Question 1

Limiting net external wealth effects could be accomplished by limiting movements in the exchange rate. What measure might address this situation?
A) devaluing the currency
B) keeping nominal interest rates exactly 1% higher than one's trading partners
C) borrowing only in U.S. dollars
D) pegging the exchange rate to the currency of the largest creditor nation

Accepted Answer

Pegging the exchange rate to the currency of the largest creditor nation would limit movements in the exchange rate and therefore limit net external wealth effects. This would provide stability for trade and investment, reducing the risk of sudden shifts in wealth due to exchange rate fluctuations. A devaluation of the currency (choice A) would have the opposite effect, as it would entail a sudden and dramatic shift in the exchange rate. Keeping nominal interest rates higher than one's trading partners (choice B) and borrowing only in U.S. dollars (choice C) would have limited impact on net external wealth effects, as they are not directly related to exchange rate stability.

Question 2

In a system in which there is an administered exchange rate, what is the term used when the government sets the rate higher to buy fewer units of foreign currency?
A) a revaluation
B) an appreciation
C) a depreciation
D) a devaluation

Accepted Answer

When a government sets the exchange rate higher to buy fewer units of foreign currency, it is called a devaluation. This is typically done to make the country's exports cheaper and more competitive on the global market. A devaluation can also help reduce trade deficits by making imports more expensive.

Question 3

In a noncooperative pegged situation, when the home country devalues in response to an external shock the:
A) foreign nation will also devalue, endangering the peg.
B) home country suffers the entire burden.
C) resulting depreciation causes a large shift in demand from the foreign nation to the home country, thereby exporting the recession to the foreign nation.
D) nations agree to switch their peg to the U.S. dollar.

Accepted Answer

In a noncooperative pegged situation, when the home country devalues its currency in response to an external shock, it makes its goods cheaper relative to the foreign nation's goods. This causes a shift in demand from the foreign nation to the home country, effectively exporting the recession or economic downturn to the foreign nation by improving the home country's trade balance at the expense of the foreign nation's economy.

Question 4

In nations that cannot borrow in their own currencies, which exchange rate system is more destabilizing and less useful in terms of stabilizing GDP?
A) floating exchange rates
B) fixed exchange rates
C) banded exchange rates
D) open pegs

Accepted Answer

Floating exchange rates can be more destabilizing for countries that cannot borrow in their own currencies, as they are more susceptible to currency speculation and sudden shifts in exchange rates, which can lead to economic instability and make it harder to stabilize GDP. Fixed, banded, or pegged rates provide more predictability.

Question 5

When analyzing cooperative fixed exchange rate agreements, there are two forms of cooperation:
A) decentralized and center-oriented.
B) agreement over interest rates and agreement over exchange rates.
C) compromise and democratic methodology.
D) idiosyncratic and rules-based.

Accepted Answer

The two forms of cooperation when analyzing cooperative fixed exchange rate agreements are agreement over interest rates and agreement over exchange rates. None of the other options accurately reflect the two forms of cooperation in this context.

Question 6

In practice, cooperative agreements are:
A) the largest single exchange rate format.
B) easy to maintain because they have little impact on the nations.
C) often contentious because nations favor their own situations over those of their trading partners.
D) impossible to maintain because nations have widely differing systems and values.

Accepted Answer

Cooperative agreements can be difficult to negotiate and maintain because nations often prioritize their own interests over those of their trading partners. This can lead to contentious negotiations and disputes.

Question 7

Political tensions may arise from nations pegging to a center base country's currency if:
A) asymmetric shocks cause the home nation to lose the power to stabilize.
B) it is determined that the center nation has been misrepresenting the value of its currency.
C) financing of military spending becomes more difficult.
D) interest rates are affected.

Accepted Answer

If asymmetric shocks (sudden events that affect one country or a group of countries differently than others) cause the home nation to lose its ability to stabilize its economy, tensions may arise as the center country's currency peg may no longer be suitable for the home nation's economic needs. This can lead to political tensions and disputes between the two countries. The other options (B, C, and D) may also cause tensions, but they are not necessarily direct consequences of pegging to a center country's currency.

Question 8

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (cooperatively) and to the center as a result of a demand shock, what is the effect?
A) The center nation will require that the two line up their rates.
B) The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the impact of the demand shock).
C) The devaluing nation will see a larger increase in demand while its partner will suffer more (thus favoring the devaluing nation).
D) Both nations will suffer more because the center nation will match the devaluation, thus negating the effect.

