Deck 3: The International Monetary System

Question 1

Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true?

A)Fixed rates provide stability in international prices for the conduct of trade.
B)Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate.
C)Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies.
D)Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses.

Answer 1

Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies.

Question 2

Most Western nations were on the gold standard for currency exchange rates from 1876 until 1914. Today we have several different exchange rate regimes in use, but most larger economy nations have freely floating exchange rates today and are not obligated to convert their currency into a predetermined amount of gold on demand. Today several parties still call for the "good old days" and a return to the gold standard. Develop an argument as to why this is a good idea.

Answer 2

The gold standard forces a nation to maintain sufficient reserves of gold to back its currency's value. This helps control inflation, as a country cannot print additional money without sufficient gold to back it up. The gold standard eases international transactions as there is little uncertainly about exchange rates for trade with foreign countries.

Question 3

Based on the premise that, other things equal, countries would prefer a fixed exchange rate: Variable rates provide stability in international prices for the conduct of trade.

A)True
B)False

Answer 3

False

Question 4

Which of the following correctly identifies exchange rate regimes from less fixed to more fixed?

A)Independent floating, currency board arrangement, crawling pegs.
B)Independent floating, currency board arrangement, managed float.
C)Independent floating, crawling pegs, exchange arrangements with no separate legal tender.
D)Exchange arrangements with no separate legal tender, currency board arrangement, crawling pegs.

Question 5

The mobility of international capital flows is causing emerging market nations to choose between a free-floating currency exchange regime and a currency board (or taken to the limit, dollarization). Describe how each of the regimes would work and identify at least two likely economic results for each regime.

Question 6

Another name for the International Bank for Reconstruction and Development is ________.

A)the Recon Bank
B)the European Monetary System
C)the Marshall Plan
D)the World Bank

Question 7

Which of the following led to the eventual demise of the fixed currency exchange rate regime worked out at Bretton Woods?

A)Widely divergent national monetary and fiscal policies among member nations.
B)Differential rates of inflation across member nations.
C)Several unexpected economic shocks to member nations.
D)all of the above

Question 8

The International Monetary Fund (IMF)

A)in recent years has provided large loans to Russia, South Korea, and Brazil.
B)was created as a result of the Bretton Woods Agreement.
C)aids countries with balance of payment and exchange rate problems.
D)is all of the above.

Question 9

The IMF's exchange rate regime classification identifies ________ as the most rigidly fixed, and ________ as the least fixed.

A)exchange arrangements with no separate legal tender; independent floating
B)crawling pegs; managed float
C)currency board arrangements; independent floating
D)pegged exchange rates within horizontal bands; exchange rates within crawling pegs

Question 10

Members of the International Monetary Fund may settle transactions among themselves by transferring Special Drawing Rights (SDRs).

A)True
B)False

Question 11

Today, the United States has been ejected from the International Monetary Fund for refusal to pay annual dues.

A)True
B)False

Question 12

Under the terms of Bretton Woods countries tried to maintain the value of their currencies to within 1% of a hybrid security made up of the U.S. dollar, British pound, and Japanese yen.

A)True
B)False

Question 13

If exchange rates were fixed, investors and traders would be relatively certain about the current and near future exchange value of each currency.

A)True
B)False

Question 14

Which of the following is NOT an attribute of the "ideal" currency?

A)Monetary independence.
B)Full financial integration.
C)Exchange rate stability.
D)All are attributes of an ideal currency.

Question 15

The United States currently uses a ________ exchange rate regime.

A)crawling peg
B)pegged
C)floating
D)fixed

Question 16

The post WWII international monetary agreement that was developed in 1944 is known as the ________.

A)United Nations.
B)League of Nations.
C)Yalta Agreement.
D)Bretton Woods Agreement.

Question 17

A small economy country whose GDP is heavily dependent on trade with the United States could use a (an)________ exchange rate regime to minimize the risk to their economy that could arise due to unfavorable changes in the exchange rate.

A)pegged exchange rate with the United States
B)pegged exchange rate with the Euro
C)independent floating
D)managed float

Question 18

The authors discuss the concept of the "Impossible Trinity" or the inability to achieve simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve?

A)Monetary independence and exchange rate stability.
B)Exchange rate stability and full financial integration.
C)Full financial integration and monetary independence.
D)A country cannot attain any of the exchange rate goals with a pure float exchange rate regime.

Question 19

World War I caused the suspension of the gold standard for fixed international exchange rates because the war

A)cost too much money.
B)interrupted the free movement of gold.
C)lasted too long.
D)used gold as the main ingredient in armament plating.

