Deck 26: Monetary Policy in a Globalized Financial System

Question 1

_______________ occurs under a flexible exchange rate system, when the value of a currency rises in terms of another currency.

A) Appreciation
B)Depreciation
C)Devaluation
D)Revaluation

Answer 1

A

Question 2

Appreciation occurs under a flexible exchange rate system, when the value of a currency ________ in terms of another currency.

A) rises
B)falls
C)remains the same
D)changes

Answer 2

A

Question 3

_______________ occurs under a flexible exchange rate system, when the value of a currency falls in terms of another currency.

A)Appreciation
B)Depreciation
C)Devaluation
D)Revaluation

Answer 3

B

Question 4

_______________ occurs under fixed exchange rates, when the monetary authorities reduce the value of their currency in relation to the official reserve asset.

A)Appreciation
B)Depreciation
C)Devaluation
D)Revaluation

Question 5

Devaluation occurs under fixed exchange rates, when the monetary authorities ______ the value of their currency in relation to the official reserve asset.

A)increase
B)decrease
C)double
D)reduces by 100%

Question 6

_______________ occurs under fixed exchange rates, when the monetary authorities increase the value of their currency in relation to the official reserve asset.

A)Appreciation
B)Depreciation
C)Devaluation
D)Revaluation

Question 7

The _______________ established a fixed exchange rate system among the major world economies in 1944.

A)Eurosystem
B)Currency Board
C)European Union (EU)
D)Bretton Woods Accord

Question 8

The _______________ includes the European Central Bank and the central banks of the 12 countries that participate in the euro.

A)seigniorage
B)Eurosystem
C)European Union (EU)
D)Bretton Woods Accord

Question 9

Which of the following are tools of the Eurosystem?

A)open market operations
B)a lending facility called the standing facility
C)setting reserve requirements
D)All of the above are tools of the Eurosystem.

Question 10

Which of the following is true?

A)Although 15 countries in Europe have adopted a single currency called the euro, each country still retains control over its own monetary policy.
B)The Eurosystem implements and carries out monetary policy for the eurozone.
C)If countries have divergent policies, then a fixed exchange rate system is preferable over a flexible exchange rate system.
D)Under a flexible exchange rate system, capital flows free countries to have absolute control over their own monetary policies and exchange rate risk is reduced.

Question 11

Sterilization is

A)the process whereby the full amount of the foreign exchange transaction by the central bank is offset by an open market operation so that the monetary base is increased.
B)the process whereby the full amount of the foreign exchange transaction by the central bank is offset by an open market operation so that the monetary base is unaffected.
C)the process whereby the full amount of the foreign exchange transaction by the central bank is offset by an open market operation so that the monetary base is decreased.
D)the process whereby the full amount of the foreign exchange transaction by the central bank is offset by an open market operation so that the fed funds rate target increases to counteract it.

Question 12

Which of the following is not an advantage of a fixed exchange rate system?

A)Inflation is somewhat self-correcting.
B)Central banks can more easily engage in expansionary policy even if other countries do not.
C)Unemployment is somewhat self-correcting.
D)Exchange rate risk is reduced.

Question 13

Under the Bretton Woods Accord, if a country other than the U.S. ran a trade deficit or experienced a capital outflow, there was

A)upward pressure on the exchange rate and the foreign central bank had to purchase its own currency with dollars.
B)upward pressure on the exchange rate and the foreign central bank had to purchase dollars with its own currency.
C)downward pressure on the exchange rate and the foreign central bank had to purchase dollars with its own currency.
D)downward pressure on the exchange rate and the foreign central bank had to purchase its own currency with dollars.

Question 14

If a country under a fixed exchange rate regime wanted to pursue contractionary policies, ceteris paribus,

A)net exports would rise and capital inflows would fall, putting offsetting pressure on the exchange rate.
B)net exports would fall and capital inflows would rise, putting offsetting pressure on the exchange rate.
C)net exports and capital inflows would rise, and upward pressure would be placed on the exchange rate.
D)net exports and capital inflows would fall, and downward pressure would be placed on the exchange rate.

