Deck 15: Flexible Versus Fixed Exchange Rates,european Monetary Systems,and Macroeconomic Policy Coordination

Question 1

Under a flexible exchange rate system_____________ would be changed in order to correct a disequilibrium in the nation's balance of payments.

A)monetary policies
B)fiscal policies
C)only the exchange rate
D)monetary and fiscal policies

Answer 1

C

Question 2

The formation of an optimum currency area is more likely to be beneficial on balance:

A)the greater the mobility of resources among the various member nations
B)the less structurally similar the member countries are
C)the less willing the member countries are to closely coordinate their fiscal,monetary,and other policies.
D)the less willing the member countries are to interact with each other

Answer 2

A

Question 3

The system under which the exchange rate is always determined by the forces of demand and supply without any government intervention in foreign exchange markets is a(n):

A)fixed exchange rate system
B)import system
C)freely floating exchange rate system
D)export system

Answer 3

C

Question 4

An optimum currency area has all of the following except:

A)zero cost of official interventions in foreign exchange markets
B)No cost of hedging
C)zero cost of exchanging one currency for another to pay for imports of goods and tourist services
D)a common currency for all countries

Question 5

_____________ was defined by the European Monetary System as the weighted average of the currencies of the EU members

A)The European Currency Unit
B)The European Monetary Cooperation Fund
C)The Euro
D)The European Monetary Institute

Question 6

Under which system does a nation not concern itself with external balance?

A)flexible exchange rate system
B)fixed exchange rate system
C)managed peg
D)gold standard

Question 7

The formation of a(n)_____________ eliminates the uncertainty that arises when exchange rates are not permanently fixed,which in turn stimulates specialization in production among member nations.

A)optimum currency area
B)adjustable peg system
C)fixed exchange rate system
D)flexible exchange rate system

Question 8

A(n)______________ should aim at maximizing the benefits from permanently fixed exchange rates and minimizing the costs.

A)optimum currency area
B)adjustable peg system
C)fixed exchange rate system
D)flexible exchange rate system

Question 9

A fixed exchange rate system is alleged to:

A)be efficient
B)adjust rates smoothly and does not require the use of policies
C)lead to policy mistakes
D)destabilize speculation

Question 10

Advocates of fixed exchange rates claim that flexible exchange rates:

A)increase the volume of international trade and investment
B)lead to stabilizing speculation
C)are inflationary
D)makes internal balance of the economy more difficult to attain

Question 11

The organization formed by the members of the European Union in 1979 based on the creation of the European currency unit of account,limited exchange rate flexibility among members,and formation of the European Monetary Fund is known as the:

A)European Currency Unit
B)European Monetary Cooperation Fund
C)European Monetary System
D)European Monetary Institute

Question 12

A(n)_____________ refers to a group of nations whose national currencies are linked through permanently fixed exchange rates.

A)optimum currency area
B)adjustable peg system
C)fixed exchange rate system
D)flexible exchange rate system

Question 13

In order to attain the goal of a monetary union,the president of the European Commission recommended a stage based transition.Which stage of this transition involved the completion of the monetary union with the establishment of a single currency and a European Central Bank.

A)Stage one
B)Stage two
C)Stage three
D)Stage four

Question 14

A(n)_________________ allows an optimum currency area to be more likely to experience greater price stability.

A)permanently flexible exchange rate
B)permanently fixed exchange rate
C)managed peg system
D)currency board

Question 15

In order to attain the goal of a monetary union,the president of the European Commission recommended a stage based transition.Which stage of this transition called for the creation of an European Monetary Institute (EMI)?

A)Stage one
B)Stage two
C)Stage three
D)Stage four

Question 16

Which of the following was (were)not one of the main feature(s)of the European Monetary System (EMS)?

A)creation of the European Currency Unit
B)allowing the currency of each EU member to fluctuate by a maximum of 2.25 percent on either side of its center rate
C)the establishment of the European Cooperation Fund
D)Paris was selected as the headquarter of the EMS

Question 17

The case against fixed exchange rates is:

A)the alleged smaller degree of uncertainty introduced into international trade and finance
B)being more likely to lead to stabilizing speculation
C)the greater price discipline than under flexible rates
D)requires the use of policies to figure out how to deal with pressures on the foreign exchange rate

Question 18

From March 1979 to September 1992,how many times the European Monetary System had to realign their currency as high-inflation member countries devalued their currencies?

A)5
B)11
C)12
D)14

Question 19

In order to attain the goal of a monetary union,the president of the European Commission,recommended a stage based transition.Which stage of this transition called for convergence of economic performance and cooperation in monetary and fiscal policy?

A)stage one
B)stage two
C)stage three
D)stage four

Question 20

Under a ____________,a nation is free to utilize all polices at its disposal to achieve its goal of full employment with price stability without having to worry about external balance.

A)flexible exchange rate system
B)fixed exchange rate system
C)managed peg
D)gold standard

Question 21

What country was admitted to the EMU on January 1,2001?

A)Greece
B)Spain
C)Ireland
D)France

Question 22

In 1997,the ________________ was negotiated to further tighten the fiscal constraint of participating countries in European Monetary Union.

A)Maastricht Treaty
B)Stability and Growth Pact
C)European Currency Unit
D)European Monetary System

Question 23

The exchange rate arrangement whereby the nation fixes the exchange rate and allows the nation's money supply to increase or decrease only in response to balance-of-payments surpluses or deficit is known as (a):

A)Currency board arrangements
B)Dollarization
C)Crawling peg system
D)Managed floating exchange rate system

Question 24

_________________ are the most extreme form of a fixed exchange rate system,short of adopting a common currency or dollarization.

