Deck 2: International Monetary System

Question 1

Which of the following is a cost of a Monetary Union:

A) Loss of national monetary policy independence
B) Loss of exchange rate uncertainty
C) Increased transaction costs
D) Loss of efficiency

Answer 1

A

Question 2

Which of the following objectives is not true regarding European Monetary System (EMS):

A) To establish a "zone of monetary stability" in Europe
B) To coordinate exchange rate policies vis-à-vis the non EMS currencies
C) To pave the way for the eventual European monetary union
D) To pave away from the European monetary union

Answer 2

D

Question 3

Which international organization was created by the Bretton Woods agreement:

A) WTO
B) World Bank
C) IMF
D) NAFTA

Answer 3

C

Question 4

The exchange rate arrangement in which the currency is adjusted periodically in small amounts at a fixed,preannounced rate or in response to changes in selective quantitative indicators is called

A) Currency Board
B) Pegged Exchange rate within horizontal bands
C) Crawling pegs
D) Exchange rate within crawling bands

Question 5

Suppose that the British pound is pegged to gold at £6 per ounce,whereas one ounce of gold is worth FF12.Under the gold standard,any misalignment of the exchange rate will be automatically corrected by cross border flows of gold.Calculate the possible savings for buying FF1,000,if the British pound becomes undervalued and trades for FF1.80/£.(Assume zero shipping costs). (Hint: Gold is first purchased using the devalued British pound from the Bank of England,then shipped to France and sold for FF1,000 to the Bank of France).

A) £55.56
B) £65.56
C) £75.56
D) £85.56

Question 6

Which of the following is NOT a responsibility of the European System of Central Banks:

A) To define and implement the common monetary policy of the EU
B) To define and implement the common fiscal policy of the EU
C) To conduct foreign exchange operations
D) To hold and manage the official foreign exchange reserves of the euro member states

Question 7

The international monetary system went through several distinct stages of evolution.These stages are summarized,in alphabetic order,as follows: (i)- Bimetallism
(ii)- Bretton Woods system
(iii)- Classical gold standard
(iv)- Flexible exchange rate regime
(v)- Interwar period
The (chronological)order that they actually occurred is:

A) (iii), (i), (iv), (ii), and (v)
B) (i), (iii), (v), (ii), and (iv)
C) (vi), (i), (iii), (ii), and (v)
D) (v), (ii), (i), (iii), and (iv)

Question 8

Comparing the Euro-17 and the United States,which of the following statements is true?

A) The United States has a larger population than the Euro-17.
B) The United States has a larger GDP than the Euro-17.
C) Euro -17 has a larger share of World Trade than the United States.
D) Euro -17 has less international bonds outstanding than the United States.

Question 9

Which of the following is NOT a benefit of a monetary union?

A) Elimination of exchange rate uncertainty
B) Reduced transactions costs
C) Ability to absorb asymmetric economic shocks
D) Enhanced efficiency and competitiveness

Question 10

Special Drawing Rights (SDR)is:

A) used to make international payments to non-member of the International Monetary Fund (IMF).
B) a "portfolio" of currencies, and its value tends to be more instable than the currencies that it is comprised of.
C) used in addition to gold and foreign exchanges, to make domestic payments.
D) a basket currency comprising major individual currencies allotted to the members of the IMF, who could then use SDRs for transactions among themselves or with IMF.

Question 11

An "international" gold standard can be said to exist when

A) both gold and silver is assured of unrestricted coinage
B) there is absolutely no convertibility between gold and national currencies at a stable ratio
C) gold may not be freely exported or imported
D) gold alone is assured of unrestricted coinage

Question 12

A key element of the Jamaica Agreement from 1976 is

A) fixed exchange rates were declared unacceptable to the IMF members
B) pegged exchange rates were declared unacceptable to the IMF members
C) flexible exchange rates were declared acceptable to the IMF members
D) mixed exchange rates were declared acceptable to the IMF members

Question 13

The international monetary system can be defined as the institutional framework within which:

A) domestic payments are made
B) movements of goods are accommodated
C) interest rates of countries are determined
D) exchange rates among currencies are determined

Question 14

A "good" (or ideal)international monetary system should provide:

A) liquidity, elasticity, and flexibility
B) elasticity, sensitivity, and reliability
C) liquidity, adjustments, and confidence
D) sensitivity, elasticity, and flexibility

Question 15

If,under the Gold Standard,the price of 1oz of gold was $15 or £5,what was the $/£ exchange rate?

