Question 1

As envisioned at its creation at Bretton Woods,

Accepted Answer

The IMF (International Monetary Fund) was created to stabilize global financial markets, while the World Bank was established to focus on rebuilding and economic development, particularly in the aftermath of World War II.

Question 2

Which of the following statements best describes the goal of a currency board and the greatest weakness of this system?

Accepted Answer

D

Question 3

Comparing the fifty state-level economies in the United States with the country-level economies in the Eurozone,  which of these statements best describes how close the two areas are to being an optimal currency area?

Accepted Answer

The fifty state economies in the United States are more closely coordinated in their fiscal policies than the countries in the Eurozone, largely due to a more centralized federal fiscal system, and the U.S. labor market is generally more flexible, with fewer barriers to labor mobility across states compared to the movement of labor between countries in the Eurozone.

Question 4

The British central bank may choose to intervene in the free market currency exchange in which of the following cases?

Accepted Answer

The answer of The British central bank may choose to...

Question 5

One of the important disadvantages of a crawling peg system is

Accepted Answer

The crawling peg system, while designed to provide stability, can suffer from the disadvantage of not adjusting quickly enough to changing economic conditions due to bureaucratic delays. This can lead to misalignments between the pegged exchange rate and the market rate.

Question 6

What are some of the ways that fixed exchange rates can be advantageous in an economy?

Accepted Answer

Fixed exchange rates can stabilize foreign trade by reducing exchange rate volatility, help end a financial crisis by providing stability, and establish credibility for a new central bank by committing to a stable currency value.

Question 7

Which of the following best describes the World Bank today, in terms of scope and functions?

Accepted Answer

The World Bank Group's primary function is to provide financial and technical assistance to developing countries for development programs (e.g., bridges, roads, schools, etc.) that are expected to improve the economic prospects and quality of life for people in those countries. This assistance comes in the form of loans and grants. Additionally, the World Bank offers services like dispute resolution to help ensure these projects proceed smoothly. The figure of more than $60 billion in assistance aligns more closely with the scale of the World Bank's operations in recent years, making option C the best description of the World Bank's scope and functions today.

Question 8

A crawling peg exchange rate system is an exchange rate system

Accepted Answer

A crawling peg exchange rate system allows the currency to fluctuate within a specified range but adjusts the central value periodically. This adjustment is typically in response to changes in economic indicators or market conditions, allowing for a more controlled and gradual adaptation to economic realities.

Question 9

An example of a currency board regime might be if the United States were to pledge to

Accepted Answer

A currency board regime involves a commitment to exchange the domestic currency at a fixed rate with a foreign anchor currency. Choice D accurately describes this by stating the US would convert US dollars for the euro at a fixed price, with the euro being the anchor.

Question 10

Which of the following is NOT a characteristic of a target zone regime?

Accepted Answer

A target zone regime involves a central bank committing to keep the exchange rate within a specified range relative to another currency or a basket of currencies. It does not necessarily involve exchanging currencies for gold or dollars on demand, which is more characteristic of a fixed exchange rate regime or a gold standard.

Question 11

Suppose the crawling peg system is in place and you are in business with another country. You feel there is little risk as the currency of that country is highly valued relative to the dollar. When you go to exchange this foreign currency for dollars, however, you find yourself consistently unable to do so through official channels. Which of these is the most likely cause, and what may you ultimately realize?

Accepted Answer

The foreign currency being overvalued at the official exchange rate means it is not worth as much on the market as the government claims, leading to a scarcity of dollars in official exchanges and possibly forcing transactions into the black market to obtain the real value.

Question 12

Assume that the US currency is weakening due to a variety of domestic and global economic and social factors.  Which of the following courses of action could be taken by the US central bank, the Federal Reserve, if it wants to help boost the dollar so it begins to appreciate?

Accepted Answer

The answer of Assume that the US currency is weakening...

Question 13

If two countries allow people to move freely between them to find work and housing and also have integrated capital markets in terms of rules, regulations, and structures, what are the other two components they need in order to be an optimal currency area (according to Mundell)?

Accepted Answer

According to Mundell's theory of an optimal currency area, wage and price flexibility and coordinated fiscal policies are necessary to adjust to economic shocks and maintain stability.

Question 14

Which of these statements is the best description of a foreign exchange intervention?

