Question 1

If a central bank does not want to see its currency rise in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby weakening its currency.

Accepted Answer

If a central bank wants to weaken its currency, it needs to lower the domestic interest rate. To do that, it may pursue expansionary monetary policy, such as increasing the money supply or lowering the bank reserve requirement. This would put downward pressure on the interest rate, making it less attractive for foreign investors to hold the domestic currency, thereby weakening its value.

Question 2

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 purchase of international reserves by the German Bundesbank leads to an increase in the monetary base. As a result, the growth in the German money supply becomes rapid. Therefore, the correct answer is D.

Question 3

If a central bank does not want to see its currency ________ in value, it may pursue contractionary monetary policy to raise the domestic interest rate, thereby ________ its currency.

Accepted Answer

Contractionary monetary policy, which involves raising interest rates, is typically used to reduce inflation and can lead to an appreciation of the currency. Higher interest rates attract foreign investors looking for higher returns, thus increasing demand for the currency and strengthening its value.

Question 4

Since the abandonment of the Bretton Woods system, balance of payments considerations have become ________ important, and exchange rate considerations ________ important in the conduct of monetary policy.

Accepted Answer

The Bretton Woods system was a fixed exchange rate system. Since its abandonment, countries have moved towards floating exchange rate systems where the exchange rate is determined by market forces. In such a system, balance of payments considerations become less important as the exchange rate adjusts to reflect the state of a country's external balance. On the other hand, exchange rate considerations become more important as central banks seek to manage the volatility and direction of their currencies. Therefore, the correct choice is D - less important for balance of payments considerations and more important for exchange rate considerations in the conduct of monetary policy.

Question 5

If a central bank does not want to allow the domestic currency to depreciate, it will ________ international reserves by purchasing its currency, thereby ________ the monetary base and increasing the risk of higher unemployment.

Accepted Answer

When a central bank wants to prevent its domestic currency from depreciating, it sells international reserves to buy its own currency, which decreases the monetary base. This action can lead to higher unemployment due to tighter monetary conditions.

Question 6

An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for ________ traded goods to what is found in the ________ country.

Accepted Answer

Exchange-rate targeting involves tying the value of a country's currency to that of another currency or a basket of currencies, which acts as an anchor. This helps keep inflation under control by linking the inflation rate for internationally traded goods to what is found in the anchor country, which helps to stabilize prices. Therefore, the correct choice is (C) internationally; anchor.

Question 7

If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency.

Accepted Answer

A contractionary monetary policy involving raising the domestic interest rate would attract foreign investment, increasing the demand for the currency and therefore increasing its value.

Question 8

A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting.

Accepted Answer

This type of monetary policy strategy is specifically focused on maintaining a fixed exchange rate with a low inflation country. This is achieved through interventions in the foreign exchange market to buy or sell the domestic currency in order to maintain the fixed exchange rate.

Question 9

Critics of the IMF contend that its lending in the ________ crisis, which was used to bail out foreign lenders, set the stage for the ________ crisis because these lenders expected to be bailed out if things went wrong and thus provided funds that were used to fuel excessive risk taking.

Accepted Answer

The question refers to a crisis in which the IMF's lending was used to bail out foreign lenders, which set the stage for another crisis. The only options that fit this scenario are the Mexican and East Asian crises. Of these two options, the latter is the more commonly associated with IMF lending and bailouts of foreign lenders, making D the best choice.

Question 10

Critics of the IMF contend that its lending in the Mexican crisis, which was used to bail out foreign ________, set the stage for the ________ crisis because these ________ expected to be bailed out if things went wrong.

Accepted Answer

The sentence states that the IMF's lending in the Mexican crisis was used to bail out foreign lenders. Therefore, the correct answer is option B, where the bailed-out foreign lenders are the lenders mentioned in the first blank, and the East Asian crisis is the crisis mentioned in the second blank, as these lenders became overconfident and expected to be bailed out again if things went wrong.

Question 11

If a central bank does not want to allow the domestic currency to appreciate, it will ________ international reserves by selling its currency, thereby ________ the monetary base and increasing the risk of higher inflation.

Accepted Answer

If a central bank wants to prevent the appreciation of its domestic currency, it will need to sell its currency on the foreign exchange market. This action will increase the supply of the domestic currency in the foreign exchange market, lowering its value relative to other currencies, and thereby preventing it from appreciating. In order to sell its currency, the central bank will need to acquire foreign currency reserves. This acquisition of reserves will increase the monetary base, which will increase the risk of inflation. Therefore, the answer is D, acquire; increasing.

