Deck 25: National and Global Choices: Floating Rates and the Alternatives

Question 1

Export demand shocks is likely to be least disruptive to a country with:

A)a floating exchange-rate system.
B)a fixed exchange-rate system with sterilization.
C)a fixed exchange-rate system without sterilization.
D)a deficit in the current account.

Answer 1

A

Question 2

For an international capital flow shock in which foreign investors lose confidence in a country:

A)the country's real domestic product is affected if the country has a fixed exchange rate but is not affected if the country has a floating exchange rate.
B)the country's real GDP decreases regardless of whether the country has a fixed or floating exchange rate, but the country's real GDP declines less if the country has a floating exchange rate.
C)the country's real domestic product is affected if the country has a floating exchange rate but not affected if the country has a fixed exchange rate.
D)the country's real GDP tends to decline if the country has fixed exchange rate, but the country's real GDP tends to increase if the country has a floating exchange rate.

Answer 2

D

Question 3

The process of "demonetization of gold" involves:

A)purchase of gold and supply of money into the market by the central banks to defend the fixed gold prices.
B)sudden fall in private demand for gold in a country due to discovery of a minable gold deposit.
C)gold sales into the private market in recent decades by the central banks and the IMF.
D)sudden increase in the private demand for gold in a country, forcing its central bank to sell off gold.

Answer 3

C

Question 4

Which of the following is true?

A)Countries that want to have a fixed exchange-rate regime should be willing to refrain from policy changes that lead to large international capital flows.
B)For a floating exchange-rate to work for a country, it cannot have an inflation rate that is much above the inflation rate(s) of its primary trading partners.
C)Fixed exchange-rates encourage countries to have different goals, priorities and policies with respect to macroeconomic variables.
D)If capital is highly mobile, fiscal policy then loses its effectiveness under a fixed exchange rate.

Question 5

Which of the following statements is true?

A)A domestic monetary shock is less disruptive with floating exchange-rates.
B)If foreign capital is highly responsive to changes in interest rates, then domestic spending shocks are less disruptive with fixed exchange-rates.
C)With floating exchange-rates the transmission of business cycles through foreign trade and repercussion is less than with fixed exchange-rates.
D)International capital-flow shocks have domestic effects under fixed exchange-rates but not under floating exchange-rates.

Question 6

An international trade shock arising from a sudden increase in import demand is likely to be least disruptive to a country with:

A)a floating exchange-rate system.
B)a fixed exchange-rate system with sterilization.
C)a fixed exchange-rate system without sterilization.
D)a surplus in the overall payment balance.

Question 7

Monetary policy is most effective in influencing aggregate demand:

A)under a freely floating exchange-rate system.
B)under a fixed exchange-rate system with sterilization.
C)under a fixed exchange-rate system without sterilization.
D)when there is low capital mobility.

Question 8

The strongest argument in favor of fixed exchange-rates is:

A)the country's ability to use independent monetary policy to pursue internal balance.
B)that floating exchange rates are often very volatile, disrupting international trade.
C)the ease of defending fixed exchange rates during speculative attacks.
D)that a fixed exchange rate allows unrestricted flow of financial capital from and into a country.

Question 9

Which of the following is most effective under a fixed exchange-rate regime?

A)Monetary policy if there is a high capital mobility
B)Fiscal policy if there is a low capital mobility
C)Fiscal policy if there is a high capital mobility
D)Monetary policy if there is a low capital mobility

Question 10

A domestic monetary shock is least disruptive:

A)under a floating exchange-rate system.
B)under a fixed exchange-rate system with sterilization.
C)under a fixed exchange-rate system without sterilization.
D)under both fixed and floating exchange-rates.

Question 11

Which of the following is incorrect?

A)Overall, floating exchange-rates discipline countries to have low inflation rates.
B)With fixed exchange-rates, a country that prefers to have a lower inflation rate than its trading partners will tend to import inflation from its partners.
C)Floating exchange-rates permit countries to have different inflation rates.
D)Since 1973, high degrees of variability of floating exchange-rates may have caused considerable adjustment into or out of trade-oriented production from time to time.

Question 12

Fiscal policy is most effective in influencing aggregate demand:

A)under a floating exchange-rate system with a low degree of capital mobility.
B)under a fixed exchange-rate system with sterilization.
C)under a fixed exchange-rate system without sterilization.
D)under a floating exchange-rate system with a high degree of capital mobility.

Question 13

Which of the following is most likely to happen if the demand for money decreases in the domestic economy under floating exchange rates and free capital mobility?

A)The domestic interest rate will increase.
B)Domestic borrowing will decline.
C)The financial account of the country's balance of payments will deteriorate.
D)The average price level in the domestic economy will decrease.

Question 14

Which of the following is NOT among the pressures imposed by the fixed-rate system on the government of a country that has ongoing international payments deficits?