Question 15

Which of the following contributed to the demise of the Bretton Woods Accord fixed exchange rate system?

A)a refusal by countries to make necessary changes in their exchange rates
B)similar monetary and fiscal policies among countries that participated in the Accord
C)similar rates of growth and inflation among countries that participated in the Accord
D)All of the above are correct.

Question 16

If international trade and capital flows are small relative to the aggregate level of economic activity, monetary authorities may have ___________ latitude in the execution of policy.

A) more
B)less
C)about the same
D)no

Question 17

With the enactment of a flexible exchange rate system in late 1974,

A)countries gained greater independence in establishing their own monetary policies.
B)exchange rate risk was sharply curtailed.
C)Bretton Woods achieved its greatest influence.
D)foreign exchange forward and futures contracts no longer were needed.

Question 18

Which of the following factors would most likely lead to an increase in the supply of dollars in international financial markets?

A)A rise in U.S. incomes relative to foreign incomes
B)A rise in foreign inflation relative to U.S. inflation
C)An increase in foreign incomes relative to domestic incomes
D)An increase in U.S. interest rates relative to foreign interest rates

Question 19

Which of the following results from a flexible exchange rate system?

A)A country is more restricted in its own monetary policy.
B)Inflation is more likely to be self-correcting as compared to a fixed exchange rate system.
C)There is a greater risk in international trade because changes in the exchange rate can adversely affect profit.
D)Unemployment is more likely to be self-correcting as compared to a fixed exchange rate system.

Question 20

Because of the greater exchange rate risk with flexible exchange rates,

A)U.S. exporters can use foreign exchange forward and futures agreements to lock in today the amount of dollars to be received at the date the transaction is completed.
B)futures markets are made illegal in international trade.
C)contracts have to be written at a "reasonable" size to eliminate the paperwork with smaller contracts.
D)futures markets increase the negative impact of flexible exchange rates on trade.

Question 21

Which of the following is a major change since the Bretton Woods agreement broke down?

A)A retreat to isolationism reduced trade and capital flows.
B)Nations of the world have grown more interdependent because of the growth of world trade.
C)Nations of the world have become more independent and exchange rate risks have been reduced.
D)Exchanges rates have become more stable.

Question 22

Which of the following is false?

A)One reason why central banks may intervene in financial marks is to resolve a severe but temporary liquidity crisis and to stabilize international financial markets.
B)One reason why central bankers may intervene in foreign exchange markets is they believe exchange rates are deviating significantly from fundamental underlying values (that is, the dollar is overvalued or undervalued because of speculation in the market).
C)In late 2000, central banks of major industrialized countries carried out a coordinated intervention to boost the value of the sagging euro.
D)Central bank intervention has proven successful in that the goals of the intervention have always been met.

Question 23

Which of the following is true?

A)When the Fed participates in an intervention, it does so by purchasing or selling dollars for other foreign currencies.
B)Reserves are augmented when the Fed sells foreign currencies in exchange for dollars.
C)Reserves are decreased when the Fed sells dollars in exchange for foreign currencies that it has previously accumulated.
D)Sterilization will insure that a foreign exchange operation affects the monetary base.

Question 24

Which of the following is true?

A)One disadvantage of the Bretton Woods Accord was the resulting increase in exchange rate risk.
B)One advantage of a fixed exchange rate system was that the act of having to buy back one's own currency to maintain fixed exchange rates enhanced the ability of foreign countries to pursue their own monetary policies.
C)Under fixed exchange rates, a country pursuing contractionary monetary policy would be expected to experience decreased net exports and capital outflows.
D)Under the Bretton Woods Accord, as long as foreign central banks were accumulating dollars to serve as international reserves, the U.S. could pursue expansionary domestic policies that resulted in deficits on current and capital accounts without worrying about exchange rate pressures on the dollar or other foreign currencies.

Question 25

Predictions for the future relative to exchange rates appear to support

A)a picture that is, at best, controlled chaos.
B)a withdrawal into greater isolationism.
C)that there will be greater monetary policy coordination between nations.
D)that competition will be among the bankers of the world, not the producers.

Question 26

Which of the following is not considered a result of the flexible exchange rate system?

