Question 1

If freely floating currencies are allowed to fluctuate against one another,at times the fluctuations might be quite large.

Accepted Answer

Freely floating currencies are not fixed to any particular value or anchor, and their exchange rates are determined by market forces like supply and demand. This means that their values can fluctuate widely based on various economic and political factors affecting the countries issuing them. Therefore, it is true that at times the fluctuations can be quite large.

Question 2

The Fisher effect describes interest rate parity; it's the law of one price applied to interest rates.Interest rates vary to take into account anticipated differences in inflation levels.

Accepted Answer

The Fisher effect describes interest rate parity where interest rates vary to take into account anticipated differences in inflation levels.

Question 3

The complexity of the gold standard was a part of its appeal.

Accepted Answer

The gold standard was primarily valued for its simplicity and reliability in providing a fixed currency value based on a specific amount of gold, rather than its complexity.

Question 4

Currency exchange rate movements are well understood by economists and can be accurately forecast,which eliminates risk for the international seller operating with exposure outside the home currency.

Accepted Answer

While economists have tools to analyze and forecast currency exchange rate movements, there are many factors that can impact the rates, such as geopolitical events, market sentiment, and unexpected economic data releases. Therefore, it is difficult to accurately predict exchange rate movements in the long run. As a result, international sellers with exposure outside their home currency may face currency risk.

Question 5

The controlling mechanism for a gold-based exchange system and a floating rate system are the same.

Accepted Answer

The controlling mechanism for a gold-based exchange system is based on the fixed value of gold, while a floating rate system is based on market supply and demand. Therefore, the controlling mechanism for these two systems is different.

Question 6

The Bretton Woods system led to minimal growth in international trade but helped to reduce inflation levels.

Accepted Answer

The Bretton Woods system actually led to significant growth in international trade, but also resulted in increasing inflation levels.

Question 7

One possible current currency arrangement is a fixed peg,where the exchange rate of a currency is allowed to move (within a narrow band)with another currency.One example is the Canadian dollar to the U.S.dollar.

Accepted Answer

The definition of fixed peg is correct, but the example is false. One example of a fixed peg is the Saudi riyal against the U.S. dollar.

Question 8

The law of one price states that in an efficient market,like products will never have like prices.

Accepted Answer

The law of one price states that like products should have like prices in an efficient market.

Question 9

DeGaulle pushed Nixon to close the gold window at Treasury,and this one action moved the IMF toward a floating exchange rate system.

Accepted Answer

The decision to close the gold window was made by President Nixon in 1971, primarily due to economic pressures and the depletion of U.S. gold reserves, not directly due to pressure from DeGaulle. This action led to the end of the Bretton Woods system and the move towards floating exchange rates.

Question 10

A central reserve asset is a holding that has value that is held by private banks in case of a liquidity crisis.

Accepted Answer

A central reserve asset is typically held by central banks (not private banks) as part of their foreign exchange reserves to manage the country's currency exchange rate and ensure financial stability.

Question 11

The exchange rate for today for delivery within two days is known as the current rate.

Accepted Answer

The exchange rate for delivery within two days is known as the "spot rate," not the current rate. The current rate refers to the exchange rate at the present moment.

Question 12

Global foreign currency exchanges transactions total over $3.2 trillion daily.

Accepted Answer

According to the Bank for International Settlements, global foreign currency exchanges transactions averaged $6.6 trillion daily in April 2019.

Question 13

Countries put limitations on the convertibility of their currencies when they are concerned that their foreign reserves could be depleted.

Accepted Answer

When countries put limitations on the convertibility of their currencies, it is usually done to prevent their foreign reserves from being depleted too quickly. This is because if too many people try to convert their currency all at once, the country's reserves may not be able to keep up with the demand, and this could lead to a devaluation of the currency. By limiting convertibility, the government is able to control the pace at which people can convert their currency, and this helps to ensure that the country's reserves are not depleted too quickly.

Question 14

The Big Mac Index is an example of purchasing power parity,an international measure of junk food consumption.

Accepted Answer

The Big Mac Index is an informal measure of purchasing power parity (PPP) between two currencies, not a measure of junk food consumption. It compares the price of a Big Mac in different countries to assess currency value.

Question 15

As a result of Bretton Woods and the dollar's use as a proxy for gold,the U.S.ran up a Balance of Payments deficit of around $56 billion,which led to the U.S.going off the gold exchange standard in 1971.

Accepted Answer

The statement is true. The U.S. running up a Balance of Payments deficit due to the Bretton Woods system and the dollar's use as a proxy for gold was a significant factor that contributed to the decision to abandon the gold exchange standard in 1971.

Question 16

Sir Isaac Newton established the price of gold in 1717 and de facto put England on the gold standard.

Accepted Answer

Sir Isaac Newton was appointed Master of the Mint in 1699 and played a significant role in establishing the gold standard in England. He established the price of gold in 1717, which was used as the basis for valuing the currency and setting exchange rates.

Question 17

The Bretton Woods meeting in 1944 established a fix rate exchange system among Allied governments that was imposed on the Axis governments.

Accepted Answer

The Bretton Woods meeting in 1944 established a fixed exchange rate system among Allied nations, but it was not imposed on Axis governments, as they were not part of the agreement.

Question 18

Exchange rate forecasting is an advanced science; with the correct data,we can predict with accuracy exchange rate movements.

Accepted Answer

Exchange rate forecasting is not an exact science and is subject to a variety of unpredictable economic and political factors. While data can be helpful in predicting movements, there is always a level of uncertainty involved.

Question 19

The international Fisher effect states that the interest rate differentials for any two currencies reflect the expected change in their exchange rates.

Accepted Answer

The international Fisher effect is a theory that suggests that nominal interest rates of two countries should have an equal difference in their inflation rates. This means that if a country's inflation rate is higher than another's, then its nominal interest rate should also be higher if the international Fisher effect holds true. However, the Fisher effect does not necessarily state that interest rate differentials reflect expected changes in exchange rates.

Question 20

The Bank for International Settlements operates as the banker for central banks.

Accepted Answer

The Bank for International Settlements (BIS) is often referred to as the "central bank of central banks" because of its role in providing services and support to central banks around the world. It is responsible for facilitating international monetary and financial cooperation and is the banker for central banks.

Quiz 8: The International Monetary System and Financial Forces