A)The country's money supply increases substantially resulting in a higher inflation.
B)The country faces a limit on its ability to sustain deficits.
C)If the country cannot sterilize, then its money supply will decrease.
D)The country suffers deterioration in its creditworthiness.

Question 15

Which of the following is a drawback of a floating exchange-rate system?

A)Inflation is fully transmitted from one country having a higher rate of inflation to another one having a relatively lower rate.
B)Monetary policy is ineffective in raising aggregate demand since it cannot be directed toward achieving internal balance.
C)Overshooting of exchange rates may cause excessive resource shifts into and out of trade oriented industries.
D)Adverse foreign trade shocks are especially damaging since any intervention by the central bank adds to the recession.

Question 16

Under a gold standard, a major discovery of a new gold deposit would:

A)decrease the volume of world trade.
B)increase the inflation rate.
C)decrease output growth.
D)increase private demand for gold.

Question 17

A domestic spending shock are likely to be least disruptive:

A)under a floating exchange-rate system when there is high capital mobility.
B)under a fixed exchange-rate system when there is high capital mobility.
C)under a fixed exchange-rate system without sterilization.
D)under a floating exchange-rate system when there is low capital mobility.

Question 18

If two countries choose to fix the exchange rates among their currencies, then:

A)the nominal exchange rate will remain consistent independent of inflation rates.
B)the country with high rate of inflation will eventually suffer current account deficits.
C)the country with a current account deficit can increase its money supply to delay the need for intervention.
D)there usually is more pressure on the government whose country has an overall payments surplus than on the government whose country has an overall payments deficit.

Question 19

Those who advocate a return to a real gold standard believe that doing so would:

A)allow countries to pursue independent monetary policies.
B)strengthen the power of fiscal policy in influencing aggregate demand and output.
C)reduce unemployment rates by allowing the countries to adjust their money supply to the money demand.
D)reduce national and average global rates of inflation by controlling countries' abilities to expand their money supplies.

Question 20

Identify the correct statement.

A)International capital-flow shocks are likely to be less disruptive under fixed exchange-rates.
B)If a country is likely to be buffeted mainly by internal shocks, the country should choose a fixed exchange-rate.
C)The effects of shocks under floating exchange-rates depend on whether interventions are sterilized.
D)International trade shocks can be countered by adopting a fixed exchange rate that helps to improve price competitiveness of the country's products.

Question 21

Which of the following is a major drawback of the EMU?

A)Its inability to raise efficiency in production, thus lowering aggregate output of the member nations
B)Its inability to bring down the transaction costs of trade between member nations
C)Its inability to use monetary policies to address a recession that affects some member countries but not others
D)Its inability to keep the actual average inflation rate close to its target inflation rate

Question 22

Argentina's government established a currency board to:

A)signal its commitment to stop the country's hyperinflation.
B)boost its export demand.
C)minimize the impact of large international capital flows.
D)coordinate internal growth policies.

Question 23

_____ occurs when a country abolishes its own currency and uses the currency of some other country.

A)Demonetization
B)Dollarization
C)Revaluation
D)Seigniorage profit

Question 24

The _____ established the criteria for participation in the European Monetary Union (EMU).

A)Exchange Rate Mechanism
B)Treaty of Rome
C)European Central Bank
D)Maastricht Treaty

Question 25

Which of the following statements about dollarization is accurate?

A)A country that chooses to dollarize will enhance its control over its monetary policy.
B)Dollarization decreases exchange-rate risks by removing the risks of speculative attacks on its currency.
C)A country that dollarizes gains interest income on what had been the country's holdings of international reserve assets.
D)Dollarization enables a country to adopt a measure countering adverse foreign shocks without disrupting the country's economy.

Question 26

Which of the following was a criterion to participate in the European Monetary Union?

A)The country's inflation rate must be less than or equal to 1.5 percentage points above the average inflation rate for the three lowest inflation EU countries.
B)The country's budget deficit must be lesser than 10 percent of the value of its GDP.
C)The gross government debt must be lesser than 100 percent of its GDP.
D)The country's exchange rates must be maintained within the ERM bands with no realignments during at least the previous 10 years.

Question 27

_____ is an adjustable peg that provides substantial leeway for a country's monetary authority to change or abandon the fixed value.

A)Hard peg
B)Currency board
C)Soft peg
D)Dollarization

Question 28

In the absence of national monetary policy and national exchange rates in the European Monetary Union,

A)that Union cannot survive.
B)that Union will have to expel members who do not agree to austerity measures.
C)there are still steps that the Union can take to survive.
D)That Union will have to be bailed out by the European Central Bank.

Question 29

_____ was established in 1998, and in 1999 it assumed the responsibility for monetary policy in the euro area.

A)The IMF
B)The European Union
C)The European Central Bank
D)The European Currency Board

Question 30

In 2010, _____ dollarized to escape from hyperinflation.