A)Future markets have been used to hedge exchange rate risk.
B)Competition tends to set the rates.
C)Exchange rates fluctuate on a daily basis.
D)The exchange rate has been slow to change.

Question 27

The demand for dollars is determined by

A)foreign demand for U.S. goods, services, and securities.
B)domestic demand for foreign goods, services, and securities.
C)domestic supply of U.S. goods, services, and securities.
D)foreign supply of foreign goods, services, and securities.

Question 28

Which of the following is likely to occur if the United States enacts a contractionary monetary policy under flexible exchange rates?

A)Interest rates will fall.
B)Inflows of capital will increase.
C)The exchange rate will depreciate.
D)Net exports will not be affected.

Question 29

Which of the following is likely to occur if the United States enacts an expansionary monetary policy under flexible exchange rates?

A)Interest rates will increase.
B)Inflows of capital will increase.
C)The exchange rate will depreciate.
D)Outflows of capital will decrease.

Question 30

If the Fed sells dollars to purchase yen in an attempt to prop up the yen, the monetary base in the United States

A)increases.
B)decreases.
C)remains unchanged.
D)is sterilized.

Question 31

The Mexican peso crisis of 1994-1995 was caused by

A)a stock market bubble that burst and caused the outflow of dollars.
B)a decrease in U.S. interest rates orchestrated by the Fed.
C)increased capital flows into Mexico.
D)political stability in Mexico.

Question 32

The Mexican peso crisis of 1994-1995 was caused partially by

A)a domestic boom in Japan that caused increased capital flows into Mexico.
B)an increase in U.S. interest rates orchestrated by the Fed.
C)increased capital flows into Mexico.
D)All of the above are correct.

Question 33

_______________ is when a country abandons its own currency to adopt another country's currency as its official currency.

A)Seigniorage
B)Appreciation
C)Sterilization
D)Dollarization

Question 34

A __________________ is an organized body within a country with the sole responsibility and power to define the value of a country's currency.

A)central bank
B)treasury department
C)congress
D)currency board

Question 35

____________________ is the difference between the cost of producing and distributing currency and any revenues earned.

A)Dollarization
B)Seigniorage
C)Appreciation
D)Revaluation

Question 36

Which of the following is true?

A)The euro has become the official reserve asset of the world.
B)A currency board has many of the benefits of full dollarization and, under a currency board, seigniorage is not lost.
C)In the future, it is expected that the major industrial powers will return to a fixed exchange rate system as they further coordinate monetary policies.
D)Electronic payments are cheaper and therefore increase the amount of seigniorage earned by the government.

Question 37

The intervention by the United States and Japanese governments in 1998 to bolster the value of the yen relative to the dollar

A)had no effect on the value of the yen.
B)was a success.
C)was a failure.
D)decreased the power of the Fed.

Question 38

The new currency adopted by 15 European countries is the

A)Eurodollar.
B)European dollar.
C)Euro.
D)ECU.

Question 39

The _______________ of 1944 established a fixed exchange rate system among the major industrialized countries with the U.S. dollar serving as the official reserve asset.

A)Currency Board
B)Eurosystem
C)European Union (EU)
D)Bretton Woods Accord

Question 40

During recent years, financial markets have

A)stabilized with the advent of the SEC.
B)developed rigidity to protect against the globalized environment.
C)experienced rapid changes driven by technological improvements in telecommunications and increased globalization.
D)experienced little change.

Question 41

During recent years, financial markets have

A)seen little innovation.
B)seen greater isolation.
C)been driven by technological improvements in telecommunications and increased globalization.
D)All of the above are correct.

Question 42

Under a flexible exchange rate system, if a country wished to pursue contractionary policies relative to the rest of the world,

A)decreases in interest rates would lead to a capital outflow, partially offsetting the desired expansionary effect.
B)increases in interest rates would lead to a capital inflow, partially offsetting the desired contractionary effect.
C)decreases in interest rates would lead to a capital inflow, partially offsetting the desired contractionary effect.
D)increases in interest rates would lead to a capital outflow, partially offsetting the desired expansionary effect.

