Deck 9: International Monetary Relations

Question 1

A national monetary system represents a public good because:

A)it is easy to exclude people from using a currency.
B)it only has benefits for a minority of people who buy and sell goods internationally.
C)there are no downsides to providing a national currency.
D)people cannot be excluded from the monetary system or charged for using it.

Answer 1

D

Question 2

In which of the following countries would a foreign company most likely invest its money?

A)A country with a 5 percent interest rate
B)A country with a 10 percent interest rate
C)A country with a 15 percent interest rate
D)A country with a 20 percent interest rate

Answer 2

D

Question 3

If the Argentine peso appreciates in relation to the U.S.dollar,it means that:

A)the Argentine peso has increased in value relative to the dollar.
B)the Argentine peso has increased in value relative to all currencies but the dollar.
C)the Argentine peso has decreased in value relative to the dollar.
D)the Argentine peso has decreased in value relative to all currencies but the dollar.

Answer 3

A

Question 4

Which of the following is an example of a country using monetary policy?

A)Sweden increases import taxes to raise government revenues.
B)Iceland decreases its interest rate to increase consumer spending.
C)Japan borrows from the People's Republic of China for domestic consumption.
D)China increases spending on hydroelectric projects.

Question 5

Why do higher interest rates usually lead to currency values increasing?

A)Investors need to purchase the domestic currency to invest in that country and collect the higher interest rate.
B)The higher interest rate leads to inflation,which increases the price of currency together with all other products.
C)High interest rates encourage people to import more foreign goods,which will lead to more demand for the domestic currency.
D)Countries usually increase interest rates to fight recessions,and the resulting growth of the economy increases demand for that country's currency.

Question 6

Why did the Argentine currency crisis of 2001 occur?

A)The Argentine president continued to let the peso float in order to maintain political support for his party.
B)The end of the Cold War led to too many imports from former communist countries.
C)Argentina's beef exports increased so much that it led to a shortage of currency.
D)Argentina had pegged the peso to the dollar and could not easily change its policy.

Question 7

Which of the following is able to carry out monetary policy?

A)The International Monetary Fund
B)The World Bank
C)The European Central Bank
D)The World Trade Organization

Question 8

If a 100-euro pair of Italian shoes costs $200,how much would the shoes cost after the dollar appreciated by 100 percent?

A)$100
B)$200
C)$300
D)$400

Question 9

If a country has adopted a fixed exchange rate,what tool(s)has it lost to battle economic recessions?

A)The ability to spend money
B)The ability to place tariffs on imports
C)The ability to lower or raise interest rates through a central bank
D)The ability to use foreign currency

Question 10

Why would a country want a depreciated currency?

A)Depreciation makes imports cheaper for consumers.
B)Depreciation makes a country's exports more competitive.
C)Depreciation makes foreign loan repayment cheaper.
D)Depreciation makes wages increase.

Question 11

The gold standard is a monetary system in which:

A)governments used gold instead of paper currencies.
B)the exchange rate of the U.S.dollar was periodically adjusted in response to currency crises in its allies' economies.
C)exchange rates were allowed to change according to their market price.
D)the exchange rates of the major currencies remained fixed to gold.

Question 12

Why would a country change its interest rate?

A)Poorer countries peg their interest rates to the exchange rate.
B)Countries try to lure foreign investors with higher interest rates.
C)Lowering interest rates can reduce the country's trade deficit.
D)Increasing interest rates can lead to an appreciation of the currency.

Question 13

If a currency has increased in value relative to another currency it is said to have:

A)depreciated
B)appreciated.
C)been devalued.
D)been realized.

Question 14

A currency that has depreciated is one that:

A)has been devalued.
B)has been abandoned in favor of adopting a stronger currency.
C)has lost the loyalty of a country's citizens.
D)is worth more than it was previously when compared to other currencies.

Question 15

What is the exchange rate?

