Question 1

Under a flexible exchange rate system_____________ would be changed in order to correct a disequilibrium in the nation's balance of payments.
A)monetary policies
B)fiscal policies
C)only the exchange rate
D)monetary and fiscal policies

Accepted Answer

Under flexible exchange rate system, only the exchange rate is allowed to be changed based on the market forces. This adjustment in exchange rate can help to correct the disequilibrium in the balance of payments by making exports cheaper and imports more expensive, thereby reducing the trade deficit or increasing the trade surplus. Monetary and fiscal policies may indirectly affect the exchange rate, but they are not directly used to correct imbalances in the balance of payments.

Question 2

The formation of an optimum currency area is more likely to be beneficial on balance:
A)the greater the mobility of resources among the various member nations
B)the less structurally similar the member countries are
C)the less willing the member countries are to closely coordinate their fiscal,monetary,and other policies.
D)the less willing the member countries are to interact with each other

Accepted Answer

The greater the mobility of resources among the member nations, the easier it is to adjust to shocks and imbalances within the currency area. This increases the likelihood of an optimum currency area being beneficial on balance.

Question 3

The system under which the exchange rate is always determined by the forces of demand and supply without any government intervention in foreign exchange markets is a(n):
A)fixed exchange rate system
B)import system
C)freely floating exchange rate system
D)export system

Accepted Answer

A freely floating exchange rate system allows the exchange rate to be determined solely by the market forces of demand and supply without any interference or intervention from the government. Therefore, option C is the correct choice. Option A, fixed exchange rate system, involves government intervention to maintain a fixed exchange rate. Option B and option D do not relate to the exchange rate system.

Question 4

An optimum currency area has all of the following except:
A)zero cost of official interventions in foreign exchange markets
B)No cost of hedging
C)zero cost of exchanging one currency for another to pay for imports of goods and tourist services
D)a common currency for all countries

Accepted Answer

An optimum currency area is a region where a uniform currency and exchange rate are desirable to facilitate economic transactions. Therefore, the presence of a common currency for all countries is an essential characteristic of an optimum currency area. The other options, such as zero cost of official interventions in foreign exchange markets, no cost of hedging, and zero cost of exchanging one currency for another to pay for imports of goods and tourist services, are desirable but not mandatory for an area to be considered an optimum currency area.

Question 5

_____________ was defined by the European Monetary System as the weighted average of the currencies of the EU members
A)The European Currency Unit
B)The European Monetary Cooperation Fund
C)The Euro
D)The European Monetary Institute

Accepted Answer

The European Currency Unit (ECU) was defined by the European Monetary System as the weighted average of the currencies of the EU members. It was used as a unit of account in international transactions and served as a precursor to the euro.

Question 6

Under which system does a nation not concern itself with external balance?
A)flexible exchange rate system
B)fixed exchange rate system
C)managed peg
D)gold standard

Accepted Answer

In a flexible exchange rate system, the value of a nation's currency is allowed to fluctuate according to the foreign exchange market. Therefore, the country does not need to intervene to maintain its currency value for the sake of external balance, as the market forces of supply and demand automatically adjust the exchange rate to balance external transactions.

Question 7

The formation of a(n)_____________ eliminates the uncertainty that arises when exchange rates are not permanently fixed,which in turn stimulates specialization in production among member nations.
A)optimum currency area
B)adjustable peg system
C)fixed exchange rate system
D)flexible exchange rate system

Accepted Answer

An optimum currency area is a region in which a single currency or exchange rate regime is optimal for facilitating economic transactions and efficiency. By eliminating uncertainty in exchange rates, it can stimulate production and specialization among member nations. B) and C) both refer to fixed exchange rates, which may not necessarily eliminate uncertainty as they can still be subject to adjustment or speculative movements. D) refers to flexible exchange rates, which inherently have a degree of uncertainty and may not necessarily stimulate specialization.