Accepted Answer

When one nation devalues its exchange rate against the other partner (cooperatively) and to the center as a result of a demand shock, it becomes cheaper for the devaluing nation to export its goods, which may increase demand for its products. On the other hand, it may become more expensive for the partner nation to import goods from the devaluing nation, possibly decreasing demand for its products. However, since both nations are pegged to a center nation, the center nation may require that they align their exchange rates. This aligning may not necessarily negate the effect of the devaluation, but it may prevent further devaluations.

Question 9

When a country has monetary autonomy, it can:
A) conduct monetary policy independently of all other countries.
B) conduct monetary policy only in coordination with all other countries.
C) conduct monetary policy only in cooperation with its reserve currency country (the country to which it fixes its currency).
D) print money without affecting inflation.

Accepted Answer

Monetary autonomy refers to the ability of a country to conduct its own monetary policy independent of other countries. This means that the country can adjust its interest rates, control the money supply, and influence inflation rates without coordinating with other countries.

Question 10

A cooperative outcome in a situation where one nation pegs to another would be that the:
A) center country abandons its own stabilization policy in favor of the home country.
B) home country absorbs the losses resulting from the stabilization policy in the center country.
C) center country makes concessions, recognizing the impact on the home country, thereby sharing the pain.
D) peg is temporarily abandoned.

Accepted Answer

In a situation where one nation pegs to another, a cooperative outcome would involve the center country making concessions and recognizing the impact on the home country, thereby sharing the pain. This approach ensures that both countries bear the burden of any potential losses resulting from the stabilization policy. Abandoning the peg or abandoning the center country's own stabilization policy would not be a cooperative outcome, as it would place all the burden on one country. Similarly, the home country absorbing the losses resulting from the stabilization policy would also not be a cooperative outcome, as it would place an undue burden on the home country.

Question 11

In a reserve currency system (such as the Bretton Woods system or the European ERM), currencies peg to a reserve currency. As a result:
A) only the reserve currency country has monetary autonomy.
B) all countries, other than the reserve currency country, have monetary autonomy.
C) all countries have monetary autonomy.
D) no country has monetary autonomy.

Accepted Answer

In a reserve currency system, other countries peg their currency to the reserve currency. This means that the value of their currency will be tied to the reserve currency, and their monetary policy will be influenced by the monetary policy of the reserve currency country. Therefore, only the reserve currency country (e.g. US in the case of Bretton Woods system) has complete monetary autonomy, while other countries have limited autonomy.

Question 12

If the center nation operates under a cooperative peg agreement, how does the cooperation work?
A) The home nation will try to resist any changes coming from the center.
B) The home nation will accept all changes coming from the center without discussion.
C) The center nation will make policy concessions to other nations in its cooperative currency agreement.
D) Cooperation usually does not work well.

Accepted Answer

In a cooperative peg agreement, the center nation will make policy concessions to other nations in its agreement to promote stability and cooperation in their currencies. Therefore, choice C is the most appropriate answer.

Question 13

A pegged rate system that includes policy cooperation is usually:
A) difficult to maintain.
B) a good compromise for nations who want exchange rate stability, stable output, and some flexibility.
C) not a good bet for nations who are large trading partners.
D) administered by large private banks.

Accepted Answer

A pegged rate system that includes policy cooperation allows nations to maintain exchange rate stability and stable output while also allowing for some flexibility. This is a good compromise for nations who want the benefits of both fixed and flexible exchange rates. While it may be difficult to maintain and may not be a good bet for large trading partners, it is still a viable option for smaller nations. The system is not administered by large private banks, but instead requires cooperation and coordination among national governments and central banks.

Question 14

Fear of floating is:
A) when the benefits of floating exchange rates outweigh the costs.
B) when the attractions of fixed exchange rates are large relative to those of floating.
C) when countries adopt the gold standard.
D) when countries say they are floating, but fix their exchange rates in practice.

Accepted Answer

Fear of floating refers to a situation where a country prefers fixed exchange rates to floating exchange rates even when the benefits of floating exchange rates outweigh the costs. This could be due to factors such as the attraction of the stability that comes with fixed exchange rates or fear of potential currency fluctuations. Therefore, option B is the correct answer as it states that fear of floating occurs when attractions of fixed exchange rates are large relative to those of floating.

