Question 1

Under a pegged exchange rate regime,a country will peg the value of its currency to _____ so that its own currency rises too.

Accepted Answer

Under a pegged exchange rate regime, a country will peg the value of its currency to that of a major currency so that its own currency rises too. This means that the value of the country's currency will be determined by the exchange rate of the major currency it is pegged to. This allows the country to stabilize its currency and maintain a fixed exchange rate with other countries.

Question 2

The IMF has been criticized because of all of the following reasons except:

Accepted Answer

The given options mention that the IMF has been criticized for a "one-size-fits-all" approach, exacerbating moral hazard, and being too powerful without proper accountability. However, none of the options mention the IMF's lax macroeconomic policies during the Asian crisis, which were criticized for not being well suited to countries with deflationary undertones and private sector debt. Hence, option D is the correct answer as it is not mentioned in the given options.

Question 3

In 1997,the IMF agreed to provide the Thai government with $17.2 billion in loans to help its shattered economy.While doing so,IMF imposed all of the following restrictions except:

Accepted Answer

The IMF did impose the requirements of increasing taxes, cutting public spending, and privatizing state-owned businesses, but they did not require a reduction in interest rates.

Question 4

When a country commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate,the country has adopted a _____ system of exchange rates.

Accepted Answer

A currency board system involves a country committing to convert its domestic currency into another currency at a fixed exchange rate, maintaining full backing of its currency reserves.

Question 5

The use of the forward market and swaps to protect against foreign exchange risk has increased markedly since:

Accepted Answer

The collapse of the Bretton Woods system in 1973 marked the end of a fixed exchange rate regime and the beginning of a floating exchange rate system. This increased uncertainty and volatility in foreign exchange markets, leading to a greater use of forward contracts and swaps to manage foreign exchange risk.

Question 6

_____ arises when people behave recklessly because they know they will be saved if things go wrong.

Accepted Answer

This scenario describes the concept of moral hazard, where individuals or entities take greater risks because they know they will not bear the full consequences of their actions. In this case, people may act recklessly because they have an assurance that they will be saved if things go wrong, leading to potentially harmful outcomes.

Question 7

A fixed exchange rate regime:

Accepted Answer

The Bretton Woods system was a successful fixed exchange rate regime until it ended in the early 1970s. However, replicating it today is challenging due to changes in global economic conditions and the need for significant international cooperation and discipline.

Question 8

Because of the long-term implications of volatile exchange rates,firms should:

Accepted Answer

Pursuing strategies that reduce economic exposure is the most effective way for firms to manage the long-term implications of volatile exchange rates. The other options are not practical or feasible. The forward market is not a perfect predictor of future exchange rates, and insurance coverage for several years in the future is unlikely to be available. Avoiding foreign currency transactions would limit the firm's ability to engage in international trade and could result in lost opportunities.

Question 9

Pegged exchange rates are popular among many of the world's:

Accepted Answer

Pegged exchange rates are popular among smaller nations that have less stable or less established economies. These nations often have less ability to control their own currency value or manage fluctuations in the currency market, so they peg their currencies to a more stable currency like the US dollar or the Euro. This can help provide more stability and predictability for businesses and investors operating in those countries. Highly developed and large economies often have more established and stable currencies and may not need to rely on pegged exchange rates.

Question 10

A banking crisis:

Accepted Answer

A banking crisis specifically refers to a loss of confidence in the banking system, leading to individuals withdrawing their deposits en masse. This can result in the collapse of the banking system and severe economic repercussions. The other options describe different types of economic crises but do not specifically relate to the banking system.

Question 11

The _____ suggested that it would be desirable for most major currencies to appreciate relative to the dollar,and signatories pledged to intervene in the foreign exchange markets,selling dollars,to achieve this objective.

Accepted Answer

The Plaza Accord, signed in 1985, suggested that major currencies (including the Japanese Yen, German Deutsche Mark, and British Pound) should appreciate relative to the US dollar, in order to rebalance global trade and reduce US trade deficits. Signatories pledged to intervene in foreign exchange markets, selling dollars and buying other currencies, to achieve this objective. The Louvre Accord, signed in 1987, was a follow-up to the Plaza Accord and reaffirmed the commitment to exchange rate stability. The Bretton Woods Agreement (1944) established the post-World War II global monetary system, while the gold standard tied a currency's value to a fixed amount of gold.

