Deck 20: Global Financial Architecture

Question 1

As envisioned at its creation at Bretton Woods,

A)the IMF would be responsible for stabilizing global financial markets, and the World Bank would be responsible for rebuilding and economic development.
B)the World Bank would be responsible for stabilizing global financial markets, and the IMF would be responsible for rebuilding and economic development.
C)the IMF would be responsible for creating the Eurozone, and the World Bank would be in charge of developing the euro as a currency.
D)the IMF would oversee all central banks around the globe, and the World Bank would be in charge of overseeing foreign currency exchanges.

Answer 1

A

Question 2

Which of the following statements best describes the goal of a currency board and the greatest weakness of this system?

A)A currency board can instill confidence in a currency but may be useless if the anchor currency becomes devalued.
B)A currency board can help central banks to address local problems with monetary policy, but there is no way to make sure they do.
C)A currency board can ensure at least a moderate amount of stability in an economy but leaves central banks with no way to address local problems with monetary policy.
D)A currency board can instill confidence in a currency, as all local currency is backed up by another currency, but there is no real way to enforce this.

Answer 2

D

Question 3

Comparing the fifty state-level economies in the United States with the country-level economies in the Eurozone,  which of these statements best describes how close the two areas are to being an optimal currency area?

A)The Eurozone in general is closer to an optimal currency area than the fifty state economies in the United States.
B)The fifty state economies in the United States are more closely coordinated in their fiscal policies than the countries in the Eurozone and have a more flexible labor pool.
C)The use of the euro has been one step in making the Eurozone more integrated, even as the US states are moving away from being an optimal currency area.
D)The Eurozone is now considered to be as integrated as the fifty state-level economies in the United States.

Answer 3

B

Question 4

The British central bank may choose to intervene in the free market currency exchange in which of the following cases?

A)The British pound sterling has appreciated, and the price of goods and services has appreciated in direct proportion.
B)There has been an unanticipated increase in Great Britain's money supply, but prices of goods and services have not changed.
C)The British pound undershoots in the short run.
D)There has been an unanticipated decrease in Great Britain's money supply, and the price of goods and services has changed proportionally.

Question 5

One of the important disadvantages of a crawling peg system is

A)there is not enough gold to exchange for currency when citizens demand gold from the central bank in exchange for bank notes.
B)it works too well.
C)the official exchange rate does not change as often as it should because government bureaucracy does not react fast enough to changing economic conditions.
D)economic conditions become too stable.

Question 6

What are some of the ways that fixed exchange rates can be advantageous in an economy?

A)Fixed exchange rates make foreign investment easier, solve the problem of "stickiness" in the price of goods and services, and make a financial crisis less likely.
B)Fixed exchange rates are the most accurate reflection of market realities, make foreign trade easier, and can help end a financial crisis.
C)Fixed exchange rates can make foreign trade easier, help end a financial crisis, or help establish a new central bank's credibility.
D)Fixed exchange rates reduce uncertainty for businesses, make a financial crisis less likely, and can help end a financial crisis if one occurs.

Question 7

Which of the following best describes the World Bank today, in terms of scope and functions?

A)The World Bank Group assists developing countries with low-rate loans and dispute resolution for entities engaged in development; more than $10 billion in assistance was provided in 2016.
B)The World Bank Group assists developing countries with low-interest loans and free imports of food; approximately $20 billion in assistance was provided in 2016.
C)The World Bank Group assists developing countries with loans and grants, provides dispute resolution, and provided more than $60 billion in assistance in 2016.
D)The World Bank Group assists developing countries with low-rate and no-interest loans; nearly $100 billion in assistance was provided in 2016.

Question 8

A crawling peg exchange rate system is an exchange rate system

A)where the stated official exchange rate remains unchanged day to day but is changed by the government or central bank when economic conditions warrant a change.
B)where the official exchange rate is denominated in ounces of gold.
C)where the official exchange rate is determined directly by the real, risk-adjusted interest rate.
D)using an anchor currency tied to the price of gold.

Question 9

An example of a currency board regime might be if the United States were to pledge to

A)undertake an intervention in the currency market if the US dollar approaches the upper bound.
B)undertake an intervention in the currency market if the US dollar approaches the lower bound.
C)undertake an intervention in the currency market if the euro approaches either the upper or lower bound.
D)convert or exchange US dollars for the euro at any time at a stated fixed price because the euro is the anchor currency of the US dollar.

Question 10

Which of the following is NOT a characteristic of a target zone regime?

