Question 1

In the 1930s, some nations such as the United States and Britain abandoned their gold pegs by adopting ________, whereas other nations such as Germany and South American nations adopted ________.

Accepted Answer

In the 1930s, nations like the United States and Britain moved away from the gold standard and adopted floating exchange rates along with open capital markets to manage their economies during the Great Depression. Conversely, countries such as Germany and those in South America opted for fixed exchange rates and implemented capital controls to stabilize their currencies and economies.

Question 2

Explain seigniorage and how it influences the choice of exchange rate regime.

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Question 3

Adding to the problems of low-income nations is the effect of currency depreciation on external wealth. Discuss various views on this issue.

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Question 4

Noncooperative adjustments could lead to a cycle of competitive devaluations. Explain this concept and how it might affect a fixed exchange rate system.

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Question 5

Explain why economic similarity is such an important issue for countries deciding whether to fix or float.

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Question 6

Traders in nations abiding by rules of Bretton Woods found ways to avert restrictions on _______ by offshore banking and improper accounting reporting.

Accepted Answer

The phrase "capital controls" refers to restrictions on the movement of money across borders, which was a key feature of the Bretton Woods system. Traders found ways to evade these restrictions by using offshore banks, which were located outside the jurisdiction of the capital controls, and by engaging in improper accounting practices to hide their transactions. The other options - imports, gold movements, and interest rate changes - were also regulated under Bretton Woods, but they do not directly relate to the issue of capital controls.

Question 7

What are benefits of a cooperative peg versus a noncooperative peg?

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Question 8

Suppose that Venezuela pegs its bolivar to the Mexican peso. Suppose further that both countries are in a recession. Using the IS-LM-FX model, explain what will happen in Venezuela when Mexican firms begin to expect higher profits in the future.

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Question 9

What is a beggar-thy-neighbor policy and why would a country engage in such a policy?

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Question 10

Explain the concept of liability dollarization.

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Question 11

Which of the following did NOT lead to the collapse of Bretton Woods?

Accepted Answer

Ample supplies of gold actually helped to support Bretton Woods, as the system was based on fixed exchange rates with gold serving as the underlying anchor. The collapse of Bretton Woods was due to the other factors listed, including the collapse of capital controls, the cost of the Vietnam War, and the unwillingness of other countries to continue pegging their currencies to the U.S. dollar at the fixed rate established by Bretton Woods.

Question 12

How does exchange rate volatility affect economic integration?

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Question 13

During the Great Depression era, what happened to the gold standard?

Accepted Answer

The Great Depression marked the breakdown of the gold standard as countries abandoned it in order to combat deflationary pressures and stimulate their economies. One by one, countries abandoned the gold standard until it effectively disappeared as a global monetary system.

Question 14

From 1929 to 1935, countries that:

Accepted Answer

This is based on historical evidence and research, as many countries that abandoned the gold standard during the Great Depression experienced higher rates of economic growth and were able to implement more expansionary monetary policies, while countries that continued on the gold standard were constrained by its limitations.

Question 15

Evaluate the following claim: Fixed exchange rates help reduce inflation in developing economies.

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Question 16

Which is the best characterization of the current international payments system?

Accepted Answer

Currently, there is no standard or set of rules that all nations follow in terms of their exchange rate regimes and capital flows. Each nation chooses the system that they believe works best for their individual circumstances at the time. While some nations have floating exchange rates, others still peg currencies to other nations or use a fixed exchange rate system. Overall, the international payments system is characterized by diversity and a lack of uniformity.

Question 17

Suppose Ireland decides to peg its currency to the U.S. dollar. What is the likely impact of expansionary fiscal policy by the United States on Ireland?

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Question 18

"Original sin" sometimes refers to a nation's inability to borrow in its own currency, and therefore is forced to borrow and repay internationally in other currencies. Why is this the case? What other problems flow from this inability?

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Question 19

Home's currency is the peso and trades at 2 pesos per dollar. Home has external assets of $100 billion, all of which are denominated in dollars. It has external liabilities of $250 billion, 50% of which are denominated in dollars. What happens to net wealth (in pesos) if the peso depreciates to 3 pesos per dollar?

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Question 20

Low-income nations have a dilemma as to whether to fix or float. There are many factors that affect their decisions and how effectively they can manage a financial system. Discuss a few of these issues and the factors that play into the success of a policy.

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Quiz 19: Fixed Versus Floating: International Monetary Experience

In the 1930s, some nations such as the United States and Britain abandoned their gold pegs by adopting , whereas other nations such as Germany and South American nations adopted .