Question 1

In response to the overvalued dollar in the early 1970s,the German Bundesbank bought ________ and sold ________ to keep the exchange rate fixed,gaining international reserves.

Accepted Answer

To maintain the fixed exchange rate, the German Bundesbank bought dollars and sold marks. This action was aimed at preventing the dollar from depreciating further against the mark, thereby increasing their international reserves in dollars.

Question 2

Under the Exchange Rate Mechanism of the European Monetary System,when the British pound depreciated below its lower limit against the German mark,the German central bank was required to buy ________ and sell ________,thereby ________ international reserves.

Accepted Answer

When the British pound depreciated below its lower limit against the German mark, the German central bank was required to buy pounds (to support the pound's exchange rate) and sell marks (to maintain the mark's exchange rate). This means that the German central bank would be gaining international reserves as they would be acquiring more pounds and selling their own currency. Choice B accurately describes this process.

Question 3

Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system. What alternative policies are available to eliminate the overvaluation of the exchange rate?

Accepted Answer

The answer of Explain and demonstrate graphically the situation of...

Question 4

An international lender of last resort creates a serious moral hazard problem because ________ and other ________ of banking institutions expect that they will be protected if a crisis occurs.

Accepted Answer

Depositors and creditors expect that they will be protected if a crisis occurs because they know that an international lender of last resort will step in to bail out the banks. This creates a moral hazard problem whereby the banks are more likely to take on excessive risk since they know they will be bailed out if they fail.

Question 5

Which of the following is NOT a disadvantage of controls on capital outflows?

Accepted Answer

Controls on capital outflows are typically implemented to stabilize financial markets and prevent sudden capital flight. However, they do not inherently lead to excessive risk-taking by domestic banks. This risk-taking behavior is more associated with the regulatory environment and the banks' management practices rather than the controls on capital outflows themselves.

Question 6

A capital ________ can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks,which helps trigger a ________.

Accepted Answer

An inflow of capital can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking. This can then create a debt bubble, which may burst and trigger a financial crisis. A currency devaluation is not directly related to an inflow of capital.

Question 7

A capital ________ can promote financial instability in an emerging-market country because it is what forces a country to ________ its currency.

Accepted Answer

A capital outflow can promote financial instability in an emerging-market country because it represents a withdrawal of investment, leading to a decrease in the value of the country's currency. This often forces the country to devalue its currency to make its exports more competitive and stabilize the economy.

Question 8

In the early 1970s,the U.S. ran large balance of payments ________,causing an ________ dollar and an ________ German mark.

Accepted Answer

A balance of payments deficit means that the country is importing more goods and services than it is exporting, resulting in a net outflow of currency. This leads to a decline in the value of the currency, in this case, the U.S. dollar. An overvalued currency means that it is priced higher than its actual value in the market, while an undervalued currency means the opposite. Therefore, an undervalued German mark is a consequence of the overvalued U.S. dollar.

Question 9

In response to the overvalued dollar in the early 1970s,the German Bundesbank bought dollars and sold marks to keep the exchange rate fixed,gaining international reserves. The huge purchase of international reserves meant that the German monetary base began to ________,leading to ________ growth in the German money supply.

Accepted Answer

The Bundesbank's purchase of dollars and sale of marks led to an increase in international reserves, which in turn led to a rapid growth in the German money supply due to the expansion of the monetary base. Therefore, option D is the correct choice.

Question 10

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,the German central bank was required to buy ________ and sell ________,thereby ________ international reserves.

Accepted Answer

The answer of Under the Exchange Rate Mechanism of the...

Question 11

This agency acts like an international lender of last resort to cope with financial instability.

Accepted Answer

The IMF (International Monetary Fund) is an international organization that serves as a lender of last resort to countries facing financial crisis or instability. Its primary purpose is to ensure the stability of the international monetary system and promote international trade by providing emergency loans to its member countries. The World Bank and the International Bank for Reconstruction and Development (IBRD) focus more on financing long-term development projects, while the European Central Bank primarily manages monetary policy for the Eurozone countries.

Question 12

The Policy Trilemma states that a country or a monetary union can't pursue the following three policies at the same time

Accepted Answer

The Policy Trilemma (or Impossible Trinity) posits that it is impossible to have all three of the following at the same time: free capital mobility, a fixed exchange rate, and an independent monetary policy. Countries must choose between these options, sacrificing at least one.

Question 13

An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.

Accepted Answer

The creation of an international lender of last resort creates a moral hazard problem, as it leads to an increased likelihood of banks taking excessive risks, knowing that they will be bailed out in the event of a crisis. This expectation of protection also encourages depositors and other creditors to invest in risky or poorly managed banks, leading to potential instability in the financial system.