Question 20

Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20.67 in U.S. dollars and £4.2474 in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was

A)£4.8665/$.
B)£0.2055/$.
C)always changing because the price of gold was always changing.
D)unknown because there is not enough information to answer this question.

Question 21

The Euro currency is fixed against other currencies on the international currency exchange markets, but allows member country currencies to float against each other.

A)True
B)False

Question 22

All exchange rate regimes must deal with the trade-off between rules and discretion as well as between cooperation and independence.

Question 23

Regime structures like the gold standard required no cooperative policies among countries, only the assurance that all would abide by the "rules of the game."

Question 24

In January 2002, the Argentine Peso changed in value from Peso1.00/$ to Peso1.40/$, thus, the Argentine Peso ________ against the U.S. dollar.

A)strengthened
B)weakened
C)remained neutral
D)all of the above

Question 25

Which of the following is NOT a required convergence criteria to become a full member of the European Economic and Monetary Union (EMU)?

A)National birthrates must be at 2.0 or lower per person.
B)The fiscal deficit should be no more than 3% of GDP.
C)Nominal inflation should be no more than 1.5% above the average inflation rate for the three members with the lowest inflation rates in the previous year.
D)Government debt should be no more than 60% of GDP.

Question 26

The European Central Bank is a strong and independent central bank that has completely replaced the individual central banks of the countries that use the euro as their currency.

Question 27

In the decade since 2000, the U.S. has experienced its largest bilateral trade deficits with the countries of China and Japan.

Question 28

Beginning in 1991 Argentina conducted its monetary policy through a currency board. In January 2002, Argentina abandoned the currency board and allowed its currency to float against other currencies. The country took this step because

A)the Argentine Peso had grown too strong against major trading powers thus the currency board policies were hurting the domestic economy.
B)the United States required the action as a prerequisite to finalizing a free trade zone with all of North, South, and Central America.
C)the Argentine government lost the ability to maintain the pegged relationship as in fact investors and traders perceived a lack of equality between the Argentine Peso and the U.S. dollar.
D)all of the above

Question 29

Of the following, which is NOT a trade-off that must be dealt with in any exchange rate regime?

A)Cooperation vs independence.
B)Rules vs discretionary action.
C)Dollars vs pounds.
D)All of the above are rate regime trade-offs.

Question 30

You have been hired as a consultant to the central bank for a country that has for many years suffered from repeated currency crises and depends heavily on the U.S. financial and product markets. Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the United States?

A)Dollarization.
B)An exchange rate pegged to the U.S. dollar.
C)An exchange rate with a fixed price per ounce of gold.
D)An internationally floating exchange rate.

Question 31

Which of the following is NOT an argument against dollarization?

A)Dollarization causes a loss of sovereignty over domestic monetary policy.
B)Dollarization removes currency volatility against the dollar.
C)Dollarization causes the country to lose the power of seignorage.
D)The central bank of the dollarized country loses the role of lender of last resort.

Question 32

For the three years from early 2002 to early 2005, the euro maintained a strong and steady rise in value against the U.S. dollar (USD). Which of the following were NOT a contributing factor in the assent of the euro and the decline in the dollar?

A)Severe U.S. balance of payments deficits.
B)A general weakening of the dollar after the attacks of September 11, 2001.
C)Large U.S. balance of payment surpluses.
D)All of the above were contributing factors.

Question 33

Bretton Woods required less in the way of cooperation among countries than did the gold standard.

Question 34

In January 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre, with the U.S. dollar. This practice is known as ________.

A)bi-currencyism.
B)sucrerization.
C)a Yankee bailout.
D)dollarization.

Question 35

According to the authors, what is the single most important mandate of the European Central Bank?

A)Promote international trade for countries within the European Union.
B)Price, in euros, all products for sale in the European Union.
C)Promote price stability within the European Union.
D)Establish an EMU trade surplus with the United States.

Question 36

Which of the following is a way in which the euro affects markets?

A)Countries within the Euro zone enjoy cheaper transaction costs.
B)Currency risks and costs related to exchange rate uncertainty are reduced.
C)Consumers and business enjoy price transparency and increased price-based competition.
D)all of the above

Question 37

Dollarization is a common solution for countries suffering from currency revaluation.

Question 38

The ability of a country to profit from its ability to print money is known as ________.

A)profiteering
B)dollarization
C)seignorage
D)inflation

Question 39

A currency board exists when a country's central bank commits to back its money supply entirely with foreign reserves at all times.