Question 1

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from DS1U1B10S1U1B0 to DS1U1B11S1U1B0. 
Figure 17.1 Foreign Exchange Market
 
-Refer to Figure 17.1. If the exchange rate was allowed to rise to $4 per pound, U.S. monetary authorities would have to supply 6 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

Accepted Answer

If the demand for pounds rises from D0 to D1, the exchange rate will appreciate and move from $3 per pound to a higher rate. In order to maintain the exchange rate at $4 per pound, U.S. monetary authorities would have to supply more than 6 million pounds to the foreign exchange market in exchange for dollars. Therefore, the statement is false.

Question 2

An advantage of international reserves is that they allow countries to sustain temporary balance-of-payments deficits until acceptable adjustment measures can operate to correct the disequilibrium.

Accepted Answer

International reserves provide a cushion for countries to finance temporary balance-of-payments deficits and allow for time to implement corrective measures instead of having to resort to sudden and destabilizing adjustments.

Question 3

The greater a nation's propensity to apply tariffs and quotas to key sectors, the greater will be the need for international reserves.

Accepted Answer

The answer of The greater a nation's propensity to apply...

Question 4

With floating exchange rates, countries require sizable amounts of international reserves for the stabilization of exchange rates.

Accepted Answer

The answer of With floating exchange rates, countries require sizable...

Question 5

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from DS1U1B10S1U1B0 to DS1U1B11S1U1B0. 
Figure 17.1 Foreign Exchange Market
 
-Refer to Figure 17.1. Under a floating exchange rate system, the exchange rate would rise to $4 and U.S. monetary authorities would have to supply 4 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

Accepted Answer

Based on the diagram, an increase in demand for pounds would cause the exchange rate to rise to $3.5, not $4. Therefore, U.S. monetary authorities would not have to supply 4 million pounds and the statement is false.

Question 6

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from DS1U1B10S1U1B0 to DS1U1B11S1U1B0. Figure 17.1 Foreign Exchange Market -In the market for British Pounds the demand is represented by D₀ and supply by S₀. If the exchange rate is allowed to rise as high as $4 and the demand for pounds increases to D1, US monetary authorities will need to

Accepted Answer

The answer of The diagram below represents the exchange market...

Question 7

International reserves allow a country to finance disequilibria in its balance-of-payments position.

Accepted Answer

International reserves can be used to finance deficits in a country's balance-of-payments, including trade imbalances and capital outflows. These reserves may include foreign currencies, gold, and other internationally accepted assets, which can be used to pay for imports, service debt, or otherwise support the economy during times of financial stress. However, relying on reserves to finance persistent imbalances can lead to long-term vulnerabilities and reduced economic stability.

Question 8

To the extent that adjustments in prices, interest rates, and income levels promote balance-of-payments equilibrium, the demand for international reserves decreases.

Accepted Answer

When prices, interest rates, and income levels are adjusted to promote balance-of-payments equilibrium, it reduces the need for international reserves as the economy becomes more stable and able to manage its foreign exchange needs without relying on reserves.

Question 9

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from DS1U1B10S1U1B0 to DS1U1B11S1U1B0. 
Figure 17.1 Foreign Exchange Market
 
-Refer to Figure 17.1. Under a fixed exchange rate system, U.S. monetary authorities would have to supply 8 million pounds in exchange for dollars to keep the exchange rate at $3 per pound.

Accepted Answer

The answer of The diagram below represents the exchange market...

Question 10

When exchange rates are fixed by central bankers, international reserves are necessary for financing payments imbalances and the stabilization of exchange rates.

Accepted Answer

When exchange rates are fixed, international reserves are necessary to ensure that the country can finance any payments imbalances that may arise, as well as to stabilize the exchange rate. This typically involves the central bank buying or selling foreign currency to maintain the fixed exchange rate.

