Question 1

When a country experiences a currency crisis,the IMF
A) provides loans and grants to the government to purchase and distribute food and other necessities
B) purchases the country's currency, to signal international confidence in the currency
C) lends foreign reserves to the country's central bank
D) makes loans to public and private institutions within the country on a long term basis with relatively few restrictions
E) lends funds to neighboring countries, which can then purchase exports from the country experiencing the crisis

Accepted Answer

When a country experiences a currency crisis, the IMF typically provides loans to the country's central bank to help stabilize the currency and prevent further depreciation. These loans are typically provided in the form of foreign reserves, which can be used to support the value of the currency and provide liquidity to the financial system. This approach is intended to restore confidence in the currency and prevent capital flight, ultimately helping the affected country regain its financial footing. While the IMF may also provide other forms of support, such as technical assistance and policy recommendations, lending foreign reserves is typically the key tool used to address currency crises.

Question 2

Which of the following does not describe the Asian economies involved in the 1997 currency crisis?
A) banks had borrowed foreign currency and lent in domestic currency, exposing themselves to exchange rate risk
B) banks had borrowed on a short term basis and lent on a long term basis
C) over-accumulation of physical capital
D) high and rapidly rising trade barriers within Asia
E) high rates of domestic saving

Accepted Answer

High and rapidly rising trade barriers within Asia do not describe the Asian economies involved in the 1997 currency crisis. The crisis was caused, in part, by factors such as over-accumulation of physical capital, banks borrowing on a short term basis and lending on a long term basis, and banks exposing themselves to exchange rate risk by borrowing foreign currency and lending in domestic currency. Additionally, high rates of domestic saving were a characteristic of many Asian economies leading up to the crisis.

Question 3

Sterilized foreign exchange intervention is defined as
A) Intervention that is offset by open market operations that leave the monetary base unchanged
B) Intervention that is ineffective
C) Intervention that leaves the stock of domestic assets held by the Central Bank unchanged
D) Local currency buying intervention
E) Foreign currency buying intervention

Accepted Answer

Sterilized foreign exchange intervention involves the central bank conducting offsetting open market operations to neutralize the impact of foreign exchange intervention on the domestic monetary base, keeping it unchanged.

Question 4

Which of the following is true of currency crises?
A) They have become less frequent since 1978
B) They are often caused by slow, steady, capital inflows
C) They generally affect nominal exchange rates but not real exchange rates
D) They generally reduce national income
E) By making exports inexpensive and imports costly, they stimulate GDP

Accepted Answer

Currency crises typically lead to a reduction in national income due to the sudden stop in capital flows, depreciation of the national currency, and the subsequent adjustments in the economy. This can lead to a contraction in economic activity, affecting GDP negatively.

Question 5

Emerging markets undertake capital account liberalization to encourage
A) short term inflows
B) long term inflows
C) short term outflows
D) long term outflows
E) all of the above

Accepted Answer

Emerging markets undertake capital account liberalization to encourage long term inflows of foreign investment, such as foreign direct investment, portfolio investment and foreign loans. This is because long term inflows contribute to economic growth and development, while short term inflows can be volatile and destabilizing. Short term outflows are not encouraged as they can lead to currency depreciation and balance of payment problems.

Question 6

A resource-based Sovereign Wealth Funds can benefit a nation by
A) Converting a temporary resource windfall into a longer term income stream
B) Mitigating the 'Dutch disease'
C) Investing the proceeds of persistent FX buying by the Central Bank
D) Both a) and b)
E) Stabilizing the price of the natural resource

Accepted Answer

A resource-based Sovereign Wealth Fund can benefit a nation by both converting a temporary resource windfall into a longer-term income stream and mitigating the 'Dutch disease.' This is because such funds can help to smooth the volatility of income associated with natural resource revenues while simultaneously allocating resources toward long-term investments rather than short-term consumption.

Question 7

The next questions refer to the following.
Suppose the yen-pound exchange rate is currently £1 = ¥300. A Japanese bank borrows £2 million from UK lenders for 1 year at 6% interest, and lends ¥600 million to Japanese borrowers for 1 year at 8% interest.
-This strategy will fail to yield the bank a profit if
A) the UK inflation rate exceeds 2% during the year
B) Japan experiences deflation of 2% or more
C) the pound appreciates by 2%
D) the yen appreciates by 2% or more
E) short term interest rates in the UK rise above 8%

Accepted Answer

The answer of The next questions refer to the following.
Suppose...