Question 43

Expansionary fiscal or monetary policy could cause a country to

A)grow slower than other countries.
B)grow faster than other countries.
C)increase exports faster than imports.
D)experience deflation.

Question 44

Under a fixed exchange rate system, imbalances in the current and capital accounts would persist if countries had different

A)growth rates.
B)inflation rates.
C)interest rate structures.
D)All of the above are correct.

Question 45

Which of the following is not a result of the flexible exchange rate system put in place in the early 1970s?

A)Relative changes in domestic and foreign income growth rates affect exchange rates.
B)Relative changes in interest rates affect exchange rates.
C)Changing market conditions and market expectations affect exchange rates.
D)Greater dependence on the monetary policies of other countries has now slowed international trade.

Question 46

Which of the following factors would most likely lead to an increase in the demand for dollars in international financial markets?

A)U.S. prices increase relative to foreign prices
B)foreign incomes increase relative to domestic incomes
C)foreign interest rates rise relative to U.S. interest rates
D)U.S. incomes rise relative to domestic incomes

Question 47

The volume of trade has changed dramatically between 1960 and 2007. Which empirical statement best describes this transformation?

A)U.S. exports have increased from 4.8 to 11.6 percent of GDP, while U.S. imports have risen from 4.3 to 16.7 percent of GDP.
B)U.S. exports have increased from 4.8 to 51.5 percent of GDP, while U.S. imports have risen from 4.3 to 52.9 percent of GDP.
C)U.S. exports have increased from 4.8 to 41.5 percent of GDP, while U.S. imports have risen from 4.3 to 42.9 percent of GDP.
D)U.S. exports have decreased from 61.5 to 4.8 percent of GDP, while U.S. imports have fallen from 32.9 to 4.3 percent of GDP.

Question 48

Under flexible exchange rates,

A)the value of the dollar is determined by supply and demand.
B)the demand for dollars is determined by foreign demand for U.S. goods, services, and securities.
C)ceteris paribus, the quantity demanded of dollars is inversely related to the exchange rate.
D)All of the above are correct.

Question 49

In order to limit the effect on reserves of a foreign exchange intervention, the Fed engages in _______________

A)seigniorage.
B)sterilization.
C)dollarization.
D)revaluation.

Question 50

In addition to the growth in trade, which of the following has also occurred in recent decades?

A)More restrictions have been placed on capital flows.
B)The dismantling of barriers to capital flows were almost completed in the 1980s.
C)Electronic transfer of funds has many problems with technological breakdowns.
D)The world has become more rigid in its trade pattern.

Question 51

In terms of volume of trading, the largest market in the world is which of the following?

A)the automobile market in the United States if imports are included
B)the world gold market
C)the U.S. stock market
D)the foreign exchange market

Question 52

When an increase in domestic interest rates causes the dollar to appreciate, which of the following is false?

A)The dollar price of foreign goods falls.
B)Net exports will fall.
C)The increase in domestic interest rates could cause a reduction in domestic demand.
D)The reduction in aggregate demand increases the demand for imports.

Question 53

Contractionary monetary policy that increases the value of the dollar will

A)increase net exports.
B)decrease net exports.
C)increase aggregate demand.
D)increase aggregate supply.

Question 54

Relative to the globalization of monetary policy, the text takes the position that

A)increased coordination will result regardless of the exchange rate system.
B)countries will return to some type of fixed rate system.
C)countries will remain on a flexible exchange rate system.
D)None of the above is correct.

Question 55

A fixed rate system has several problems, an example of which is that

A)countries cannot maintain divergent economic goals indefinitely.
B)inflation can be handled easily.
C)unemployment problems are resolved among participating countries.
D)domestic problems can be ignored.

Question 56

Under flexible exchange rates,

A)capital flows allow countries to execute policies on their own with no domestic ramifications.
B)incentives are present that promote monetary policy coordination between countries because without coordination there can be changes in exchange rates and capital flows that feed back to the domestic economy.
C)there is presently no monetary policy coordination between developed countries.
D)monetary policy coordination is presently led by the World Bank.