Question 11

A nation may experience debt-servicing problems because of

Accepted Answer

Pursuing improper macroeconomic policies can lead to unsustainable borrowing and high levels of debt. Additionally, adverse economic events such as recessions or natural disasters can disrupt a country's economy and make it difficult to service existing debt. Therefore, both factors contribute to debt-servicing problems. Inadequate borrowing, on the other hand, would not directly lead to debt-servicing issues.

Question 12

The demand for international reserves tend to increase with the level of world income and trade activity.

Accepted Answer

As world income and trade activity increase, countries tend to demand more international reserves to ensure they have sufficient foreign currency to facilitate trade and investment transactions and to defend against potential balance of payment crises.

Question 13

When exchange rates are fixed by central bankers, the need for international reserves disappears.

Accepted Answer

Even when exchange rates are fixed, international reserves are still needed to maintain the fixed rates and intervene in the foreign exchange market if necessary.

Question 14

With floating exchange rates, payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate, and the need for exchange-rate stabilization and international reserves disappears.

Accepted Answer

In a floating exchange rate system, market forces tend to correct payments imbalances by causing fluctuations in the exchange rate. This means that there is no need for exchange-rate stabilization or for countries to hold large amounts of international reserves in order to maintain a fixed exchange rate. Therefore, the statement is true.

Question 15

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from DS1U1B10S1U1B0 to DS1U1B11S1U1B0. Figure 17.1 Foreign Exchange Market -In the market for British Pounds the demand is represented by D₀ and supply by S₀. If the exchange rate is fixed at $3 and the demand for pounds increases to D1, US monetary authorities will need to

Accepted Answer

The answer of The diagram below represents the exchange market...

Question 16

There exists a direct relationship between the degree of exchange rate flexibility and the need for international reserves.

Accepted Answer

The answer of There exists a direct relationship between the...

Question 17

Swap arrangements

Accepted Answer

The answer of Swap arrangements
...

Question 18

The demand for international reserves is negatively related to the level of world prices and income.

Accepted Answer

The answer of The demand for international reserves is negatively...

Question 19

Under a system of fixed exchange rates, international reserves are needed to bridge the gap between monetary receipts and monetary payments.

Accepted Answer

Under fixed exchange rates, the central bank needs to maintain a stock of international reserves to intervene in the foreign exchange market and ensure that the exchange rate does not deviate from its target. Reserves are also necessary to cover a country's international payment obligations, including imports, debt servicing, and capital outflows.

Question 20

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from DS1U1B10S1U1B0 to DS1U1B11S1U1B0. Figure 17.1 Foreign Exchange Market -In the market for British Pounds the demand is represented by D₀ and supply by S₀. If the exchange rate is flexible and the demand for pounds increases to D1, US monetary authorities will need to

Accepted Answer

The answer of The diagram below represents the exchange market...

Quiz 17: International Banking: Reserves, Debt, and Risk

An advantage of international reserves is that they allow countries to sustain temporary balance-of-payments deficits until acceptable adjustment measures can operate to correct the disequilibrium.

The greater a nation's propensity to apply tariffs and quotas to key sectors, the greater will be the need for international reserves.

With floating exchange rates, countries require sizable amounts of international reserves for the stabilization of exchange rates.

International reserves allow a country to finance disequilibria in its balance-of-payments position.

To the extent that adjustments in prices, interest rates, and income levels promote balance-of-payments equilibrium, the demand for international reserves decreases.

When exchange rates are fixed by central bankers, international reserves are necessary for financing payments imbalances and the stabilization of exchange rates.

A nation may experience debt-servicing problems because of

The demand for international reserves tend to increase with the level of world income and trade activity.

When exchange rates are fixed by central bankers, the need for international reserves disappears.

With floating exchange rates, payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate, and the need for exchange-rate stabilization and international reserves disappears.

There exists a direct relationship between the degree of exchange rate flexibility and the need for international reserves.

Swap arrangements

The demand for international reserves is negatively related to the level of world prices and income.

Under a system of fixed exchange rates, international reserves are needed to bridge the gap between monetary receipts and monetary payments.