Exam 19: The International Financial System

Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves.

How would the Bank of Canada operate in a fixed exchange rate regime when the dollar is overvalued and undervalued? What are the effects on international reserves?

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to purchase the domestic currency by selling foreign assets.

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant.

Explain what is the unsterilized foreign exchange intervention.

A weakness of the Bretton Woods system was that the ________ had no way to force surplus countries to either revalue their exchange rates upwards or pursue more expansionary policies.

Both France and the United Kingdom successfully used exchange-rate targeting to lower inflation in the late 1980s and early 1990s by tying the value of their currencies to the ________.

Under a fixed exchange rate system, countries that ran large, persistent balance of payments deficits would ________ international reserves, thereby pressuring them into ________ their exchange rate.

Because central banks have not been willing to give up their option of intervening in the foreign exchange market, the current international financial system can best be described as a ________.

Under the Bretton Woods system, a country running a balance of payments surplus ________ international reserves, and had to implement ________ monetary policy to weaken its currency.

The account that shows international transactions involving financial transactions (stocks, bonds, bank loans, etc.)is called the ________.

Under a fixed exchange rate regime, a central bank that does not want to acquire international reserves to keep its currency from ________ will decide to ________ its currency.

Under a fixed exchange rate regime, if a central bank must intervene to purchase the ________ currency by selling ________ assets, then, like an open market sale, this action reduces the monetary base and the money supply, causing the interest rate on domestic assets to rise.

If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency.

Countries with balance of payments deficits do not want to see their currencies ________ because it makes foreign goods ________ expensive for domestic consumers.

Exchange-rate targeting is not an option for the U.S. because ________.

Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system. What alternative policies are available to eliminate the overvaluation of the exchange rate?

A balance of payments deficit is associated with a ________ of international reserves, while a balance of payments surplus is associated with a ________.

A current account surplus indicates that Canada is ________ its claims on foreign wealth, while a deficit indicates that this country is ________ its claims on foreign wealth.

Under an exchange-rate targeting rule for monetary policy, a crawling peg ________.