Question 12

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 13

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of foreign currencies leads to ________ international reserves which ________ the monetary base.

Accepted Answer

When a central bank purchases foreign currencies to prevent its own currency from appreciating, it increases its international reserves. This action, in turn, increases the monetary base, which can stimulate domestic inflation.

Question 14

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of its currency leads to ________ international reserves which ________ the monetary base.

Accepted Answer

When a central bank sells its own currency to prevent appreciation, it reduces its international reserves, which in turn decreases the monetary base. This decrease in the monetary base reduces the central bank's ability to control inflation, leading to an increase in domestic inflation. Therefore, the correct choice is D.

Question 15

If a central bank does not want to see its currency ________ in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby ________ its currency.

Accepted Answer

The answer of If a central bank does not want...

Question 16

The German central bank gained international reserves in the early 1970s because it sold ________ to prevent mark ________.

Accepted Answer

The answer of The German central bank gained international reserves...

Question 17

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

Accepted Answer

A balance of payments deficit means that a country is spending more on imports than it is earning from exports. This leads to a decrease in demand for the country's currency, causing it to become overvalued. In this case, the US had a large balance of payments deficit, causing an overvalued dollar. On the other hand, Germany had a large balance of payments surplus, causing an undervalued German mark.

Question 18

Under an exchange-rate targeting rule for monetary policy, a crawling peg ________.

Accepted Answer

Under an exchange-rate targeting rule with a crawling peg, the domestic currency is allowed to gradually depreciate at a steady rate relative to the anchor currency. This allows the pegging country to have slightly higher inflation than the anchor country, as the depreciation of the currency helps offset any inflationary pressures.

Question 19

An advantage of an international lender of last resort is its ability to prevent ________, in which a successful speculative attack on one currency leads to attacks on others.

Accepted Answer

Contagion refers to the situation where a successful speculative attack on one currency leads to attacks on others. An international lender of last resort can prevent contagion by lending to countries in need of foreign exchange reserves, stabilizing their economies and preventing further speculative attacks on other currencies. Adverse selection refers to the situation where the borrower has all the information about the risk of the investment and the lender has none. Moral hazard refers to the situation where the lender assumes excessive risk because it does not bear the full cost of the risk. Currency virus is not a recognized term in economics.

Question 20

An advantage of an international lender of last resort is its ability to prevent ________, in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of ________ if creditors expect to be protected if a crisis occurs.

Accepted Answer

An international lender of last resort can prevent contagion, where a successful speculative attack on one currency leads to attacks on others, by providing liquidity when needed. However, this can create a moral hazard problem if creditors expect to be protected if a crisis occurs, which undermines incentives for risk management and can lead to further crises in the future. Options C and D are not commonly used terms in economics and are not relevant to the topic.

Quiz 19: The International Financial System

If a central bank does not want to see its currency rise in value, it may pursue monetary policy to the domestic interest rate, thereby weakening its currency.

If a central bank does not want to see its currency in value, it may pursue contractionary monetary policy to raise the domestic interest rate, thereby its currency.

Since the abandonment of the Bretton Woods system, balance of payments considerations have become important, and exchange rate considerations important in the conduct of monetary policy.

If a central bank does not want to allow the domestic currency to depreciate, it will international reserves by purchasing its currency, thereby the monetary base and increasing the risk of higher unemployment.

An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for traded goods to what is found in the country.

If a central bank does not want to see its currency fall in value, it may pursue monetary policy to the domestic interest rate, thereby strengthening its currency.

A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting.

Critics of the IMF contend that its lending in the crisis, which was used to bail out foreign lenders, set the stage for the crisis because these lenders expected to be bailed out if things went wrong and thus provided funds that were used to fuel excessive risk taking.

Critics of the IMF contend that its lending in the Mexican crisis, which was used to bail out foreign , set the stage for the crisis because these expected to be bailed out if things went wrong.

If a central bank does not want to allow the domestic currency to appreciate, it will international reserves by selling its currency, thereby the monetary base and increasing the risk of higher inflation.

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.

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the of foreign currencies leads to international reserves which the monetary base.

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the of its currency leads to international reserves which the monetary base.

If a central bank does not want to see its currency in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby its currency.

The German central bank gained international reserves in the early 1970s because it sold to prevent mark .

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

Under an exchange-rate targeting rule for monetary policy, a crawling peg ________.

An advantage of an international lender of last resort is its ability to prevent ________, in which a successful speculative attack on one currency leads to attacks on others.

An advantage of an international lender of last resort is its ability to prevent , in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of if creditors expect to be protected if a crisis occurs.