Question 1

Under the 1976 Jamaica Agreement, gold was abandoned as a reserve asset.

Accepted Answer

The 1976 Jamaica Agreement led to the demonetization of gold, meaning it was no longer used as a standard for valuing currencies or as a reserve asset in the international monetary system.

Question 2

The Bretton Woods system could work only as long as the U.S. inflation rate remained low and the United States did not run a balance-of-payments deficit.

Accepted Answer

The Bretton Woods system relied on the U.S. dollar being stable and backed by gold, so low inflation and no balance-of-payments deficit were crucial to maintain confidence in the dollar's value.

Question 3

The process of dollarization occurs when a country abandons its own currency and adopts another currency-typically the U.S. dollar.

Accepted Answer

Dollarization is when a country uses a foreign currency, often the U.S. dollar, instead of or alongside its own currency for transactions and savings.

Question 4

The U.S. balance-of-payments position flourished throughout the 1970s under the guidance of President Nixon.

Accepted Answer

The U.S. balance-of-payments position faced challenges in the 1970s, including the end of the Bretton Woods system and the oil crisis, leading to economic difficulties rather than flourishing.

Question 5

As the only currency that could be converted into gold, the British pound occupied a central place in the fixed exchange rate system up until 1973.

Accepted Answer

The US dollar, not the British pound, was the currency that could be converted into gold under the Bretton Woods system, which lasted until 1971.

Question 6

A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.

Accepted Answer

A currency board system is a monetary system that is based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation.

Question 7

It has been shown that countries with pegged exchange rates have a lower annual inflation rate than countries with floating regimes.

Accepted Answer

Countries with pegged exchange rates have a lower annual inflation rate than countries with floating regimes because the central bank can intervene in the foreign exchange market to keep the exchange rate within a target range. This helps to stabilize the prices of imported goods and services, which in turn helps to keep inflation low.

Question 8

When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a pegged exchange rate regime.

Accepted Answer

A pegged exchange rate regime is when a country's currency value is fixed relative to another currency or a basket of currencies, not determined by the foreign exchange market.

Question 9

Critics argue that a floating exchange rate system can be affected by uncertainty and the bandwagon effect.

Accepted Answer

A floating exchange rate is determined by market forces, which can lead to volatility and speculative trading, causing uncertainty and the bandwagon effect.

Question 10

Under a currency board system, the government has the absolute authority to set interest rates.

Accepted Answer

A currency board system pegs the local currency to a foreign currency, limiting the government's ability to set interest rates independently.

Question 11

When the Bretton Woods participants established the International Monetary Fund, nations who chose to borrow from the IMF could borrow a limited amount without adhering to any specific agreements.

Accepted Answer

The answer of When the Bretton Woods participants established the...

Question 12

Under the gold standard, a country in balance-of-trade equilibrium earns income from exports that is equal to the money its residents pay for imports.

Accepted Answer

Under the gold standard, a balance-of-trade equilibrium implies that the value of a country's exports equals the value of its imports, maintaining a stable exchange rate and gold reserves.

Question 13

Since 1973, exchange rates have become less volatile and more predictable.

Accepted Answer

Exchange rates have generally become more volatile and less predictable since 1973 due to the shift from fixed to floating exchange rate systems, influenced by market forces and economic events.

Question 14

During the Bretton Woods negotiations, there was a consensus among the countries represented that fixed exchange rates were preferred.

Accepted Answer

The Bretton Woods Conference in 1944 resulted in an agreement to establish a system of fixed exchange rates, where currencies were pegged to the US dollar, which was convertible to gold.

Question 15

The activities of the International Monetary Fund have declined after the collapse of the Bretton Woods system in 1973.

Accepted Answer

The IMF's role evolved after the collapse of the Bretton Woods system, focusing more on providing financial assistance and policy advice to countries facing economic difficulties.

Question 16

Under a floating exchange rate system, a country's ability to expand or contract its money supply as it sees fit is limited by the need to maintain exchange rate parity.

Accepted Answer

Under a floating exchange rate system, exchange rates are determined by market forces, allowing a country to expand or contract its money supply without the need to maintain a fixed exchange rate parity.

Question 17

The architects of the Bretton Woods agreement wanted to avoid high unemployment, so they built the fixed exchange rate system to be highly inflexible.

Accepted Answer

The architects of the Bretton Woods agreement aimed to promote economic stability and avoid high unemployment by creating a fixed exchange rate system that was adjustable, allowing for changes in currency values under certain conditions to maintain economic balance.

Question 18

A pegged exchange rate means the value of the currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

Accepted Answer

A pegged exchange rate system involves fixing the value of a currency to a reference currency, such as the US dollar, and the exchange rate with other currencies is influenced by the reference currency's exchange rate.

Question 19

Pegged exchange rates are most popular in larger nations.

Accepted Answer

Pegged exchange rates are more common in smaller nations as they help stabilize their currency by tying it to a more stable and widely used currency, like the US dollar or euro. Larger nations typically have more robust economies and prefer floating exchange rates.

Question 20

The U.S. dollar, EU euro, Japanese yen, and British pound are all free to float against each other, which means their exchange rates never fluctuate.

Accepted Answer

Exchange rates for these currencies do fluctuate due to market forces such as supply and demand, economic indicators, and geopolitical events.

Quiz 11: The International Monetary System