Question 8

Advocates of capital account liberalization emphasize each of the following except the idea that capital flows
A) enable poor countries to borrow for investment
B) smooth consumption in the face of idiosyncratic risk
C) impose discipline on policy makers
D) increase the depth and sophistication of financial markets
E) lead to factor price equalization across countries

Accepted Answer

Advocates of capital account liberalization do not typically emphasize the idea that capital flows lead to factor price equalization across countries, which suggests that wages and returns to capital should be the same around the world.

Question 9

Dollarization occurs when
A) the Federal Reserve finances a federal budget deficit by buying newly issued Treasury bonds in order to prevent interest rates from rising
B) a country adopts the US dollar as its legal tender
C) foreign currency boards target the US dollar
D) US importers reprice items in dollar terms
E) The IMF or a central bank sells reserves of US dollars on the world market to alter exchange rates

Accepted Answer

Dollarization occurs when a country adopts the US dollar as its legal tender, meaning their economy will no longer have their own independent currency and instead they will use and transact with the US dollar.

Question 10

Which of the following is not a central feature in first generation models of currency crises?
A) budget deficits
B) reduction of the money supply
C) high inflation
D) depletion of a country's foreign exchange reserves
E) capital outflows

Accepted Answer

Reduction of the money supply is not a central feature in first generation models of currency crises. The other options (budget deficits, high inflation, depletion of foreign exchange reserves, and capital outflows) are all key features in these models.

Question 11

The central feature of second-generation currency crisis models is
A) large budget deficits
B) tight monetary policy
C) information lags
D) covered interest parity
E) self-fulfilling prophecies

Accepted Answer

The answer of The central feature of second-generation currency crisis...

Question 12

A Sovereign Wealth Fund is generally defined as
A) A fund that invests in Sovereign Debt
B) Central Bank holdings of foreign exchange
C) A State-Run Fund that generally invest overseas in risky and/or illiquid assets
D) A State-Run Fund that invests only in domestic assets
E) A fund that invests the wealth of a King or Queen

Accepted Answer

A Sovereign Wealth Fund is typically defined as a state-run investment fund that invests in a variety of assets, including international equities, real estate, private equity, and infrastructure. These funds are usually established by countries with large current account surpluses or significant mineral or energy resources. They aim to diversify their investments and generate returns that can be used for future generations or to support the government's budget. One of the main criticisms of these funds is that they can invest in risky or illiquid assets, which can expose the country to significant losses.

Question 13

In first-generation models of currency crises,speculators
A) play no significant role; only the government is to blame
B) initiate the crisis, to which the government must then respond
C) exacerbate the crisis when foreign reserves are depleted to a critical level
D) misinterpret market signals regarding a currency's long run value
E) help to stabilize the currency and prevent the financial system from collapsing

Accepted Answer

Speculators can exacerbate a currency crisis when foreign reserves are depleted to a critical level, as they may then sell off the currency in large amounts, leading to a further decline in its value.

Question 14

The Bretton Woods system
A) created flexible exchange rates following World War II
B) was the predecessor to the North American Free Trade Agreement (NAFTA)
C) replaced the European Exchange Rate Mechanism (ERM)
D) tied the dollar to gold and other currencies to the dollar
E) is the clearinghouse process by which nations buy and sell reserves of foreign currency

Accepted Answer

The Bretton Woods system, established in 1944, tied the value of the US dollar to gold, and fixed the exchange rates of other currencies to the dollar. This allowed for stability in international trade and investment, but eventually led to its collapse in the 1970s due to economic pressures and currency speculation.

Question 15

Which of the following is not a potential problem for emerging economies which liberalize their capital accounts to allow funds to flow in from developed countries?
A) Asymmetric information can cause funds to be directed into unprofitable sectors
B) A sudden withdrawal of foreign funds could create a recession
C) A weak banking sector can generate excessive risk taking as funds flow in
D) The inflows may be volatile and thus unpredictable
E) Investment could exceed the level of domestic saving

Accepted Answer

All of the other options are potential problems that could arise from liberalizing the capital account, but investment exceeding the level of domestic saving is not a problem. In fact, it could be seen as a positive outcome, as it would increase investment and economic growth.

