Deck 18: The International Financial System

Question 1

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 1

C

Question 2

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

Answer 2

B

Question 3

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

Answer 3

B

Question 4

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 5

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 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

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.

Question 8

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 9

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 10

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 11

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 12

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 13

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 14

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

Question 15

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 16

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 17

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 18

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 19

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 20

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

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

Question 21

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 22

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 23

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 24

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 25

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 26

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 27

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 28

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 29

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 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

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 32

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 33

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 34

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 35

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 36

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 37

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 38

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 39

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 40

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 41

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 42

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 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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 56

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 57

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 58

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 59

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 60

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 61

An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.

A)moral hazard
B)adverse selection
C)public choice
D)strategic choice

Question 62

In the early 1970s,the U.S.ran large balance of payments ________,causing an ________ dollar and an ________ German mark.

A)deficits;undervalued;overvalued
B)deficits;overvalued;undervalued
C)surpluses;undervalued;overvalued
D)surpluses;overvalued;undervalued

Question 63

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,the German central bank 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 64

A capital ________ can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks,which helps trigger a ________.

A)inflow;financial crisis
B)inflow;currency devaluation
C)outflow;financial crisis
D)outflow;currency devaluation

Question 65

This agency acts like an international lender of last resort to cope with financial instability.

A)World Bank
B)European Central Bank
C)IMF
D)International Bank for Reconstruction and Development

Question 66

Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system.What alternative policies are available to eliminate the overvaluation of the exchange rate?

Question 67

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,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 68

In September 1992,the Bundesbank attempted to keep the mark from appreciating relative to the British pound,but it failed because participants in the foreign exchange market came to expect the

A)appreciation of the mark.
B)depreciation of the mark.
C)revaluation of the dollar.
D)end of the Exchange Rate Mechanism.

Question 69

The United States chooses to have ________ and ________ and therefore,cannot have a fixed exchange rate at the same time.

A)capital control;an independent monetary policy
B)free capital mobility;an independent monetary policy
C)free capital mobility;no control of monetary policy
D)capital control;no control of monetary policy

Question 70

A case for capital inflow controls can be made because capital inflows

A)can cause a lending boom and lead to excessive risk taking.
B)never finance productive investments.
C)always finance productive investments.
D)are less likely to cause financial crises than regulation of banking activities.

Question 71

Assume that a fixed exchange rate is overvalued.Describe the situation of a speculative crisis against this currency.What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

Question 72

The Policy Trilemma states that a country or a monetary union can't pursue the following three policies at the same time

A)capital control,a fixed exchange rate,and an independent monetary policy.
B)free capital mobility,a fixed exchange rate,and an independent monetary policy.
C)free capital mobility,a flexible exchange rate,and an independent monetary policy.
D)capital control,a flexible exchange rate,and an independent monetary policy.

Question 73

Under the Exchange Rate Mechanism of the European Monetary System,when the British pound depreciated below its lower limit against the German mark,the German central bank 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 74

Which of the following is NOT a disadvantage of controls on capital outflows?

A)The controls may lead to excessive risk taking by the domestic banks.
B)They are seldom effective during a crisis.
C)Capital flight may increase after they are put in place.
D)Controls often lead to an increase in government corruption.

Question 75

A speculative attack involves massive sales of a currency or purchases of a currency that cause a sharp change in the exchange rate under a exchange rate system.

A)weak;strong;fixed
B)strong;weak;fixed
C)weak;strong;floating
D)strong;weak;floating

Question 76

An international lender of last resort creates a serious moral hazard problem because ________ and other ________ of banking institutions expect that they will be protected if a crisis occurs.

A)depositors;debtors
B)depositors;creditors
C)borrowers;debtors
D)borrowers;creditors

Question 77

China chooses to have ________ and ________ and therefore,cannot have free capital mobility at the same time.

A)a fixed exchange rate;no control of monetary policy
B)a fixed exchange rate;an independent monetary policy
C)a flexible exchange rate;an independent monetary policy
D)a flexible exchange rate;no control of monetary policy

Question 78

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 79

A capital ________ can promote financial instability in an emerging-market country because it is what forces a country to ________ its currency.

A)inflow;devalue
B)inflow;revalue
C)outflow;devalue
D)outflow;revalue

Question 80

Hong Kong chooses to have ________ and ________ and therefore,cannot have an independent monetary policy at the same time.

A)capital control;a fixed exchange rate
B)free capital mobility;a fixed exchange rate
C)free capital mobility;a flexible exchange rate
D)capital control;a flexible exchange rate