A)Zimbabwe
B)Argentina
C)El Salvador
D)Palau

Question 31

Which of the following is true of a system of fixed exchange-rates adopted by many countries?

A)For each of these countries, monetary policy can be a powerful policy tool in managing aggregate demand.
B)The countries will have large differences in their inflation rates.
C)The goals and policies can differ substantially across the countries.
D)The relative stability can promote higher levels of international trade.

Question 32

_____ fixed the exchange rates of Germany, France, Italy, the Netherlands, Belgium, Denmark, Ireland, and Luxembourg beginning in 1979.

A)The International Monetary Fund
B)The Exchange Rate Mechanism
C)The European Central Bank
D)A currency board

Question 33

Dollarization is a method to:

A)increase the country's seigniorage profit.
B)allow flexibility in the country's exchange-rate.
C)remove exchange-rate risk.
D)sterilize interventions by the central bank.

Question 34

Which of the following is a characteristic of a currency board?

A)A currency board focuses on maintaining a floating exchange-rate.
B)A currency board issues domestic currency liabilities only in exchange for foreign currency assets.
C)A currency board frequently carries out sterilized intervention in order to maintain the fixed rate.
D)A currency board insulates the country from adverse foreign shocks by prescribing effective fiscal and regulatory policies.

Question 35

Which of the following has exchange-rates permanently fixed between countries and a single monetary authority that conducts a single monetary policy for all member countries?

A)A free trade area
B)A monetary union
C)A currency board
D)A special economic zone

Question 36

One of the benefits of the European Monetary Union is that the governments of the member nations:

A)are free to erect trade barriers according to their needs.
B)will be forced to maintain a balanced budget.
C)can eliminate all exchange-rate concerns by participating in EMU.
D)are able to deal with their domestic imbalances independently.

Question 37

The central bank of which of the following countries dominated monetary policy within the Exchange Rate Mechanism?

A)Germany
B)France
C)The United States
D)The United Kingdom

Question 38

_____ attempts to establish a fixed exchange-rate that is long-lived by focusing on maintaining the fixed exchange-rate and holds only foreign-currency assets.

A)A central bank
B)A monetary union
C)The IMF
D)A currency board

Question 39

One way for a country to gain policy independence and provide some ability to reduce exchange-rate variability is to use:

A)a managed floating exchange rate.
B)a gold standard.
C)a monetary union.
D)a currency board.

Question 40

In 2001, which of the following countries replaced its currency with the U.S. dollar?

A)Panama
B)El Salvador
C)Hong Kong
D)Argentina

Question 41

With respect to each of the following issues, explain whether floating or fixed exchange-rates would be better and why it would be better.
a.Internal monetary shocks
b.External macroeconomic shocks
c.A need for diversity in macroeconomic goals and policies across countries

Question 42

State the advantages and disadvantages of a foreign country adopting the U.S. dollar as its own currency.

Question 43

Intervention to defend a fixed exchange rate can magnify the transmission of a foreign recession into an economy.

Question 44

Argentina's experience since 1990 suggests that adopting a currency board imposes strict discipline on the country's fiscal policies.

Question 45

What challenges does the European Central Bank (ECB) face in making monetary policy for the euro zone?

Question 46

"A country that initially has a floating exchange rate and a high inflation rate can use a shift to a fixed exchange rate as part of its effort to lower its inflation rate." Is the statement correct? Why or why not?

Question 47

Making effective monetary policy for the euro zone should be a relatively easy task for the European Central Bank (ECB) since the euro member countries are very similar.

Question 48

International capital-flow shocks tend to be less disruptive with floating exchange rates than with fixed exchange-rates.

Question 49

A reduction in taxes on domestic financial investments usually leads to capital outflows.

Question 50

Japanese economists worry that changes in the U.S. inflation rate have too large an effect on the Japanese economy. What type of exchange rate regime should Japan have if it does not want the U.S. inflation changes to impact the Japanese internal economy? Explain, and use relative PPP in your explanation.

Question 51

If a country wants to make extensive use of monetary policy to address domestic issues, then that country should adopt a floating exchange-rate.

Question 52

Fiscal policy is highly effective when capital is not mobile and the country has fixed exchange-rates.

Question 53

What are the five criteria for a country to join the European Monetary Union? What is the purpose of the criteria? What are the gains from establishing the monetary union?

Question 54

The Maastricht Treaty laid out the convergence criteria for the Exchange Rate Mechanism.

Question 55

Dollarization will reduce exchange-rate risk for a country.

Question 56

With dollarization adopted by a country, the "seigniorage profit" from issuing currency in the country goes to a foreign government.

Question 57

In an economic union, member countries do not have free flow of factors of production but have a common internal policy.

Question 58

A fixed exchange-rate system in which most countries participate imposes price discipline on the countries.

Question 59

One advantage of joining a monetary union is that a member country does not have to run an independent monetary policy.

Question 60

Internal shocks cause less trouble with floating exchange-rates.