A)The amount of trade passing from one country to another
B)The price of a national currency relative to other national currencies
C)The price of gold
D)The speed with which currency traders buy and sell currencies

Question 16

What is a floating exchange rate?

A)A trading system in which governments do not limit how many goods can be sent between countries
B)A monetary system in which the exchange rates of currencies are set at a permanent price of gold
C)A monetary system in which the exchange rates of major currencies retain nearly the same value with respect to gold but are periodically adjusted during currency crises
D)A monetary system in which exchange rates are allowed to change according to their market prices

Question 17

Monetary policy is the government's ability to:

A)borrow and spend.
B)raise tax revenues.
C)regulate imports and exports.
D)affect the economy by manipulating the money supply.

Question 18

If the Argentine peso depreciates in relation to the dollar,it means that:

A)the Argentine peso has increased in value relative to the dollar.
B)the Argentine peso has increased in value relative to all currencies but the dollar.
C)the Argentine peso has decreased in value relative to the dollar.
D)the Argentine peso has decreased in value relative to all currencies but the dollar.

Question 19

What domestic institution is usually responsible for determining interest rates in developed countries?

A)Monetary funds
B)Adjustable pegs
C)Regulatory banks
D)Central banks

Question 20

What is a fixed exchange rate?

A)A trading system in which governments do not limit how many goods can be sent between countries
B)A monetary system in which the exchange rates of currencies are set at a permanent price of another currency or a precious metal
C)A monetary system in which the exchange rates of major currencies retain nearly the same value with respect to gold but are periodically adjusted in response to currency crises
D)A monetary system in which exchange rates are allowed to change according to their market price

Question 21

Which country did President Trump,during his campaign,threaten to label as a currency manipulator?

A)Russia
B)China
C)Mexico
D)Japan

Question 22

Why do we need international monetary regimes?

A)Each country would rather address its own currency problems without outside interference.
B)Countries usually want to create a single global currency.
C)There is no international government to coordinate monetary relations.
D)Governments have an interest in creating a global government.

Question 23

Why would a country adopt floating exchange rates?

A)Floating exchange rates allow a government the freedom to pursue its own monetary policies.
B)Floating exchange rates reduce the likelihood of abrupt changes in currency values.
C)Floating exchange rates are beneficial for borrowers of foreign funds.
D)Floating exchange rates make international trade less risky.

Question 24

Why might a central bank oppose a country moving to a fixed exchange rate?

A)Fixed exchange rates limit the ability of central banks to change interest rates to affect the domestic economy.
B)Fixed exchange rates often lead to higher inflation,which central banks tend to oppose.
C)Fixed exchange rates force central banks to hold more foreign currency reserves than they would prefer.
D)Fixed exchange rates increase the risk of private bank failures,which the central bank would need to bail out.

Question 25

The Bretton Woods Monetary System can best be described as which of the following?

A)A good standard system
B)A flexible exchange rate system
C)An adjustable peg system
D)A central bank system

Question 26

Which of the following events in the history of international monetary regimes came first?

A)The competitive devaluations of the Great Depression
B)The classical gold standard
C)The Bretton Woods System
D)Exchange rates that freely float according to their market price

Question 27

There have been numerous international monetary orders in the past two centuries.Which of the following best explains why international monetary orders aren't more stable?

A)An international monetary order is an easily provided public good.
B)The global financial world benefits from having regularly changing international monetary orders.
C)Global banks adapt too well to existing monetary orders and take advantage of them.
D)There is no global government to provide a single global monetary order.

Question 28

Why can interactions in an international monetary regime be like a Prisoner's Dilemma?

A)Each government has an incentive to cheat by pegging its currency; the result is a world where every government wants to peg its currency to someone else.
B)Each government has an incentive to cheat by devaluing its currency,and the result is that all governments become worse off because of competitive devaluations.
C)Each government faces a choice between fixing its currency's exchange rate and letting the currency float freely.
D)All governments have a clear incentive to create an international government to regulate monetary affairs even though this will make them captive to its rules.