Question 14

The United States chooses to have ________ and ________ and therefore,cannot have a fixed exchange rate at the same time.

Accepted Answer

The United States has chosen to have free capital mobility and an independent monetary policy, which means that it cannot have a fixed exchange rate at the same time. With free capital mobility, capital flows in and out of the country without restrictions, which makes it impossible to control the exchange rate. At the same time, an independent monetary policy allows the central bank to adjust interest rates to achieve economic goals such as price stability or full employment, which can also have an impact on the exchange rate. Therefore, a fixed exchange rate cannot be maintained in such a scenario.

Question 15

In September 1992,the Bundesbank attempted to keep the mark from appreciating relative to the British pound,but it failed because participants in the foreign exchange market came to expect the

Accepted Answer

Participants in the foreign exchange market expected the mark to appreciate, which made it difficult for the Bundesbank to keep the mark from appreciating relative to the British pound.

Question 16

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,the Bank of England was required to buy ________ and sell ________,thereby ________ international reserves.

Accepted Answer

C)marks;pounds;gaining. Under the mechanism, if the German mark depreciated below its lower limit against the British pound, the Bank of England would buy marks and sell pounds to support the mark. This action would increase the Bank of England's holdings of foreign currency (marks), thereby increasing its international reserves.

Question 17

From 1994 to 2005,China chose to have ________ and ________ and therefore,could not have free capital mobility at the same time.

Accepted Answer

From 1994 to 2005, China had a fixed exchange rate and an independent monetary policy. Choosing a fixed exchange rate means that the government determines the value of the currency relative to other currencies, and this requires intervention in the foreign exchange market. On the other hand, having an independent monetary policy means that the government can control the money supply and interest rates to achieve macroeconomic objectives such as price stability and economic growth. However, having both a fixed exchange rate and free capital mobility is not feasible, because it would require the government to give up its ability to control monetary policy. With a fixed exchange rate, the government must intervene in the foreign exchange market to maintain the pegged exchange rate, and this requires restrictions on capital flows. As a result, China did not have free capital mobility during this period.

Question 18

A case for capital inflow controls can be made because capital inflows

Accepted Answer

Capital inflows can cause a lending boom as foreign investors seek higher returns in the domestic economy, which can lead to excessive risk-taking by domestic financial institutions. Capital inflow controls can limit the amount of capital that flows into the country and mitigate these risks. The other options are incorrect, as capital inflows can finance both productive and unproductive investments, and regulation of banking activities can also help prevent financial crises.

Question 19

Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

Accepted Answer

The answer of Assume that a fixed exchange rate is...

Question 20

Hong Kong chooses to have ________ and ________ and therefore,cannot have an independent monetary policy at the same time.

Accepted Answer

If Hong Kong wants to have free capital mobility, which means unrestricted movement of capital in and out of the country, it cannot have an independent monetary policy as well. This is because a fixed exchange rate is necessary to maintain the stability of the currency in the face of free capital mobility, which means that the exchange rate cannot be adjusted to respond to changes in the domestic economy. Therefore, the only option that is compatible with free capital mobility is a fixed exchange rate.

Quiz 18: The International Financial System

In response to the overvalued dollar in the early 1970s,the German Bundesbank bought and sold to keep the exchange rate fixed,gaining international reserves.

Under the Exchange Rate Mechanism of the European Monetary System,when the British pound depreciated below its lower limit against the German mark,the German central bank was required to buy and sell ,thereby international reserves.

Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system. What alternative policies are available to eliminate the overvaluation of the exchange rate?

An international lender of last resort creates a serious moral hazard problem because and other of banking institutions expect that they will be protected if a crisis occurs.

Which of the following is NOT a disadvantage of controls on capital outflows?

A capital can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks,which helps trigger a .

A capital can promote financial instability in an emerging-market country because it is what forces a country to its currency.

In the early 1970s,the U.S. ran large balance of payments ,causing an dollar and an German mark.

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,the German central bank was required to buy and sell ,thereby international reserves.

This agency acts like an international lender of last resort to cope with financial instability.

The Policy Trilemma states that a country or a monetary union can't pursue the following three policies at the same time

An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.

The United States chooses to have and and therefore,cannot have a fixed exchange rate at the same time.

In September 1992,the Bundesbank attempted to keep the mark from appreciating relative to the British pound,but it failed because participants in the foreign exchange market came to expect the

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,the Bank of England was required to buy and sell ,thereby international reserves.

From 1994 to 2005,China chose to have and and therefore,could not have free capital mobility at the same time.

A case for capital inflow controls can be made because capital inflows

Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

Hong Kong chooses to have and and therefore,cannot have an independent monetary policy at the same time.