Question 8

A(n)______________ should aim at maximizing the benefits from permanently fixed exchange rates and minimizing the costs.
A)optimum currency area
B)adjustable peg system
C)fixed exchange rate system
D)flexible exchange rate system

Accepted Answer

An optimum currency area is a region where a fixed exchange rate system is likely to be most beneficial with minimal costs. In such an area, the economies are closely integrated and similar, making it possible for all the countries to benefit from a common currency. The ECB created the criteria for an optimum currency area, including similar economic structures, labor mobility, and capital mobility. Therefore, an optimum currency area is the best choice for maximizing benefits and minimizing costs for a fixed exchange rate system.

Question 9

A fixed exchange rate system is alleged to:
A)be efficient
B)adjust rates smoothly and does not require the use of policies
C)lead to policy mistakes
D)destabilize speculation

Accepted Answer

Fixed exchange rate systems can lead to policy mistakes, such as trying to maintain an artificially high or low exchange rate, which can have negative effects on the economy. Additionally, fluctuations in global markets and changes in other countries' economic policies can make it difficult to maintain a fixed exchange rate, leading to potential instability.

Question 10

Advocates of fixed exchange rates claim that flexible exchange rates:
A)increase the volume of international trade and investment
B)lead to stabilizing speculation
C)are inflationary
D)makes internal balance of the economy more difficult to attain

Accepted Answer

Advocates of fixed exchange rates argue that flexible exchange rates can lead to inflationary pressures due to currency depreciation, which can increase import prices and overall price levels.

Question 11

The organization formed by the members of the European Union in 1979 based on the creation of the European currency unit of account,limited exchange rate flexibility among members,and formation of the European Monetary Fund is known as the:
A)European Currency Unit
B)European Monetary Cooperation Fund
C)European Monetary System
D)European Monetary Institute

Accepted Answer

The organization formed by the members of the European Union in 1979 based on the creation of the European currency unit of account, limited exchange rate flexibility among members, and formation of the European Monetary Fund is known as the European Monetary System. Option A (European Currency Unit) represents only the currency unit, option B (European Monetary Cooperation Fund) is not a correct term, and option D (European Monetary Institute) was established in 1994 as a forerunner to the European Central Bank.

Question 12

A(n)_____________ refers to a group of nations whose national currencies are linked through permanently fixed exchange rates.
A)optimum currency area
B)adjustable peg system
C)fixed exchange rate system
D)flexible exchange rate system

Accepted Answer

The answer of A(n)_____________ refers to a group of nations...

Question 13

In order to attain the goal of a monetary union,the president of the European Commission recommended a stage based transition.Which stage of this transition involved the completion of the monetary union with the establishment of a single currency and a European Central Bank.
A)Stage one
B)Stage two
C)Stage three
D)Stage four

Accepted Answer

The answer of In order to attain the goal of...

Question 14

A(n)_________________ allows an optimum currency area to be more likely to experience greater price stability.
A)permanently flexible exchange rate
B)permanently fixed exchange rate
C)managed peg system
D)currency board

Accepted Answer

A permanently fixed exchange rate would provide greater price stability for an optimum currency area since it would eliminate fluctuations in exchange rates and reduce uncertainty for economic agents.

Question 15

In order to attain the goal of a monetary union,the president of the European Commission recommended a stage based transition.Which stage of this transition called for the creation of an European Monetary Institute (EMI)?
A)Stage one
B)Stage two
C)Stage three
D)Stage four

Accepted Answer

The answer of In order to attain the goal of...

Question 16

Which of the following was (were)not one of the main feature(s)of the European Monetary System (EMS)?
A)creation of the European Currency Unit
B)allowing the currency of each EU member to fluctuate by a maximum of 2.25 percent on either side of its center rate
C)the establishment of the European Cooperation Fund
D)Paris was selected as the headquarter of the EMS

Accepted Answer

The European Monetary System (EMS) did not have its headquarters in Paris; it was not an institution with a physical headquarters like the European Central Bank. The EMS was a framework for managing exchange rates and monetary policy among participating European Union countries, established to foster monetary stability in Europe.