Question 29

What is a national paper currency standard?

A)Governments issue a currency and peg its value to gold.
B)Governments issue a currency and commit to exchanging the currency for a set gold price.
C)Governments issue a currency and use gold as a standard value but do not commit to exchanging gold for the currency.
D)Governments issue a currency and commit to supporting the value of the currency.

Question 30

Which of the following is most like a commodity-backed paper standard?

A)The Bretton Woods System
B)The British pound
C)The euro
D)The classical gold standard

Question 31

Which of the following exchange rate policies would a country trying to encourage exports choose?

A)A strong floating exchange rate
B)A weak floating exchange rate
C)A strong fixed exchange rate
D)A weak fixed exchange rate

Question 32

Which of the following countries is most likely to fix their currency to the U.S.dollar?

A)Canada
B)Brazil
C)Panama
D)Germany

Question 33

Which of the following is an international monetary institution?

A)The World Trade Organization
B)The classical gold standard
C)The German government
D)The British pound

Question 34

Why does currency manipulation lead to conflictual interactions?

A)An artificially weak currency puts pressure on producers in other countries.
B)Unstable currencies cause risks to everyone involved in international exchange.
C)An artificially weak currency reduces the purchasing power of consumers in other countries.
D)The sudden withdraw of investments from a country can lead to a currency crisis.

Question 35

What is a commodity standard?

A)A widely accepted model for the production of goods
B)An agreement on trade that sets the standard for the exchange of goods
C)When a government uses a paper currency whose value is close to a universal standard unit
D)When governments use a good with a value of its own as the basic underlying monetary unit

Question 36

What is one interest all domestic actors share with regard to the national currency?

A)All domestic actors favor a currency policy that ensures stable prices.
B)All domestic actors prefer a currency that has appreciated.
C)All domestic actors prefer a floating exchange rate.
D)All domestic actors prefer a fixed exchange rate.

Question 37

Which of the following groups benefits from weak domestic currency values?

A)Consumers
B)Exporting industries
C)Non-tradable industries
D)No one benefits from weak currency values.

Question 38

Why was the Bretton Woods System a compromise?

A)Countries agreed to go back on a gold standard if the United States forgave their war debts.
B)The system combined a fixed exchange rate with the flexibility of exchange rate changes during crises.
C)The system provided for periodic adjustments of the price of the U.S.dollar while European countries kept their currencies pegged to a gold standard.
D)The system combined freely floating exchange rates with the creation of the International Monetary Fund to avoid currency crises.

Question 39

Which of the following is most likely to prefer a strong currency?

A)A rancher who exports beef to other countries
B)A car manufacturer competing with foreign imports
C)A consumer who wants to buy appliances
D)A copper mining company that excavates and exports copper

Question 40

Why do small countries that trade a lot generally prefer to fix their exchange rates?

A)Fixed exchange rates limit the inflation small countries are prone to.
B)Fixed exchange rates provide more price stability and reduce risks for exports.
C)Small countries do not have enough market size to adequately control their own flexible exchange rates when trade flows change.
D)Small countries are unable to resist pressure from the United States to fix their currency to the dollar.

Question 41

Why did the Bretton Woods System end?

A)President Richard Nixon decided that the United States could no longer support the system.
B)The major European countries decided to go on the gold standard.
C)Prime Minister Winston Churchill decided that Great Britain should stop supporting the system.
D)The major European countries decided to adopt the euro.

Question 42

What did the classical gold standard era and the Bretton Woods System have in common?

A)They shared the flexibility to adjust exchange rates when currency crises occurred.
B)The world's major powers cooperated in maintaining the system.
C)In both cases a major power (the United States and Soviet Union,respectively)opted out of the system.
D)Both were created in response to devastating wars.

Question 43

Why did the European currency crisis of 1992 occur?

