Exam 19: The International Financial System

As a result of its power to dictate loan terms to borrowing countries (under the Bretton Woods system), the IMF could encourage ________ countries to pursue ________ monetary policies that would strengthen their currency or eliminate their balance of payments deficits.

In response to the overvalued dollar in the early 1970s, the German Bundesbank bought ________ and sold ________ to keep the exchange rate fixed, gaining international reserves.

The Bretton Woods system broke down in the early 1970s for all but one of the following reasons.

Because it provides some indication of what is happening to Canadian claims on foreign wealth and the demand for imports and exports, the ________ is closely followed by economists wanting information on the future movement of exchange rates.

Policymakers in a country with a balance of payments surplus may not want to see their country's currency appreciate because this would ________.

An international lender of last resort creates a serious moral hazard problem because ________ and other ________ of banking institutions expect that they will be protected if a crisis occurs.

Between May and July 1997, concerns about the large current account deficit in Thailand and the weakness in the Thai financial system caused speculators to suspect that Thailand might be forced to ________.

In the 1990s, this agency has acted like an international lender of last resort to cope with financial instability.

If a central bank does not want to allow the domestic currency to appreciate, it will ________ international reserves by selling its currency, thereby ________ the monetary base and increasing the risk of higher inflation.

The German central bank gained international reserves in the early 1970s because it sold ________ to prevent mark ________.

When a country forgoes its own currency and starts using another country's currency as its own, we say that this country has ________.

To keep from running out of international reserves under the Bretton Woods system, a country had to implement ________ monetary policy to ________ its currency.

A capital ________ can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks, which helps trigger a ________.

The current international financial system is a managed float exchange rate system because ________.

The net amount of international reserves that move between governments to finance international transactions is called the ________ balance.

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

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

Which of the following appears in the capital account part of the balance of payments?

The revenue a government gains from issuing money is ________.

Explain how an unsterilized purchase of foreign assets impacts the exchange rate everything else held constant.