Question 1

When the domestic currency is initially undervalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________.

Accepted Answer

The answer of When the domestic currency is initially undervalued...

Question 2

Under a fixed exchange rate regime, a central bank that does not want to acquire international reserves to keep its currency from ________ will decide to ________ its currency.

Accepted Answer

The answer of Under a fixed exchange rate regime, a...

Question 3

Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bank's attempt to keep its currency from depreciating will result in a ________ of international reserves.

Accepted Answer

If a country's exchange rate is overvalued under a fixed exchange rate regime, then its central bank's attempt to keep its currency from depreciating will result in a loss of international reserves. This is because the central bank will have to sell off its international reserves in order to buy up its own currency and maintain the fixed exchange rate. This can lead to a depletion of reserves and potentially a currency crisis.

Question 4

Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bank's attempt to keep its currency from appreciating will result in a ________ of international reserves.

Accepted Answer

Under a fixed exchange rate regime, if a country has an undervalued exchange rate, its central bank will buy its own currency to prevent it from appreciating, which leads to a gain in international reserves as it sells foreign currency to buy local currency.

Question 5

The Bretton Woods system broke down in the early 1970s for all but one of the following reasons:

Accepted Answer

The answer of The Bretton Woods system broke down in...

Question 6

Under a fixed exchange rate regime, if a central bank must intervene to purchase the domestic currency by selling foreign assets, then, like an open market sale, this action ________ the monetary base and the money supply, causing the interest rate on domestic assets to ________.

Accepted Answer

When a central bank intervenes to purchase the domestic currency by selling foreign assets under a fixed exchange rate regime, it effectively reduces the monetary base and the money supply, similar to an open market sale. This reduction in the money supply causes the interest rate on domestic assets to rise.

Question 7

A balance of payments deficit is associated with a ________ of international reserves, while a balance of payments surplus is associated with a ________.

Accepted Answer

A balance of payments deficit occurs when a country imports more than they export, causing a net outflow of domestic currency to foreign countries. To make up for this outflow, the country will have to sell some of its international reserves, leading to a loss of reserves. On the other hand, a balance of payments surplus occurs when a country exports more than they import, causing a net inflow of foreign currency. This surplus can be added to international reserves, leading to a gain in reserves. Therefore, a balance of payments deficit is associated with a loss of reserves, while a balance of payments surplus is associated with a gain in reserves.

Question 8

Under a fixed exchange rate regime, if a country has an undervalued exchange rate, then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves.

Accepted Answer

The answer of Under a fixed exchange rate regime, if...

Question 9

Because the United States was the reserve-currency country under the Bretton Woods system, it could run large balance of payments ________ without ________ significant amounts of international reserves.

Accepted Answer

As the reserve-currency country, the US had the privilege of being able to run large balance of payments deficits without losing significant amounts of international reserves. This was because other countries would hold US dollars as a form of international reserve, allowing the US to print more dollars to finance its deficits without losing reserves.

Question 10

When the domestic currency is initially overvalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________.

Accepted Answer

The answer of When the domestic currency is initially overvalued...

Question 11

Under a fixed exchange rate system, countries that ran large, persistent balance of payments surpluses would ________ international reserves, thereby pressuring them into ________ their exchange rate.

Accepted Answer

The answer of Under a fixed exchange rate system, countries...

Question 12

To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the ________ would loan ________ countries international reserves contributed by other members.

Accepted Answer

The International Monetary Fund (IMF) was created to stabilize exchange rates and promote international monetary cooperation. One of its functions is to help member countries facing balance of payments difficulties by providing them with temporary financial assistance to address their deficits. This is done through loans from the IMF's pool of international reserves, which are contributed by all member countries. Therefore, choice A is the correct answer as the IMF would loan deficit countries international reserves contributed by other members to maintain fixed exchange rates.

Question 13

The Bretton Woods system was one in which central banks

Accepted Answer

In the Bretton Woods system, central banks agreed to buy and sell their own currencies to maintain fixed exchange rates. This was done through interventions in the foreign exchange market. Option B is incorrect as central banks did intervene in the foreign exchange market to maintain fixed exchange rates. Option C and D are also incorrect as there was no agreed limit on domestic money growth.

Question 14

Under the Bretton Woods system, when a country adopted an expansionary monetary policy, thereby causing a balance of payments ________, the country would eventually be forced to implement ________ monetary policy.

Accepted Answer

Under the Bretton Woods system, if a country adopted an expansionary monetary policy, it would cause a deficit in its balance of payments. This is because the expansionary monetary policy would lead to higher levels of imports and capital outflows, while the exports and capital inflows would remain constant. Thus, the country would eventually be forced to implement a contractionary monetary policy to curb the deficit and stabilize its currency under the fixed exchange rate system.

Question 15

Under a fixed exchange rate regime, a country that depletes its international reserves in an attempt to keep its currency from ________ will be forced to ________ its currency.