A)The central bank will exchange currencies for gold or dollars on demand.
B)The central bank sells its currency if the daily market-determined exchange rate approaches the upper bound of the target.
C)The central bank buys its currency if the daily market-determined exchange rate approaches the lower bound of the target.
D)Many central banks do not have enough foreign currency reserves to withstand a speculative attack against their currency.

Question 11

Suppose the crawling peg system is in place and you are in business with another country. You feel there is little risk as the currency of that country is highly valued relative to the dollar. When you go to exchange this foreign currency for dollars, however, you find yourself consistently unable to do so through official channels. Which of these is the most likely cause, and what may you ultimately realize?

A)The foreign currency is overvalued at the official exchange rate; the real value of the foreign currency is lower and it might only be obtained illegally.
B)The foreign currency is undervalued at the official exchange rate; no one will be willing to exchange your foreign currency for dollars.
C)The foreign currency is overvalued; this will likely be corrected in a very short time frame.
D)The foreign currency is undervalued; this will likely be corrected in a very short time frame.

Question 12

Assume that the US currency is weakening due to a variety of domestic and global economic and social factors.  Which of the following courses of action could be taken by the US central bank, the Federal Reserve, if it wants to help boost the dollar so it begins to appreciate?

A)The Federal Reserve could buy government bonds.
B)The Federal Reserve could sell government bonds.
C)The Federal Reserve could sell US dollars in the foreign exchange market and buy other currencies.
D)The Federal Reserve could buy US dollars in the foreign exchange market and sell other currency it holds.

Question 13

If two countries allow people to move freely between them to find work and housing and also have integrated capital markets in terms of rules, regulations, and structures, what are the other two components they need in order to be an optimal currency area (according to Mundell)?

A)They need a common central bank and a common language.
B)They need a common central bank and wage and price flexibility to adjust to shocks that hit.
C)They need a shared economic history and wage and price flexibility to adjust to shocks that hit.
D)They need wage and price flexibility and coordinated fiscal policies so one economy does not run a significantly larger deficit than the other.

Question 14

Which of these statements is the best description of a foreign exchange intervention?

A)Domestic consumers act to influence the exchange rate of their country's currency.
B)Central banks and/or national governments act to influence the exchange rate of their country or another country's currency.
C)Political action groups lobby governments to influence the exchange rate of their country's currency.
D)Foreign companies act to influence the exchange rate of another country's currency.

Question 15

A foreign exchange intervention taken by the European Central Bank to depreciate the euro might include which of these actions to sterilize the transaction, if that is wanted?

A)Buying euros and US dollars, and then buying a similar amount of government securities
B)Buying government securities, and then buying a similar amount of euros
C)Selling US dollars, and then buying a similar amount of government securities
D)Selling euros and buying US dollars, and then selling a similar amount of government securities

Question 16

If the United States is facing a financial crisis while South Africa's economy is experiencing very strong growth and has not been impacted by a financial crisis, the loanable funds model as applied to currency exchange would indicate which of the following scenarios?

A)South African currency will be sold off, and US currency will be purchased and will appreciate.
B)South African currency will be sold, but nothing will happen to US currency.
C)US currency will be sold off, and South African currency will be purchased and will appreciate.
D)US currency will be sold, but nothing will happen with South African currency.

Question 17

Which of the following is NOT one of Mundell's four characteristics for an optimal currency area?

A)Central bank mobility
B)Labor mobility
C)Capital mobility
D)Coordinated fiscal policies

Question 18

When George Soros, the head of the hedge fund, Quantum Fund, decided to systematically and repeatedly short the pound (sell, then buy again at a lower price), he was able to do what within the space of less than two months?

A)Quantum Fund pushed the pound above the upper limit of the target zone, creating inflation in the United Kingdom.
B)Quantum Fund forced the pound to fall below the lower bound of the target zone, requiring the United Kingdom to leave the European exchange rate mechanism (ERM).
C)Quantum Fund forced the pound to fall below the lower bound of the target zone, but with no further consequences to the Bank of England.
D)Quantum Fund forced the pound to fall below the lower bound of the target zone, setting off a period of deflation and unemployment in the United Kingdom.

Question 19

In a free-floating exchange rate system, the price of a country's currency in terms of another is determined purely through

A)the central bank determining the free-floating equilibrium.
B)the price of gold on the free market.
C)market forces.
D)market planners who observe the market forces.

