encourage deficit countries to pursue contractionary monetary policies that would ________ their currency or eliminate their balance of payment ________.

A)strengthen; surpluses
B)strengthen; deficits
C)weaken; surpluses
D)weaken; deficits

Question 63

Policymakers in a country with a balance of payments surplus may not want to see their country's currency appreciate because this would

A)hurt consumers in their country by making foreign goods more expensive.
B)hurt domestic businesses by making foreign goods cheaper in their country.
C)increase inflation in their country.
D)decrease the wealth of the country.

Question 64

Because central banks have not been willing to give up their option of intervening in the foreign exchange market,the current international financial system can best be described as a

A)variable-pegged exchange rate system.
B)moving-pegged exchange rate system.
C)hybrid of a fixed exchange rate and flexible exchange rate system.
D)flexible-exchange,dollar-pegged exchange rate system.

Question 65

Under the current managed float exchange rate regime,countries with ________ in their balance of payments frequently do not want to see their currencies ________ because it makes their goods more expensive abroad and foreign goods cheaper in their countries.

A)surpluses; depreciate
B)deficits; depreciate
C)surpluses; appreciate
D)deficits; appreciate

Question 66

Under the Bretton Woods system,a country running a balance of payments deficit ________ international reserves,and had to implement ________ monetary policy to strengthen its currency.

A)lost; expansionary
B)lost; contractionary
C)gained; expansionary
D)gained; contractionary

Question 67

Under the Bretton Woods system,a country running a balance of payments ________ lost international reserves,and had to implement ________ monetary policy to strengthen its currency.

A)surplus; expansionary
B)surplus; contractionary
C)deficit; expansionary
D)deficit; contractionary

Question 68

Under the Bretton Woods system,the IMF could encourage ________ countries to pursue ________ monetary policies that would strengthen their currency or eliminate their balance of payment deficits.

A)surplus; expansionary
B)surplus; contractionary
C)deficit; expansionary
D)deficit; contractionary

Question 69

Under the current managed float exchange rate regime,countries with balance of payments ________ frequently do not want to see their currencies ________ because it makes foreign goods more expensive for domestic consumers and can stimulate inflation.

A)surpluses; depreciate
B)deficits; depreciate
C)surpluses; appreciate
D)deficits; appreciate

Question 70

As a result of its power to dictate loan terms to borrowing countries (under the Bretton Woods system),the IMF could encourage ________ countries to pursue ________ monetary policies that would strengthen their currency or eliminate their balance of payments deficits.

A)surplus; contractionary
B)surplus; expansionary
C)deficit; contractionary
D)deficit; expansionary

Question 71

Under the current managed float exchange rate regime,countries with balance of payments deficits frequently do not want to see their currencies depreciate because it makes ________ goods more expensive for ________ consumers and can stimulate inflation.

A)foreign; foreign
B)foreign; domestic
C)domestic; foreign
D)domestic; domestic

Question 72

Which of the following is true?

A)Special drawing rights are loans to countries made by the IMF.
B)Changes in the quantity of special drawing rights are tied to changes in the quantity of gold.
C)Special drawing rights are a paper substitute for gold.
D)Special drawing rights are not held as international reserves.

Question 73

Countries with balance of payments deficits do not want to see their currencies ________ because it makes foreign goods ________ expensive for domestic consumers.

A)appreciate; less
B)appreciate; more
C)depreciate; less
D)depreciate; more

Question 74

Under the Exchange Rate Mechanism of the European Monetary System,when the British pound depreciated below its lower limit against the German mark,the Bank of England was required to buy ________ and sell ________,thereby ________ international reserves.

A)pounds; marks; losing
B)pounds; marks; gaining
C)marks; pounds; gaining
D)marks; pounds; losing

Question 75

A weakness of the Bretton Woods system was that the ________ had no way to force surplus countries to either revalue their exchange rates upwards or pursue more expansionary policies.

A)IMF
B)World Bank
C)European Exchange Rate Mechanism (ERM)
D)Bank of International Settlements

Question 76

Under the Bretton Woods system,a country running a balance of payments surplus ________ international reserves,and had to implement ________ monetary policy to weaken its currency.

A)lost; expansionary
B)lost; contractionary
C)gained; expansionary
D)gained; contractionary

Question 77

Under the current managed float exchange rate regime; countries with surpluses in their balance of payments frequently do not want to see their currencies appreciate because it makes their goods ________ expensive abroad and foreign goods ________ in their countries.

A)more; cheaper
B)more; costlier
C)less; cheaper
D)less; costlier

Question 78

The current international financial system is a managed float exchange rate system because

A)exchange rates fluctuate in response to,but are not determined solely by,market forces.
B)some countries keep their currencies pegged to the dollar,which is not allowed to fluctuate.
C)all countries allow their exchange rates to fluctuate in response to market forces.
D)all countries peg their currencies to the dollar which is allowed to fluctuate in response to market forces.

Question 79

Countries with surpluses in their balance of payments frequently do not want to see their currencies ________ because it makes their goods ________ expensive abroad.

A)appreciate; less
B)appreciate; more
C)depreciate; less
D)depreciate; more

Question 80

An ECU was

A)a paper substitute for gold issued by the IMF.
B)a loan by European countries to the IMF.
C)a paper currency issued by the European Common Market.
D)a monetary unit created by the European Monetary System.