Accepted Answer

Under a fixed exchange rate regime, the central bank of the country has to buy or sell its currency in the foreign exchange market to maintain the fixed exchange rate. If a country depletes its international reserves by selling its currency to support its value, it will run out of foreign exchange reserves to continue this practice. As a result, the country will be forced to devalue its currency to a lower exchange rate to match the supply and demand in the foreign exchange market. Therefore, in this scenario, the correct answer is option B, which says that the country will be forced to devalue its currency to keep up with the fixed exchange rate regime.

Question 16

Under a fixed exchange rate regime, if a country has an overvalued exchange rate, then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves.

Accepted Answer

If a country's exchange rate is overvalued and the central bank tries to keep the currency from depreciating (i.e. maintains a fixed exchange rate), then it will have to sell its own currency and buy foreign currency in the foreign exchange market. This will lead to a loss of international reserves, as the central bank's stock of foreign currency will decrease while its stock of domestic currency (which it has to sell to buy foreign currency) will increase.

Question 17

Under a fixed exchange rate system, countries that ran large, persistent balance of payments deficits would ________ international reserves, thereby pressuring them into ________ their exchange rate.

Accepted Answer

Under a fixed exchange rate system, countries with persistent balance of payments deficits would lose their international reserves, as they would need to use their reserves to maintain their fixed exchange rate. This would eventually put pressure on them to devalue their currency and lower the exchange rate. Therefore, the correct answer is C.

Question 18

Under a fixed exchange rate regime, if a country's central bank runs out of international reserves, it cannot keep its currency from

Accepted Answer

Under a fixed exchange rate regime, the central bank is committed to maintaining a certain level of exchange rate by buying and selling its currency in the international markets using its international reserves. If the central bank runs out of international reserves, it cannot continue to support the fixed exchange rate and the currency will depreciate due to supply and demand factors. Therefore, the best choice is A, depreciating.

Question 19

To keep from running out of international reserves under the Bretton Woods system, a country had to implement ________ monetary policy to ________ its currency.

Accepted Answer

Under the Bretton Woods system, a country's currency was backed by gold, and the country was expected to maintain a fixed exchange rate. If a country experienced a trade deficit and its currency began to weaken, it would need to sell off its international reserves (usually in the form of gold) to prop up the currency. However, if a country's international reserves began to run low, it would need to implement contractionary monetary policy (such as raising interest rates or reducing government spending) to strengthen its currency and avoid running out of reserves. This was necessary to maintain the fixed exchange rate and prevent a speculative attack on the currency. Therefore, the correct answer is C, contractionary monetary policy to strengthen its currency.

Question 20

A balance of payments ________ is associated with a loss of international reserves, while a balance of payments ________ is associated with a gain.

Accepted Answer

A balance of payments deficit is associated with a loss of international reserves, while a balance of payments surplus is associated with a gain. Therefore, option C is the correct answer.

Quiz 21: The International Financial System

When the domestic currency is initially undervalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to the domestic currency, thereby allowing the money supply to .

Under a fixed exchange rate regime, a central bank that does not want to acquire international reserves to keep its currency from will decide to its currency.

Under a fixed exchange rate regime, if a country has an exchange rate, then its central bank's attempt to keep its currency from depreciating will result in a of international reserves.

Under a fixed exchange rate regime, if a country has an exchange rate, then its central bank's attempt to keep its currency from appreciating will result in a of international reserves.

The Bretton Woods system broke down in the early 1970s for all but one of the following reasons:

Under a fixed exchange rate regime, if a central bank must intervene to purchase the domestic currency by selling foreign assets, then, like an open market sale, this action the monetary base and the money supply, causing the interest rate on domestic assets to .

A balance of payments deficit is associated with a of international reserves, while a balance of payments surplus is associated with a .

Under a fixed exchange rate regime, if a country has an undervalued exchange rate, then its central bank's attempt to keep its currency from will result in a of international reserves.

Because the United States was the reserve-currency country under the Bretton Woods system, it could run large balance of payments without significant amounts of international reserves.

When the domestic currency is initially overvalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to the domestic currency, thereby allowing the money supply to .

Under a fixed exchange rate system, countries that ran large, persistent balance of payments surpluses would international reserves, thereby pressuring them into their exchange rate.

To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the would loan countries international reserves contributed by other members.

The Bretton Woods system was one in which central banks

Under the Bretton Woods system, when a country adopted an expansionary monetary policy, thereby causing a balance of payments , the country would eventually be forced to implement monetary policy.

Under a fixed exchange rate regime, a country that depletes its international reserves in an attempt to keep its currency from will be forced to its currency.

Under a fixed exchange rate regime, if a country has an overvalued exchange rate, then its central bank's attempt to keep its currency from will result in a of international reserves.

Under a fixed exchange rate system, countries that ran large, persistent balance of payments deficits would international reserves, thereby pressuring them into their exchange rate.

Under a fixed exchange rate regime, if a country's central bank runs out of international reserves, it cannot keep its currency from

To keep from running out of international reserves under the Bretton Woods system, a country had to implement monetary policy to its currency.

A balance of payments is associated with a loss of international reserves, while a balance of payments is associated with a gain.