Question 16

The Guidotti-Greenspan rule suggests that foreign exchange reserves a sufficient when they
A) Cover 3 months of imports
B) are equal to 20% of GDP
C) are equal to the value of foreign currency debt
D) are equal to 20% of M2
E) are equal to short term debt of one year maturity or less

Accepted Answer

The Guidotti-Greenspan rule suggests that foreign exchange reserves should be equal to short term debt of one year maturity or less. This is because such debt is most vulnerable to changes in market conditions and can quickly become unpayable if there is a sudden loss of investor confidence or other economic shocks. Therefore, having enough reserves to cover this debt can help mitigate against such risks and maintain stability in the economy.

Question 17

Which of the following has not been raised as a criticism of IMF lending?
A) It creates moral hazard among investors by protecting them from losses
B) The conditions imposed on recipient governments often go unfulfilled
C) The default rates are quite high
D) Recipient countries recover somewhat more slowly than non-recipients
E) The loans have become so large that the IMF may need to increase its own capital reserves

Accepted Answer

While there have been concerns about the economic impact of IMF lending, including issues of moral hazard, fulfillment of conditions, slower recovery, and the size of loans, high default rates are not typically cited as a major criticism of IMF lending.

Question 18

First generation models of currency crises can most reliably explain
A) the dollar crisis of the 1960s
B) Latin American currency crises in the 1970s and 1980s
C) the 1992 crisis in the European Exchange Rate Mechanism (ERM)
D) the Asian crisis of the 1990s
E) none of the above

Accepted Answer

First generation models of currency crises focus on the balance of payments and the role of speculation in triggering crises. Latin American countries faced a number of currency crises in the 1970s and 1980s, often brought on by high levels of debt, current account deficits, and external shocks such as changes in commodity prices. These factors align with the assumptions of first generation models, making them the most reliable explanation for these crises. The other options may be better explained by second or third generation models that take into account additional factors such as macroeconomic policies or financial market imperfections.

Question 19

The next questions refer to the following.
Suppose the yen-pound exchange rate is currently £1 = ¥300. A Japanese bank borrows £2 million from UK lenders for 1 year at 6% interest, and lends ¥600 million to Japanese borrowers for 1 year at 8% interest.
-The bank's expected net gain is
A) ¥40,000
B) ¥48,000
C) ¥360,000
D) ¥12,000,000
E) ¥24,000,000

Accepted Answer

The answer of The next questions refer to the following.
Suppose...

Question 20

The use of a crawling peg refers to
A) sequentially targeting different currencies as exchange rate pegs
B) repeated devaluations despite an ostensibly fixed exchange rate
C) an annual inflation target of 2%, which allows the price level to creep upward at a deliberate pace
D) an exchange rate band which moves over time according to a planned schedule
E) the gradually widening gap between the interest rates of 2 countries with a fixed exchange rate, due to a rising risk premium

Accepted Answer

The use of a crawling peg refers to an exchange rate band that moves over time according to a planned schedule. This allows for some flexibility in the exchange rate without completely abandoning the fixed exchange rate regime. The central bank can adjust the exchange rate periodically to reflect changes in economic conditions, such as inflation, trade imbalances, or capital flows. The crawling peg can be either upward or downward, depending on whether the country wants to depreciate or appreciate its currency over time.

Quiz 21: Currency Crises and Exchange Rate Systems

When a country experiences a currency crisis,the IMF

Which of the following does not describe the Asian economies involved in the 1997 currency crisis?

Sterilized foreign exchange intervention is defined as

Which of the following is true of currency crises?

Emerging markets undertake capital account liberalization to encourage

A resource-based Sovereign Wealth Funds can benefit a nation by

Advocates of capital account liberalization emphasize each of the following except the idea that capital flows

Dollarization occurs when

Which of the following is not a central feature in first generation models of currency crises?

The central feature of second-generation currency crisis models is

A Sovereign Wealth Fund is generally defined as

In first-generation models of currency crises,speculators

The Bretton Woods system

Which of the following is not a potential problem for emerging economies which liberalize their capital accounts to allow funds to flow in from developed countries?

The Guidotti-Greenspan rule suggests that foreign exchange reserves a sufficient when they

Which of the following has not been raised as a criticism of IMF lending?

First generation models of currency crises can most reliably explain

The next questions refer to the following. Suppose the yen-pound exchange rate is currently £1 = ¥300. A Japanese bank borrows £2 million from UK lenders for 1 year at 6% interest, and lends ¥600 million to Japanese borrowers for 1 year at 8% interest. -The bank's expected net gain is

The use of a crawling peg refers to