Question 20

The steps taken toward monetary integration in the European Union to create the euro included (in order)

A)increasing trade barriers, and then entering into an exchange rate mechanism where all economies fixed their currency with each other and eventually to the new currency, the euro.
B)reducing trade barriers, and then entering into an exchange rate mechanism where all economies fixed their currency with each other and eventually to the new currency, the euro.
C)entering into an exchange rate mechanism where all economies fixed their currency with the euro and then eventually to each other.
D)entering into an exchange rate mechanism where all economies fixed their currency with each other and eventually to the new currency, the euro, and then reducing trade barriers.

Question 21

If a country is following a "beggar-thy-neighbor" policy, it is intentionally stabilizing its currency in order to promote the appreciation of its currency and encourage more imports.

Question 22

Describe a foreign exchange market intervention from the perspective of the US Federal Reserve. Include a description of actions to cause the dollar to appreciate or depreciate. Explain what sterilized and unsterilized interventions are.

Question 23

If the World Bank loans funds to an "infant industry" to try to develop a country's finished goods sector, the World Bank may be accused of

A)encouraging import substitution policies.
B)hiring too many consultants.
C)giving funds directly to corrupt political regimes.
D)misappropriating funds toward roads, bridges, and infrastructure.

Question 24

World Bank governance and funding include all but which one of the following characteristics?

A)In addition to the funds the World Bank gets from its member nations, it is a major borrower in the global financial markets.
B)The World Bank is controlled by two representatives from each of its 188 member countries.
C)The board of governors meets once a year.
D)The World Bank issues bonds, all in US dollars.

Question 25

Because the IMF and the World Bank helped rebuild western Europe after World War II and helped to create the postwar economic boom, they are two of the most trusted institutions in the global economic structure.

Question 26

Some critics of the IMF point out that the organization should

A)lend more long-term funds and learn to be more reactionary in a financial crisis.
B)be more involved in all aspects of economic life around the globe because it is a very well-trusted organization.
C)hire more consultants to test the feasibility of projects and encourage more import substitution policies.
D)encourage countries to follow sound economic advice, especially when experiencing positive economic times and discourage long-term borrowing.

Question 27

The IMF and World Bank often are described as "sister organizations." One of the ways to resolve the problems that the sister organizations share is to

A)allow the US government to have a supermajority in voting rights.
B)allow US corporations a bigger voice in how funds are allocated.
C)reduce the size and complexity of the World Bank and IMF.
D)allow only board members from the largest multinational corporations to govern the Sisters.

Question 28

The Bretton Woods System, the crawling peg, the target zone, currency boards, and managed float systems have all been successful currency exchange systems in use since the mid-1940s.

Question 29

The problems that developed with the Bretton Woods System included

A)the system was too rigid, and the dollar should have been devalued against the other currencies in the system when the United States began suffering from inflation .
B)the system was too flexible and the dollar should have been devalued against the other currencies in the system when the United States began suffering from inflation .
C)other countries wanted to absorb the additional dollars that were being created in the United States due to inflation, but the United States did not want to create more dollars .
D)other countries tried to sell too much gold to the United States, and the demand for US currency went so high that the United States could not keep up even though the dollar was being inflated .

Question 30

The IMF changed focus after the collapse of the Bretton Woods System and assisted with

A)the reestablishment of a new gold standard system that eventually became another gold exchange system.
B)lending money to developed nations to build infrastructure such as highways and bridges.
C)the establishment of crawling peg and fixed exchange rate regimes in developed countries.
D)lending money to countries experiencing oil supply shocks, lending money to the Mexican government during financial crisis, and offering financial assistance to eastern Europe after the fall of the Berlin Wall.

Question 31

The World Bank is overseen by _____ executive directors from the five permanent nations of __________ and the remaining elected by all member nations.

A)19; France, Germany, Great Britain, China, and the United States
B)24; France, Germany, Great Britain, Japan, and the United States
C)24; France, Germany, Great Britain, Japan, and China
D)19; Spain, Portugal, Italy, Ireland, Greece, and Japan

Question 32

Discuss World Bank functioning and governance as it has been since 1988, after the creation of the fifth of the five agencies that make up the World Bank Group.

Question 33

Discuss the development and roles of the sister institutions. Include information regarding why the institutions were first created, how their roles developed, and their roles today.

Question 34

The World Bank has been criticized for

A)its import substitution policies and funding too many exceptional projects.
B)its import substitution policies and paying high consultant fees.
C)being too reactionary and lending too much.
D)its export substitution policies and being too reactionary.

Question 35

A graph of the target zone exchange regime would include an upper bound, a lower bound, and a market-determined exchange rate.