Question 1

Limits on the flow of foreign exchange and financial investment across countries are called

Accepted Answer

Capital controls refer to limits or regulations imposed by governments on the flow of foreign exchange and financial investment across countries in order to manage their economies and prevent financial crises. Fixed exchange rates refer to a system where a country's currency is pegged to another currency or a fixed commodity price, which may or may not involve capital controls. Credit constraints refer to restrictions on borrowing or lending, while currency restrictions specifically refer to limits on the use or exchange of a particular currency.

Question 2

The International Monetary Fund was created to facilitate the borrowing and lending of dollar reserves to central banks of the countries participating in the Bretton Wood System.

Accepted Answer

The International Monetary Fund was created in 1944 at the Bretton Woods conference to facilitate international monetary cooperation, stabilize exchange rates, and provide resources to member countries in need of financial assistance. Its initial purpose was to facilitate the borrowing and lending of dollar reserves to central banks of the participating countries.

Question 3

The German central bank, the Bundesbank, faced the risk of increased inflation caused by its actions to support an overvalued deutsche mark in the 1960s.

Accepted Answer

The answer of The German central bank, the Bundesbank, faced...

Question 4

If speculators believe a currency is soon going to be revalued, they will increase their demand for that currency.

Accepted Answer

Speculators believe that if a currency is going to be revalued, its value will increase in the future. This means that they will try to buy more of that currency now, in order to sell it later at a higher price and make a profit. This increase in demand for the currency will drive up its price even further, creating a self-fulfilling prophecy.

Question 5

What is destabilizing speculation? What role did it play in the collapse of the Bretton Woods system?

Accepted Answer

The answer of What is destabilizing speculation? What role did...

Question 6

Briefly describe how the Bretton Woods system operated.

Accepted Answer

The answer of Briefly describe how the Bretton Woods system...

Question 7

In order to reduce or eliminate a chronic shortage in the market for a currency under a fixed exchange rate system, we must devalue the currency.

Accepted Answer

The answer of In order to reduce or eliminate a...

Question 8

Figure 30-12 
-Refer to Figure 30-12. The graph above, depicts supply and demand for U.S. dollars during a trading day. At a fixed exchange rate of 0.30 pounds per dollar, the dollar is ________ versus the pound. A ________ of the dollar would correct the fundamental disequilibrium that exists in this market.

Accepted Answer

The answer of Figure 30-12 
-Refer to Figure 30-12. The...

Question 9

Under the Bretton Woods system, the World Trade Organization (WTO) provided foreign currency loans to central banks and approved adjustments to the agreed upon fixed exchange rates.

Accepted Answer

The World Trade Organization (WTO) did not exist under the Bretton Woods system. It was created in 1995 to manage and regulate international trade. It was the International Monetary Fund (IMF) that provided foreign currency loans to central banks and approved adjustments to the fixed exchange rates under the Bretton Woods system.

Question 10

Increasing a fixed exchange rate is called a revaluation.

Accepted Answer

Increasing a fixed exchange rate is called a revaluation, while decreasing it is called a devaluation.

Question 11

If speculators believe a currency is undervalued, their trades in international exchange markets will

Accepted Answer

If speculators believe a currency is undervalued, they will demand more of it, which will lead to a shortage of the currency, and thus increase the shortage of the currency at the existing fixed exchange rate. Therefore, the correct choice is D.

Question 12

A persistent shortage of yen at a given fixed exchange rate (in dollars per yen) is evidence that the yen is ________ versus the dollar. This shortage can be reduced or eliminated through a ________ of the yen.

Accepted Answer

A persistent shortage of yen at a given fixed exchange rate indicates that the demand for yen is higher than its supply at that rate, suggesting the yen is undervalued. To correct this, a revaluation (increasing the value of the yen relative to the dollar) would reduce or eliminate the shortage by making the yen more expensive, thus potentially decreasing demand and increasing supply.

Question 13

By the late 1950s, dollars held by foreign central banks exceeded the official dollar value of U.S. gold reserves.

Accepted Answer

The answer of By the late 1950s, dollars held by...

Question 14

If the equilibrium exchange rate exceeds the par exchange rate in the market for pounds, the pound is overvalued.

Accepted Answer

If the equilibrium exchange rate exceeds the par exchange rate, it means the market value of the pound is higher than the official rate, indicating the pound is undervalued, not overvalued.

Question 15

What determined the exchange rates among currencies under the gold standard, and what caused the gold standard to collapse?

Accepted Answer

The answer of What determined the exchange rates among currencies...

Question 16

Under the Bretton Woods system, central bankers could obtain foreign currency loans from the

Accepted Answer

Under the Bretton Woods system, central bankers could obtain foreign currency loans from the International Monetary Fund (IMF). The IMF was created as a part of the Bretton Woods Agreement to provide financial assistance and promote international monetary cooperation.

Question 17

What is the difference between a devaluation and a revaluation of a currency?

Accepted Answer

The answer of What is the difference between a devaluation...

Question 18

In a fixed exchange rate system, speculation regarding an expected revaluation or devaluation of a currency makes it more difficult to maintain the existing exchange rate.

Accepted Answer

Speculation regarding an expected revaluation or devaluation of a currency can lead to increased demand or supply of the currency, which can cause fluctuations in the exchange rate and make it more challenging to maintain the fixed exchange rate.

Quiz 30: The International Financial System