A)Germany raised its interest rates to combat inflation,which led investors to question whether other European countries would keep their currencies pegged to the Deutschemark.
B)West and East Germany reunited after the Cold War ended,which led investors to question whether the country could support the Deutschemark,so they sold the currency and bought U.S.dollars.
C)Sweden raised its interest rates to 500 percent to reduce inflation,which led investors to dump their other currencies and buy Swedish krona.
D)A housing bubble collapsed in Italy,sparking a financial crisis throughout the region.

Question 44

Which of these steps usually comes first in a currency crisis?

A)The government offers substantially higher interest rates.
B)The government devalues its currency.
C)Investors begin to sell a nation's currency.
D)The government faces some difficulty in maintaining a fixed exchange rate.

Question 45

Why did some potential eurozone countries,such as Lithuania,choose to maintain their peg with the euro while others,like Poland,chose to devalue during the eurozone crisis?

A)Lithuania was smaller than Poland and more susceptible to German pressure.
B)Lithuania traded more with the rest of Europe than Poland and so needed to maintain stable exchange rates.
C)Lithuania was much more indebted than Poland,and a devaluation would have increased the cost of that debt.
D)Lithuania had a right-wing government that preferred price stability,while Poland had a left-wing government that cared more about reducing unemployment.

Question 46

What is the Bretton Woods System?

A)A monetary system in which the exchange rate of major currencies retained nearly the same value with respect to the U.S.dollar
B)A monetary system in which the exchange rates of the major currencies remained fixed to gold
C)A monetary system in which the exchange rate of the U.S.dollar was periodically adjusted in response to currency crises in its allies' economies
D)A monetary system in which exchange rates were allowed to change according to their market prices

Question 47

Which of the following events precipitated the Mexican currency crisis of 1994?

A)The end of the Cold War
B)The narrow election victory of the incumbent party
C)Recession in the United States
D)The signing of the new World Trade Organization agreement

Question 48

Why were farmers in the United States particularly harmed by the gold standard of the late nineteenth century?

A)The strong value of the dollar made imported agriculture too competitive.
B)Falling food prices made it hard for farmers to pay off their debts.
C)Inflation made their savings worth less so that they were no longer sufficient to tide them over during droughts.
D)Manufacturing made more extensive use of precious metals and so had an easier time acquiring gold.

Question 49

Why did European countries adopt the euro?

A)Adoption of the euro was connected to other favorable economic and political joint endeavors.
B)Most European currencies depended on the British pound,but Britain could no longer provide sufficient support for its own currency.
C)Germany could not continue to defend its currency when it reunified after the Cold War.
D)By adopting the euro,France would take Germany's place as the center of European monetary decision making.

Question 50

In the late nineteenth century,which effect of a change in the gold standard would have been desired by the Populists?

A)A change to using the gold standard would have reduced currency instability and encouraged more international trade.
B)A change to using a silver standard would have allowed an appreciation of the dollar,thus helping exporters.
C)A change to using a silver standard would have allowed a devaluation of the dollar,thus helping exporters.
D)A change to using a silver standard would have increased imports and made manufacturing cheaper.

Question 51

What type of country would be the strongest supporter of adopting the euro?

A)A large country with a very protectionist trade policy
B)A large country with a moderately liberal trade policy
C)A small country with a very liberal trade policy
D)A small country with a very protectionist trade policy

Question 52

A currency crisis in 1997 and 1998 spread quickly throughout ________,which eventually led to at least two governments falling from the resulting economic recessions.

A)Latin America
B)Europe
C)Africa
D)East Asia

Question 53

Why would a country use another country's currency instead of its own?

A)Larger countries want to reduce the possibility of a global currency crisis.
B)Smaller countries want to reduce the instability of their own currencies.
C)The International Monetary Fund forces smaller countries to adopt the U.S.dollar when they have serious currency crises.
D)Larger countries force smaller countries to adopt their currencies in order to facilitate trade.

Question 54

Why did the Bretton Woods System succeed?