A)Currency board arrangements
B)Adjustable peg systems
C)Crawling peg systems
D)Managed floating exchange rate systems

Question 25

In 1998,the _______________ was established as a federal structure of the national central banks of the European Union.

A)European Monetary System
B)European Currency United
C)European Central Bank
D)European Monetary Institute

Question 26

Which of the following EU countries did not accept Euro as its currency

A)Austria
B)Belgium
C)Sweden
D)Italy

Question 27

At the beginning of 1999,the European Monetary System became the _________________ with the introduction of the euro and the adoption of a common monetary policy by the European Central Bank.

A)European Monetary Institute
B)European Monetary Union
C)European Currency Unit
D)European Monetary Cooperation Fund

Question 28

The second stage of the monetary union,approved at a meeting in Maastricht in December 1991,called for the creation of the________________.

A)European Currency Unit
B)European Monetary Cooperation Fund
C)Supranational Monetary Agency
D)European Monetary Institute

Question 29

The institution similar to the Federal Reserve System in the United States that would control the money supply and issue the single currency of the European Union is the:

A)European Monetary System
B)European Currency Unite
C)European Central Bank
D)European Monetary Institute

Question 30

The situation whereby a nation adopts another nation's currency as its legal tender is known as:

A)Currency board arrangements
B)Dollarization
C)Crawling peg system
D)Managed floating exchange rate system

Question 31

Under the ________________,the creation of the European Monetary Institute was created as a forerunner of the European Central Bank and monetary union.

A)Maastricht Treaty
B)European Monetary Union
C)European Currency Unit
D)European Monetary System

Question 32

Which of the following is one of the conditions that was set under the Maastricht Treaty and must be met before a nation could join the European Monetary Union?

A)an inflation rate not exceeding 10 percent of the three member nations with highest inflation rate
B)a budget surplus not exceeding 3 percent of GDP
C)overall government debt not exceeding 60 percent of GDP
D)the average exchange rate not increasing by more than 5% of the EMS for the 5 years before joining the union

Question 33

What country tried to slow the negotiations of the monetary union in the European Monetary Union?

A)Italy
B)Germany
C)United Kingdom
D)Spain

Question 34

A(n)______________ is a fixed exchange rate system where the band of allowed fluctuation is very narrow.

A)currency board arrangements
B)adjustable peg system
C)crawling peg system
D)managed floating exchange rate system

Question 35

The institution of the European Monetary System that provides short-term and medium-term balance-of-payments assistance to member nations is known as:

A)the European Currency Unit
B)the European Monetary Cooperation Fund
C)the European Assistance Fund
D)the European Monetary Institute

Question 36

The common currency adopted at the beginning of 1999 by eleven of the fifteen member countries of the European Union was known as:

A)the pound sterling
B)the European Currency Unit
C)the euro
D)the dollar

Question 37

Which of the following does a nation sacrifice when dollarization takes place?

A)conducting its own monetary policy
B)acting as a lender of last resort
C)collecting seigniorage from independently issuing its own currency
D)all of the above

Question 38

How many members are in the European Monetary Union?

A)12
B)5
C)18
D)26

Question 39

What system was created to avoid the disadvantage of relatively large changes in par values and possibly destabilizing speculation?

A)Currency board arrangements
B)Adjustable peg system
C)Crawling peg system
D)Managed floating exchange rate system

Question 40

The system under which exchange rates or par values are periodically changed to correct balance-of-payments disequilibria is known as a(n):

A)currency board arrangements
B)adjustable peg system
C)crawling peg system
D)managed floating exchange rate system

Question 41

Robert Mundell and Ronald McKennion developed the theory of optimum currency during the 1960s.

Question 42

Before the euro,no large group of sovereign nations had voluntarily given up their own currency for a common currency.

Question 43

The modification of national economic policies in recognition of international interdependence is known as:

A)international macroeconomic policy coordination
B)international microeconomic policy coordination
C)monetary policy
D)fiscal policy

Question 44

A clean float system has no government intervention at all in foreign exchange markets.

Question 45

Optimum currency areas provide each member with the ability to pursue its own independent stabilization.

Question 46

What are the advantages of International Macroeconomic Policy Coordination?

Question 47

What are the advantages and disadvantages of fixed versus flexible exchange rates?

Question 48

Under a flexible exchange rate system,monetary policies must be changed in order to correct the nation's balance of payments disequilibrium.

Question 49

If the exchange rate did reach the limit of its range,intervention burdens were to be shared symmetrically by the strong-currency members.

Question 50

Under a(n)_____________ ,the nation's monetary authorities are entrusted with the responsibility of intervening in foreign exchange markets to smooth out short-run fluctuations in exchange rates without attempting to affect their long-run trend.

A)currency board arrangements
B)adjustable peg system
C)crawling peg system
D)managed floating exchange rate system

Question 51

A monetary union in Europe would mean that member nations would relinquish their sovereign power over their money supply and monetary policy.

Question 52

The currencies of member nations in an optimum currency area float jointly with respect to the currencies of nonmember nations.

Question 53

Advocates of fixed exchange rates claim that flexible exchange rates reduce the volume of international trade and investment,are more likely to lead to destabilizing speculation and are inflationary.

Question 54

What is dollarization? What are some of the benefits and cost that go along with it?

Question 55

Pegging or fixing the exchange rate at one level usually results in excess demand or excess supply of foreign exchange.