Question 12

The 1995 Mexican currency crisis and the 1997 Asian financial crisis were the result of all of the following except:

Accepted Answer

The 1995 Mexican currency crisis and the 1997 Asian financial crisis were not caused by high balance-of-trade surplus, but rather by the other factors listed, such as excessive foreign borrowings, weak or poorly regulated banking systems, and high inflation rates.

Question 13

Under the _____ of 1987,the Group of Five agreed that exchange rates had realigned sufficiently from earlier levels and pledged to support the stability of exchange rates around their current levels by intervening in the foreign exchange market when necessary.

Accepted Answer

The Louvre Accord of 1987 was an agreement among the Group of Five to stabilize exchange rates after the realignment achieved by the Plaza Accord.

Question 14

According to some analysts,under a _____ regime,countries are limited in their ability to use monetary policy to expand or contract their economies by the need to maintain exchange rate parity.

Accepted Answer

Fixed exchange rate regime is characterized by a government's commitment to fix the value of its currency in relation to other currencies or a commodity such as gold, and maintain that fixity by buying and selling its own currency in foreign exchange markets. This constraint limits a country's ability to use monetary policy to manage its economy because any changes it makes to interest rates, money supply, or other measures affecting economic activity could lead to a change in the value of their currency, which would conflict with their commitment to maintain exchange rate parity.

Question 15

Under a strict currency board system,interest rates:

Accepted Answer

Under a strict currency board system, interest rates adjust automatically based on the supply and demand for money, as the currency board maintains a fixed exchange rate with a foreign currency and does not control monetary policy.

Question 16

When a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of a currency,a(n)_____ has occurred.

Accepted Answer

A currency crisis occurs when a speculative attack on the exchange value of a currency leads to a sudden and significant depreciation in its value. This can happen when investors and speculators believe that a currency is overvalued or when they lose confidence in a country's economy or government policies. This can lead to a decrease in foreign investment, capital flight, and potentially inflationary pressures. A currency crisis can also trigger other economic problems, such as a banking crisis or foreign debt crisis.

Question 17

The great virtue claimed for a pegged exchange rate is that it:

Accepted Answer

A pegged exchange rate system enforces monetary discipline on a country by limiting the central bank's ability to expand the money supply. The government must earn or borrow foreign currency reserves to maintain the peg, which encourages fiscal restraint and discipline. This helps to control inflation and stabilize the economy. The other choices - B, C, and D - do not accurately describe the effects of a pegged exchange rate system.

Question 18

In 2006,about a quarter of the IMF members had a(n)_____ exchange rate policy.

Accepted Answer

A fixed peg exchange rate policy refers to a situation where the value of a country's currency is fixed to a certain value, typically the US dollar or the euro. This policy is often adopted by countries with weaker economies seeking stability and lower inflation. In 2006, about a quarter of IMF members would have had a fixed peg exchange rate policy, according to the information provided. None of the other options (currency board, free float, or adjustable peg) necessarily involve a fixed exchange rate.

Question 19

A foreign debt crisis:

Accepted Answer

A foreign debt crisis occurs when a country cannot meet its debt obligations. This can happen when a country borrows heavily from foreign lenders and is unable to generate enough revenue to repay the loans. This can lead to default and can have severe consequences for the country's economy, including inflation, devaluation of the currency, and a decrease in foreign investment.

Question 20

A managed-float system is also known as a:

Accepted Answer

A managed-float system is a type of floating exchange rate system where a country's central bank intervenes in the foreign exchange market to influence the value of its currency. This intervention can take the form of buying or selling foreign currency, adjusting interest rates, or implementing other monetary policies. Because the central bank is actively managing the exchange rate, it is sometimes referred to as a dirty-float exchange rate system to distinguish it from a pure floating exchange rate system where the exchange rate is determined solely by market forces.

Quiz 10: The International Monetary System