Question 1

Under a fixed exchange rate system such as the gold standard, __________ is when a country increases the units of currency equal to one ounce of gold.

Accepted Answer

Devaluation is the correct term when a country decides to increase the number of its currency units that are required to purchase one ounce of gold under a fixed exchange rate system like the gold standard. This effectively reduces the value of the currency in terms of gold.

Question 2

During the 19th and early 20th centuries, the United States and its major trading partners were on a gold standard. Which of the following statements about the gold standard is false?

Accepted Answer

The statement that the gold standard stabilized international trade and eliminated financial crises is false. The gold standard did provide some stability to the international monetary system, but it did not eliminate financial crises. In fact, crises like the Panic of 1907 and the Great Depression were exacerbated by the rigidity of the gold standard.

Question 3

If the Fed wanted to increase the value of the Yen, what would it do?

Accepted Answer

To increase the value of the yen, the Fed would have to increase the demand for yen, which can be done by buying yen and selling dollars. This would decrease the supply of yen in the market, leading to an increase in its value. Buying dollars and selling yen (choice A) would have the opposite effect and decrease the value of the yen. Buying both dollars and yen (choice B) would not have a direct impact on the value of the yen. Selling both yen and dollars (choice D) would also have the opposite effect and decrease the value of the yen.

Question 4

If the Fed wanted to reduce the value of the Yen, what would it do?

Accepted Answer

To reduce the value of the Yen, the Fed would buy dollars and sell yen. This action increases the supply of yen in the market while increasing the demand for dollars, leading to a depreciation of the yen's value.

Question 5

The __________ is an international financial organization located in Basle Switzerland created in 1930 that promotes international cooperation among central banks and provides facilities for international financial operations.

Accepted Answer

The Bank for International Settlements (BIS) is an international financial organization located in Basle Switzerland created in 1930 that promotes international cooperation among central banks and provides facilities for international financial operations. The Bretton Woods Accord established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), while the International Development Association (IDA) is a specialized agency of the World Bank Group that provides loans and grants to the world's poorest developing countries.

Question 6

The __________ is an agreement reached in 1944 among major industrialized countries that established fixed exchange rates with the U.S. dollar serving as the official reserve currency.

Accepted Answer

The Bretton Woods Accord was an agreement reached in 1944 among major industrialized countries that established fixed exchange rates with the U.S. dollar serving as the official reserve currency. The International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) were established under the Bretton Woods Agreement to provide financial assistance for postwar reconstruction and development. The Bank for International Settlements (BIS) was founded in 1930 to facilitate cooperation among central banks and provide financial services for international transactions, but it was not directly related to the Bretton Woods system.

Question 7

The __________ makes 12-to 15-year loans to poor countries, but not the poorest, charging an interest rate just above the rate at which the bank borrowed; it is affiliated with the World Bank...

Accepted Answer

The International Bank for Reconstruction and Development (IBRD), part of the World Bank Group, offers financial products and policy advice to middle-income and credit-worthy low-income countries, including 12-to 15-year loans with interest rates slightly above the bank's borrowing rate.

Question 8

The __________ is an investment bank created in 1944 that issues bonds to make low interest rate or interest-free, long-term loans to poor countries for economic development projects.

Accepted Answer

The International Development Association (IDA) is a part of the World Bank Group and was created in 1960 to provide interest-free, long-term loans and grants to the world's poorest countries for economic development projects. The International Bank for Reconstruction and Development (IBRD) is also a part of the World Bank Group but issues bonds to make low interest rate loans for middle-income countries. The International Monetary Fund (IMF) is a separate organization that provides financial assistance and policy advice to member countries experiencing economic hardships.

Question 9

Since World War II, the international financial system has been coordinated

Accepted Answer

After World War II, the international financial system was initially coordinated by a fixed exchange rate system through the Bretton Woods Agreement. However, in the 1970s, this system broke down, leading to the adoption of a flexible exchange rate system. Therefore, the international financial system has been coordinated first by a fixed exchange rate system and then by a flexible exchange rate system.

Question 10

The numerous rules, customs, instruments, facilities, markets, and organizations through which international payments are made and through which funds flow across borders is called

Accepted Answer

The international financial system encompasses all the rules, customs, instruments, facilities, markets, and organizations through which international payments are made and through which funds flow across borders. The other answer choices refer specifically to exchange rate systems within the international financial system.

Question 11

The U.S. dollar served as the __________ under the Bretton Woods accord.

Accepted Answer

The answer of The U.S. dollar served as the __________...

Question 12

__________ is when a currency has increased in value relative to another currency under a flexible exchange rate system.

Accepted Answer

Appreciation is when a currency increases in value relative to another currency in a floating exchange rate system. Depreciation is the opposite, when a currency decreases in value relative to another currency. Devaluation and revaluation involve deliberate government intervention to decrease or increase the value of a currency, respectively, in a fixed exchange rate system.

Question 13

__________ is when a currency has decreased in value relative to another currency under a flexible exchange rate system.

Accepted Answer

Depreciation is when a currency has decreased in value relative to another currency under a flexible exchange rate system. This means that it takes more units of the depreciated currency to equal one unit of the stronger currency.

Question 14

__________ is when a country increases the units of its currency equal to one unit of the official reserve asset under a fixed exchange rate system.

Accepted Answer

The answer of __________ is when a country increases the...

Question 15

__________ is when a country decreases the units of its currency equal to one ounce of the official reserve asset under a fixed exchange rate system.

Accepted Answer

The answer of __________ is when a country decreases the...

Question 16

During recent years, financial markets have

Accepted Answer

Financial markets have undergone significant change due to technological advancements in telecommunications and increased globalization. This has led to the emergence of new financial products, greater efficiency in trading and increased interconnectedness between markets.

Question 17

Suppose the dollar and the euro had an agreed-upon exchange of $1 = 1 euro and supply and demand factors caused the market value of the two currencies to move to $3 = 1 euro; in order to maintain the fixed exchange rate, the European Central Bank would

Accepted Answer

To maintain the fixed exchange rate of $1 = 1 euro, the European Central Bank would need to increase the supply of euros in the market by buying dollars with euros, thereby reducing the euro's value back to the agreed rate.

Question 18

Suppose the dollar and the euro had an agreed-upon exchange of $1 = 1 euro and supply and demand factors caused the market value of the two currencies to move to $1 = 3 euros; in order to maintain the fixed exchange rate, the European Central Bank would

Accepted Answer

To maintain the fixed exchange rate, the European Central Bank would need to buy euros with dollars. This would increase demand for euros and decrease demand for dollars, helping to keep the exchange rate at the agreed-upon rate of $1 = 1 euro.

Question 19

Which of the following is a major change since the Bretton Woods Accord broke down?

Accepted Answer

Since the breakdown of the Bretton Woods Accord, nations of the world have grown more interdependent due to the growth of world trade, with increased capital flows and a greater reliance on free trade policies. There has not been a retreat to isolationism, and nations have not become more independent as a result of increased trade.

Question 20

Which of the following statements about fixed exchange rates is true?

Accepted Answer

To revalue a currency means to increase its value relative to the official reserve asset. This is true under a fixed exchange rate system where the value of a currency is tied to a specific reserve asset, such as gold or another currency. Under a fixed exchange rate system, the value of a currency cannot fluctuate freely in response to market forces, making it susceptible to imbalances and capital flight.

Quiz 18: The International Financial System