A)Fixing all currencies to the unchanging gold standard caused economic prosperity for all of the major countries.
B)The World Trade Organization facilitated cooperation by providing monetary support during crises.
C)The economic,political,and military interests of Western nations coincided.
D)The monetary system received support from both of the superpowers,the United States and the Soviet Union.

Question 55

Why did the East Asian currency crisis of 1997 occur?

A)East Asian countries were unwilling to borrow enough international money to build sufficient infrastructure.
B)As inflation rose in East Asian countries,investors anticipated devaluations and began to sell off East Asian currencies.
C)Investors were surprised by an abrupt devaluation by the Thai government of its currency and responded by selling their Thai currency.
D)The Suharto dictatorship in Indonesia collapsed,sparking instability in the region.

Question 56

Why do currency crises become internationalized?

A)Domestic investors seek to retaliate against the countries that caused the currency crisis by withdrawing money from that country.
B)The World Bank often gives loans to ease the effects of the currency crisis.
C)International investors look for countries similar to the one that had a currency crisis and withdraw money from those countries as well.
D)Since so many countries use the same currencies-either the dollar or the euro-when this currency loses value in one country,it also loses value in many other countries.

Question 57

Which of the following countries was one of the first to suffer from the 1992 European currency crisis?

A)Germany
B)United Kingdom
C)Belgium
D)Greece

Question 58

Which of these countries have adopted the U.S.dollar as their currencies?

A)Israel and Egypt
B)Mexico and Canada
C)Ecuador and El Salvador
D)Russia and Georgia

Question 59

Why did the European monetary crisis of 2011 occur?

A)A handful of European countries borrowed heavily during an economic boom,and the global financial crisis of 2007 made it difficult to pay off those debts.
B)Greece,Ireland,Portugal,and Spain never fully adopted the euro,and their preference for a dual currency made investors wary.
C)Germany wanted to allow countries like Greece,Ireland,Portugal,and Spain to set their own monetary policies.
D)Countries heavily in debt wanted free monetary policy control so they could appreciate the currency in response to the crisis.

Question 60

Why is it difficult for a government to avoid a currency crisis?

A)Important companies that have borrowed in foreign currencies can be a powerful lobby in favor of abrupt devaluations of the currency in order to reduce their debts.
B)Exporters clamor for the government to maintain overvalued exchange rates when the currency should be devalued.
C)International investors are easily alarmed by any sign of instability and are quick to sell off currency.
D)In democracies,government officials have to worry about the votes of consumers who would be hurt by overvalued exchange rates.

Question 61

What does it mean for a country to manipulate its currency? Should it be allowed to do this? Why or why not?

Question 62

Why do monetary interactions between governments sometimes resemble a Prisoner's Dilemma?

Question 63

What explains why governments choose particular currency arrangements?

Question 64

Imagine that you are the financial adviser to the leader of a new country.The leader wants your advice on how to set up the country's currency-should it be pegged to a commodity,pegged to a large neighboring nation's currency,or allowed to float? What considerations would you want to take into account before giving your advice? What might make you recommend one alternative over another?

Question 65

How does the current international monetary system differ from the gold standard and the Bretton Woods System? What effect do these differences have on international monetary relations as well as on domestic policies?

Question 66

Why would a country want its currency to float? Why might the country instead prefer it to be fixed in value with a nearby nation's currency?

Question 67

How did domestic interests and international conditions affect the adoption of the euro?

Question 68

When and why do governments agree on a particular monetary system?

Question 69

Explain how an international monetary regime depends on interactions among the governments of the world's major economies.

Question 70

Why do currency crises occur?

Question 71

Explain how an international monetary system is a public good.

Question 72

How did interests,institutions,and interactions contribute to the success and failure of the Bretton Woods System?

Question 73

What determines the value of a currency? What government policies can be used to influence this value?

Question 74

What are the root causes of the 2011 European monetary crisis? What lessons from previous crises are valuable in understanding this one?

Question 75

When and why do currency crises have international repercussions? What can be done to contain such crises?