A) $0.25/£
B) $0.33/£
C) $1/£
D) $3/£

Question 16

The key arguments for flexible exchange rates are:

A) Easier external adjustments and national policy autonomy
B) Easier internal adjustments and national policy autonomy
C) Easier external adjustments and easier international trade
D) Easier internal adjustments and easier international trade

Question 17

On January 1,1999,an epochal event took place in the arena of international finance when

A) all EU countries adopted a common currency called the euro.
B) eight of 15 EU countries adopted a common currency called the euro.
C) nine of 15 EU countries adopted a common currency called the euro.
D) eleven of 15 EU countries adopted a common currency called the euro.

Question 18

Gresham's law is most applicable to which of the following monetary system?

A) Bimetallism
B) Classical Gold Standard
C) Bretton Woods System
D) Flexible exchange rate regime

Question 19

Under the Bretton Woods system,

A) there was an explicit set of rules about the conduct of international trade policies
B) each country was responsible for maintaining its exchange rate within 2.50 percent of the adopted par value by buying or selling foreign exchanges as necessary
C) the U.K. sterling pound was the only currency that was fully convertible to gold
D) each country established a par value in relation to the U.S. dollar, which was pegged to gold at $35 per ounce.

Question 20

Which is the following is true for countries with fixed exchange rate regimes?

A) Central banks of these courtiers are required to maintain exchange reserves to cover 100% of the existing domestic currency
B) Centrals banks cannot use monetary policy to affect the economic fundamentals (such as inflation)
C) These countries must use currency board
D) The external value of the country's currency will simply depreciate to the level at which there is no excess supply of the country's currency

Question 21

Can all of the following three conditions:
(1)fixed exchange rate,
(2)free international flow of capital,and
(3)independent monetary policy
Be satisfied simultaneously?
Why?

Question 22

The Chinese renminbi is currently pegged to the US dollar at a rate of 8.28 to 1.The renminbi is considered to be undervalued (that is the exchange rate should be lower).Graphically illustrate the external adjustment mechanism.What happens to the Chinese foreign exchange reserves?

Question 23

Suppose that the British pound is pegged to gold at £6 per ounce and one ounce of gold is worth FF12.The exchange rate is FF1.8/£ and you have FF11,000.How much profit can you make?
(Assume zero shipping costs).

Question 24

It is said that the gold-exchange system was programmed to collapse in the long run.To satisfy the growing need for reserves,the United States had to run balance-of-payments deficits continuously.Yet,if the United States ran perennial balance-of-payments deficits,it would eventually impair the public confidence in the dollar.This dilemma was known as the

A) Triffin paradox
B) Triffin dilemma
C) Mundell paradox
D) Mundell dilemma

Question 25

Bretton Woods system:

A) is an example of a fixed exchange rate regime
B) is an example of a flexible exchange rate regime
C) gave birth to the introduction of the Euro
D) was used to smooth transition from bimetallism to the classical gold standard

Question 26

The Argentine peso was pegged to the US dollar at a rate of 1 to 1 until January 17,2002.Argentina experienced trade deficits in prior to the collapse of the currency board.Graphically illustrate the external adjustment mechanism.

Question 27

Before World War I,$20.67 was needed to buy one ounce of gold and FF 310.00 would also buy one ounce of gold.What was the exchange rate between the French franc and the US dollar?

A) FF0.0667/$
B) FF14.9976/$
C) FF6407.7/$
D) $6407.7/FF

Question 28

Before World War I,GBP 2.2474 was needed to buy one ounce of gold.FF 310.00 would also buy one ounce of gold.What was the exchange rate between the French franc and the British Pound?