Accepted Answer

Foreign exchange intervention is typically conducted by central banks or national governments to influence the exchange rate of their own or another country's currency, often to stabilize or adjust the currency's value for economic reasons.

Question 15

A foreign exchange intervention taken by the European Central Bank to depreciate the euro might include which of these actions to sterilize the transaction, if that is wanted?

Accepted Answer

To depreciate the euro, the ECB would sell euros and buy US dollars. To sterilize this intervention, they would sell a similar amount of government securities to offset the increase in the money supply caused by the initial transaction.

Question 16

If the United States is facing a financial crisis while South Africa's economy is experiencing very strong growth and has not been impacted by a financial crisis, the loanable funds model as applied to currency exchange would indicate which of the following scenarios?

Accepted Answer

In the loanable funds model, investors seek higher returns. If the US is in a financial crisis and South Africa's economy is strong, investors will likely sell US currency to buy South African currency, seeking better returns. This demand increases the value of the South African currency.

Question 17

Which of the following is NOT one of Mundell's four characteristics for an optimal currency area?

Accepted Answer

Mundell's four characteristics for an optimal currency area include labor mobility, capital mobility, and coordinated fiscal policies, but not central bank mobility. Central bank mobility is not a concept associated with the criteria for an optimal currency area as outlined by economist Robert Mundell.

Question 18

When George Soros, the head of the hedge fund, Quantum Fund, decided to systematically and repeatedly short the pound (sell, then buy again at a lower price), he was able to do what within the space of less than two months?

Accepted Answer

Quantum Fund's actions led to the pound falling below the lower bound of the target zone, which ultimately forced the United Kingdom to withdraw from the European Exchange Rate Mechanism (ERM).

Question 19

In a free-floating exchange rate system, the price of a country's currency in terms of another is determined purely through

Accepted Answer

In a free-floating exchange rate system, the value of a currency is determined by supply and demand factors in the foreign exchange market, without direct intervention by the country's government or central bank.

Question 20

The steps taken toward monetary integration in the European Union to create the euro included (in order)

Accepted Answer

The correct steps toward the creation of the euro involved reducing trade barriers to facilitate easier trade and economic integration among EU countries, followed by entering into an exchange rate mechanism. This mechanism was designed to reduce exchange rate variability and achieve monetary stability within the EU before adopting the euro as a common currency.

Quiz 20: Global Financial Architecture

As envisioned at its creation at Bretton Woods,

Which of the following statements best describes the goal of a currency board and the greatest weakness of this system?

Comparing the fifty state-level economies in the United States with the country-level economies in the Eurozone, which of these statements best describes how close the two areas are to being an optimal currency area?

The British central bank may choose to intervene in the free market currency exchange in which of the following cases?

One of the important disadvantages of a crawling peg system is

What are some of the ways that fixed exchange rates can be advantageous in an economy?

Which of the following best describes the World Bank today, in terms of scope and functions?

A crawling peg exchange rate system is an exchange rate system

An example of a currency board regime might be if the United States were to pledge to

Which of the following is NOT a characteristic of a target zone regime?

Assume that the US currency is weakening due to a variety of domestic and global economic and social factors. Which of the following courses of action could be taken by the US central bank, the Federal Reserve, if it wants to help boost the dollar so it begins to appreciate?

If two countries allow people to move freely between them to find work and housing and also have integrated capital markets in terms of rules, regulations, and structures, what are the other two components they need in order to be an optimal currency area (according to Mundell) ?

Which of these statements is the best description of a foreign exchange intervention?

A foreign exchange intervention taken by the European Central Bank to depreciate the euro might include which of these actions to sterilize the transaction, if that is wanted?

If the United States is facing a financial crisis while South Africa's economy is experiencing very strong growth and has not been impacted by a financial crisis, the loanable funds model as applied to currency exchange would indicate which of the following scenarios?

Which of the following is NOT one of Mundell's four characteristics for an optimal currency area?

When George Soros, the head of the hedge fund, Quantum Fund, decided to systematically and repeatedly short the pound (sell, then buy again at a lower price) , he was able to do what within the space of less than two months?

In a free-floating exchange rate system, the price of a country's currency in terms of another is determined purely through

The steps taken toward monetary integration in the European Union to create the euro included (in order)