Question 57

Looking forward in the 21st century, the changing operations of the Fed will, in all likelihood, place greater emphasis upon which of the following?

A)greater freedom for small businesses
B)a convertible gold standard
C)lower interest rates to stimulate welfare reform
D)greater international coordination of policies among central banks

Question 58

Which of the following statements is false?

A)Policy coordination is not needed under a flexible exchange rate regime because exchange rates are free to fluctuate.
B)Openness of world trade and finance makes for greater interdependence among nations.
C)Capital mobility means that a change in the interest rate relative to rates in other countries can lead to changes in exchange rates and capital flows.
D)Monetary policy of the future will likely involve more global cooperation under either a fixed or flexible exchange rate system.

Question 59

The purpose of foreign exchange futures agreements under flexible exchange rates is to

A)make more profits for international bankers.
B)prevent shipping costs.
C)effectively reduce or eliminate exchange rate risk.
D)force economics students to really understand hedging.

Question 60

Which of the following statements is false?

A)Under flexible exchange rates, the value of the dollar is determined by supply and demand.
B)The demand for dollars is determined by foreign demand for U.S. goods, services, and securities.
C)Ceteris paribus, the quantity demanded of dollars is directly (positively) related to the exchange rate.
D)Ceteris paribus, the quantity supplied of dollars is directly (positively) related to the exchange rate.

Question 61

Which of the following statements is (are) true?

A)Under flexible exchange rates, the value of the dollar is determined by supply and demand.
B)The demand for dollars is determined by foreign demand for U.S. goods, services, and securities.
C)Ceteris paribus, the quantity supplied of dollars is directly related to the exchange rate.
D)All of the above are true.

Question 62

If the Fed sells dollars to purchase yen in an attempt to prop up the yen and wishes to sterilize the transaction, the change in the monetary base in the U.S. would require the Fed to

A)use open market purchases to offset the increase in the monetary base.
B)use open market sales to offset the increase in the monetary base.
C)use open market purchases to offset the decrease in the monetary base.
D)use open market purchases to offset the increase in the monetary base.

Question 63

Which of the following is false?

A)The Fed earns seigniorage when it issues currency by purchasing government securities that earn interest.
B)If electronic payments reduce the amount of currency used in the future, the amount of seigniorage will be reduced.
C)Countries that dollarize increase the amount of seigniorage that they earn.
D)A cost of dollarization is that a country gives up control over its own monetary policy.

Question 64

The Bretton Woods system could only be maintained if all countries were willing and able to _______ their currencies.

A)support
B)never devaluate
C)never revalue
D)change

Question 65

Supporters of the Bretton Woods system believed that inflation and unemployment would, under some circumstances, __________

A)be nonexistent.
B)be self-correcting.
C)equal equilibrium rates.
D)below equilibrium rates.

Question 66

Economic efficiency is ___________________unless funds flow to the location with the ____ risk-adjusted return.

A) less than the maximum possible, highest
B)less than the maximum possible, lowest
C)eliminated, zero
D)eliminated, highest

Question 67

Economic efficiency is enhanced when funds flow to the location with the ____ risk-adjusted return.

A)highest
B)lowest
C)natural
D)lowest natural

Question 68

With a contractionary U.S. policy, if the _____ in the domestic interest rate causes the dollar to ________, then the dollar price of foreign good falls whle the foreign price of U.S. goods rises.

A)increase, appreciate
B)increase, depreciate
C)decrease, appreciate
D)rise, remain the same

Question 69

The crux of the dilemma is that under fixed exchange rates, countries are limited in running their own _______ policies because of the need to maintain the value of their currency.

A)monetary
B)fiscal
C)tax
D)fiscal and tax

Question 70

The full benefits of globalization could be reached while minimizing the costs assuming which of the following occur?

A)countries standardize reporting of financial market information
B)the surveillance of international organizations becomes more transparent and open
C)a world government is established
D)Both a and b are correct.

Question 71

Under flexible exchange rates, _______ limit a country's ability to execute policies that deviate significantly from those of the rest of the world.

A)capital flows
B)exchange rate controls
C)capital controls
D)All of the above are correct.