Question 1

Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is, above par, the central bank must intervene to sell the ________ currency by purchasing ________ assets.

Accepted Answer

If the domestic currency is initially undervalued, the central bank would want to increase its value by selling the domestic currency and buying foreign currencies/assets. This would require the central bank to sell domestic currency reserves and buy foreign currency reserves. Therefore, the correct choice is A) domestic currency; foreign assets.

Question 2

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, each country maintained a fixed exchange rate between its currency and the US dollar, which was backed by gold. To maintain this fixed exchange rate, a country had to be able to exchange its currency for US dollars at the fixed rate upon demand. If international reserves were running low, a country had to implement contractionary monetary policy, which would typically involve increasing interest rates and decreasing the money supply, to strengthen its currency and discourage capital outflows. This would help to maintain the fixed exchange rate and prevent the country from running out of international reserves.

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

Under a fixed exchange rate regime, if a country has an overvalued exchange rate, its central bank will need to sell its own currency and buy foreign currency to support its currency's value, leading to a loss of international reserves.

Question 4

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

Under a fixed exchange rate regime, if a country has an overvalued exchange rate, its central bank will try to prevent its currency from depreciating. This typically involves selling foreign currency reserves to buy domestic currency, leading to a loss of international reserves.

Question 5

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 deficit in the balance of payments means that a country is spending more on imports than it is earning from exports, leading to a drain on its international reserves. On the other hand, a surplus in the balance of payments means that a country is earning more from its exports than it is spending on imports, leading to an increase in its international reserves. Therefore, a balance of payments deficit is associated with a loss of international reserves, while a balance of payments surplus is associated with a gain.

Question 6

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to purchase the domestic currency by selling foreign assets.

Accepted Answer

Under a fixed exchange rate regime, if the domestic currency is initially overvalued, it means it is valued higher than it should be, or above its market equilibrium level. This situation does not directly relate to being above or below par in the context of the question's phrasing. However, the central bank must intervene to maintain the fixed rate by purchasing the domestic currency, which would involve selling foreign assets to support the domestic currency's value. The correct terminology in the context of exchange rates typically involves the currency being too strong (overvalued) or too weak (undervalued) rather than above or below par. The explanation provided aims to clarify the misunderstanding in the question's phrasing.

Question 7

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 8

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, it means its currency is cheaper than it should be. To prevent the currency from appreciating, the central bank will buy its own currency, which increases demand for it, using its international reserves. This action actually leads to a gain in international reserves because the central bank is selling foreign currency (from its reserves) to buy domestic currency, effectively increasing its reserve holdings.

Question 9

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 10

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

If a country depletes its international reserves to prevent its currency from depreciating, it means that the demand for the currency is greater than its supply. As a result, the country would be forced to devalue its currency in order to increase its supply and restore the balance in the foreign exchange market. Therefore, the correct choice is B: depreciating; devalue.

Question 11

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 United States could run deficits without losing significant amounts of international reserves, as it could simply print more dollars to cover the deficit.

Question 12

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 13

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 14

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

Under a fixed exchange rate regime, if a country has an undervalued exchange rate, its currency is likely to face upward pressure, meaning it would tend to appreciate. The central bank would intervene by buying foreign currency to maintain the fixed rate, which would increase its international reserves, hence a gain.

Question 15

Under a fixed exchange rate regime, if the domestic currency is initially overvalued, that is, below par, the central bank must intervene to purchase the ________ currency by selling ________ assets.

Accepted Answer

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

Question 16

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 exchange rate between its currency and other currencies. If the central bank runs out of international reserves, it cannot intervene in the foreign exchange market by buying its own currency to keep its value artificially high. This will lead to the currency depreciating, as the market will determine its exchange rate based on supply and demand.

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

Countries with persistent balance of payments deficits would lose international reserves as they spend more on foreign goods, services, and investments than they earn. This loss of reserves puts pressure on them to devalue their currency to make their exports cheaper and imports more expensive, aiming to correct the imbalance.

Question 18

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

Under a fixed exchange rate system, countries with large, persistent balance of payments surpluses accumulate international reserves. This accumulation puts upward pressure on the currency, often leading to calls for revaluation to correct the imbalance.

Question 19

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, a country's currency was pegged to the US dollar, and the US dollar was in turn convertible to gold. Therefore, when a country adopted an expansionary monetary policy, it would lead to an outflow of its currency, as its residents would use the increased money supply to buy more imports or invest abroad. This outflow would cause a balance of payments deficit. To address this, the country would eventually be forced to implement a contractionary monetary policy, which would reduce the outflow of currency and help restore balance in the balance of payments. Conversely, a surplus in the balance of payments would be caused by a contractionary monetary policy, and would eventually require expansionary monetary policy to prevent an excessive buildup of foreign reserves.

Question 20

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

Accepted Answer

When a central bank intervenes under a fixed exchange rate regime to purchase the domestic currency, it sells foreign assets. This action is akin to an open market sale, reducing the monetary base and the money supply, which in turn causes the interest rate on domestic assets to rise.

Quiz 19: The International Financial System

Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is, above par, the central bank must intervene to sell the currency by purchasing assets.

To keep from running out of international reserves under the Bretton Woods system, a country had to implement monetary policy 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 overvalued exchange rate, then its central bank's attempt to keep its currency from will result in a of international reserves.

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

Under a fixed exchange rate regime, if the domestic currency is initially , that is, par, the central bank must intervene to purchase the domestic currency by selling foreign assets.

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, 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.

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

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.

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 .

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 undervalued 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 regime, if the domestic currency is initially overvalued, that is, below par, the central bank must intervene to purchase the currency by selling assets.

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

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

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