Question 17

The case against fixed exchange rates is:
A)the alleged smaller degree of uncertainty introduced into international trade and finance
B)being more likely to lead to stabilizing speculation
C)the greater price discipline than under flexible rates
D)requires the use of policies to figure out how to deal with pressures on the foreign exchange rate

Accepted Answer

The case against fixed exchange rates is that it requires the use of policies to figure out how to deal with pressures on the foreign exchange rate. Fixed exchange rates make it difficult for policymakers to adjust to external shocks such as changes in the balance of payments or changes in the international monetary environment. Thus, there is a need for policies to manage such pressures, which can lead to difficulties in implementation and effectiveness.

Question 18

From March 1979 to September 1992,how many times the European Monetary System had to realign their currency as high-inflation member countries devalued their currencies?
A)5
B)11
C)12
D)14

Accepted Answer

Between March 1979 and September 1992, the European Monetary System had to realign their currencies a total of 11 times due to high inflation in member countries leading to devaluations.

Question 19

In order to attain the goal of a monetary union,the president of the European Commission,recommended a stage based transition.Which stage of this transition called for convergence of economic performance and cooperation in monetary and fiscal policy?
A)stage one
B)stage two
C)stage three
D)stage four

Accepted Answer

The answer of In order to attain the goal of...

Question 20

Under a ____________,a nation is free to utilize all polices at its disposal to achieve its goal of full employment with price stability without having to worry about external balance.
A)flexible exchange rate system
B)fixed exchange rate system
C)managed peg
D)gold standard

Accepted Answer

Under a flexible exchange rate system, a nation's currency is allowed to float freely in response to market forces without any interference from the government or central bank. This means that the country would not have to worry about external balance or maintaining a fixed exchange rate. Instead, the country can focus on implementing policies to achieve full employment with price stability without being constrained by the need to maintain a specific exchange rate.

Quiz 15: Flexible Versus Fixed Exchange Rates,european Monetary Systems,and Macroeconomic Policy Coordination

Under a flexible exchange rate system_____________ would be changed in order to correct a disequilibrium in the nation's balance of payments.

The formation of an optimum currency area is more likely to be beneficial on balance:

The system under which the exchange rate is always determined by the forces of demand and supply without any government intervention in foreign exchange markets is a(n) :

An optimum currency area has all of the following except:

_____________ was defined by the European Monetary System as the weighted average of the currencies of the EU members

Under which system does a nation not concern itself with external balance?

The formation of a(n) _____________ eliminates the uncertainty that arises when exchange rates are not permanently fixed,which in turn stimulates specialization in production among member nations.

A(n) ______________ should aim at maximizing the benefits from permanently fixed exchange rates and minimizing the costs.

A fixed exchange rate system is alleged to:

Advocates of fixed exchange rates claim that flexible exchange rates:

The organization formed by the members of the European Union in 1979 based on the creation of the European currency unit of account,limited exchange rate flexibility among members,and formation of the European Monetary Fund is known as the:

A(n) _____________ refers to a group of nations whose national currencies are linked through permanently fixed exchange rates.

In order to attain the goal of a monetary union,the president of the European Commission recommended a stage based transition.Which stage of this transition involved the completion of the monetary union with the establishment of a single currency and a European Central Bank.

A(n) _________________ allows an optimum currency area to be more likely to experience greater price stability.

In order to attain the goal of a monetary union,the president of the European Commission recommended a stage based transition.Which stage of this transition called for the creation of an European Monetary Institute (EMI) ?

Which of the following was (were) not one of the main feature(s) of the European Monetary System (EMS) ?

The case against fixed exchange rates is:

From March 1979 to September 1992,how many times the European Monetary System had to realign their currency as high-inflation member countries devalued their currencies?

In order to attain the goal of a monetary union,the president of the European Commission,recommended a stage based transition.Which stage of this transition called for convergence of economic performance and cooperation in monetary and fiscal policy?

Under a ____________,a nation is free to utilize all polices at its disposal to achieve its goal of full employment with price stability without having to worry about external balance.