Question 1

An official reserve currency is:&#10;A) The currency to which other countries fix their exchange rate to&#10;B) The currency of the largest economy of the world&#10;C) The currency of the first country to adopt a gold standard&#10;D) The currency of the most geographically central country of the world

Accepted Answer

An official reserve currency is one that other countries hold in significant quantities as part of their foreign exchange reserves. This often happens because they peg their own currency's value to the reserve currency to stabilize their exchange rate.

Question 2

A typical characteristic of a reseve country is:&#10;A) The lack of wars that country has been involved with&#10;B) The geographic size of the nation&#10;C) The size of their population&#10;D) The strength of their financial system

Accepted Answer

A reserve currency country typically has a strong financial system, which instills confidence in other countries to hold its currency as a reserve. The strength of the financial system is crucial for the global acceptance of a currency for international transactions and reserves, rather than the country's involvement in wars, its geographic size, or population size.

Question 3

A significant benefit of having the world reserve currency is:&#10;A) The status and prestige that comes with it&#10;B) Avoiding transactions costs when importing and exporting goods and services&#10;C) More media attention&#10;D) More countries wishing to make political agreements with your country

Accepted Answer

Having the world reserve currency allows a country to avoid transaction costs when importing and exporting goods and services, as it does not need to exchange its currency for a foreign one. This facilitates international trade for the country with the reserve currency.

Question 4

If the dollar is the world's reserve currency, and another country has liabilities owed to other countries, what happens to their debt level if the dollar depreciates?&#10;A) It rises&#10;B) It falls&#10;C) It is unaffected&#10;D) We do not have enough information to know

Accepted Answer

If the dollar depreciates and a country's liabilities are denominated in dollars, the real value of their debt decreases when converted back into their local currency. This is because they would need fewer units of their own currency to buy the dollars required to pay off the debt.

Question 5

What is a cost to the reserve country of having a world reserve currency?&#10;A) Not being able to borrow&#10;B) Having higher foreign exchange transaction costs&#10;C) Higher value of foreign asset holdings following a currency depreciation&#10;D) Lower bond yields

Accepted Answer

Having a world reserve currency often leads to lower bond yields for the reserve country. This is because global demand for the reserve currency (and its associated assets, such as government bonds) tends to keep bond prices high and yields low. This can be beneficial for the reserve country in terms of borrowing costs but can also limit the returns on investments for domestic savers.

Question 6

An additional cost of having a world reserve currency is:&#10;A) An ongoing trade deficit&#10;B) Higher interest rates&#10;C) Less international trade&#10;D) Less ability to take out loans

Accepted Answer

Having a world reserve currency often leads to an ongoing trade deficit. This is because the currency is in high demand globally, leading to a stronger currency. A stronger currency makes exports more expensive and imports cheaper, which can contribute to a trade deficit.

Question 7

The most dominant currency in the classical gold standard was:&#10;A) The American dollar&#10;B) The British pound&#10;C) The French franc&#10;D) The Italiran lira

Accepted Answer

The British pound was the most dominant currency during the classical gold standard period, largely because Britain was a major global economic and financial power at the time.

Question 8

The US dollar became the official world currency under:&#10;A) The Paris Peace Treaties&#10;B) The General Agreement on Tariffs and Trade&#10;C) The Bretton Woods Agreement&#10;D) The North American Free Trade Agreement

Accepted Answer

The Bretton Woods Agreement, established in 1944, created a new international monetary system that set fixed exchange rates for major currencies to the US dollar, effectively making it the world's primary reserve currency.

Question 9

A hybrid between a gold standard and reserve currency system is called:&#10;A) A classical gold standard&#10;B) A gold exchange standard&#10;C) A currency board&#10;D) A fixed exchange rate regime

Accepted Answer

A gold exchange standard is a hybrid system where currencies are backed by both gold and a reserve currency, allowing for more flexibility than a pure gold standard.

Question 10

Members of the eurozone have:&#10;A) The same laws&#10;B) A common language&#10;C) A common central bank&#10;D) A common fiscal policy

Accepted Answer

Members of the eurozone share a common central bank, the European Central Bank (ECB), which is responsible for the monetary policy of the countries that have adopted the euro as their currency.

Deck 8: World Reserve Currency