Question 15

In a noncooperative environment of pegged exchange rates, if the home nation is experiencing high inflation due to excessive demand, it may choose to ______, which would cause______.
A) forgo the pegged exchange rate; extreme depreciation
B) devalue its currency; the foreign nation to suffer deficient demand for its products
C) cut the monetary growth rate; a rise in interest rates
D) revalue its currency; the foreign nation to suffer excessive demand for its products

Accepted Answer

The answer of In a noncooperative environment of pegged exchange...

Question 16

In a system in which there is an administered exchange rate, what is the term used when the government sets the rate lower to buy more units of foreign currency?
A) a revaluation
B) an appreciation
C) a depreciation
D) a devaluation

Accepted Answer

The answer of In a system in which there is...

Question 17

If there is a center country to which other nations peg under a noncooperative arrangement, which nation(s) have monetary policy authority?
A) none
B) all
C) industrialized nations only
D) the center nation only

Accepted Answer

The center nation will have the monetary policy authority in a noncooperative arrangement where other nations peg under it.

Question 18

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (noncooperatively) and to the center as a result of a demand shock, what is the effect?
A) The center nation will require that the two line up their rates.
B) The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the effect of the demand shock).
C) The devaluing nation will devalue more steeply and will see a larger increase in demand while its partner will suffer more (thus favoring the devaluing nation).
D) Both nations will suffer more because the center nation will match the devaluation, thus negating the effect.

Accepted Answer

The answer of If two nations both peg to a...

Question 19

A noncooperative outcome after the center nation has undertaken a stabilization policy in response to an asymmetric shock would be that the:
A) center country abandons its own stabilization policy in favor of the home country.
B) home country absorbs the losses resulting from the stabilization policy in the center country.
C) center country makes concessions, recognizing the impact on the home country and thereby sharing the pain.
D) peg is temporarily abandoned.

Accepted Answer

The noncooperative outcome implies that the home country (the one not initiating the stabilization policy) ends up bearing the negative consequences of the center country's stabilization efforts, without any compensatory actions or policy adjustments from the center country.

Question 20

Why are cooperative arrangements difficult to negotiate and maintain?
A) They require a long-term policy commitment, but politics is often focused on the short run.
B) No one understands the benefits and consequences.
C) Trading nations do not trust one another.
D) They have to be approved by the IMF, which takes years to accomplish.

Accepted Answer

Cooperative arrangements, such as international trade agreements, require a long-term policy commitment and can take years to negotiate, but politics is often focused on the short run, making it difficult to maintain such agreements.

Quiz 19: Fixed Versus Floating: International Monetary Experience

Limiting net external wealth effects could be accomplished by limiting movements in the exchange rate. What measure might address this situation?

In a system in which there is an administered exchange rate, what is the term used when the government sets the rate higher to buy fewer units of foreign currency?

In a noncooperative pegged situation, when the home country devalues in response to an external shock the:

In nations that cannot borrow in their own currencies, which exchange rate system is more destabilizing and less useful in terms of stabilizing GDP?

When analyzing cooperative fixed exchange rate agreements, there are two forms of cooperation:

In practice, cooperative agreements are:

Political tensions may arise from nations pegging to a center base country's currency if:

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (cooperatively) and to the center as a result of a demand shock, what is the effect?

When a country has monetary autonomy, it can:

A cooperative outcome in a situation where one nation pegs to another would be that the:

In a reserve currency system (such as the Bretton Woods system or the European ERM) , currencies peg to a reserve currency. As a result:

If the center nation operates under a cooperative peg agreement, how does the cooperation work?

A pegged rate system that includes policy cooperation is usually:

Fear of floating is:

In a noncooperative environment of pegged exchange rates, if the home nation is experiencing high inflation due to excessive demand, it may choose to , which would cause.

In a system in which there is an administered exchange rate, what is the term used when the government sets the rate lower to buy more units of foreign currency?

If there is a center country to which other nations peg under a noncooperative arrangement, which nation(s) have monetary policy authority?

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (noncooperatively) and to the center as a result of a demand shock, what is the effect?

A noncooperative outcome after the center nation has undertaken a stabilization policy in response to an asymmetric shock would be that the:

Why are cooperative arrangements difficult to negotiate and maintain?