Question 1

A capital ________ can promote financial instability in an emerging-market country because it is what forces a country to ________ its currency.

Accepted Answer

A) inflow; devalue 
B) inflow; revalue 
C) outflow; devalue 
D) outflow; revalue

Question 2

Under the Bretton Woods system,the IMF could encourage deficit countries to pursue contractionary monetary policies that would ________ their currency or eliminate their balance of payment ________.

Accepted Answer

A) strengthen; surpluses 
B) strengthen; deficits 
C) weaken; surpluses 
D) weaken; deficits

Question 3

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

Accepted Answer

A) marks; appreciation 
B) dollars; appreciation 
C) marks; depreciation 
D) dollars; depreciation

Question 4

The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been known as the

Accepted Answer

A) General Agreement on Tariffs and Trade. 
B) Bretton Woods system. 
C) International Settlement Fund. 
D) Balance of Payments Compliance Accord.

Question 5

Everything else held constant,if a central bank makes an unsterilized ________ of foreign assets,then the domestic money supply will ________ and the domestic currency will appreciate.

Accepted Answer

A) purchase; increase 
B) purchase; decrease 
C) sale; increase 
D) sale; decrease

Question 6

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

Accepted Answer

A) devalue its currency. 
B) sell baht to prop up its value. 
C) buy dollars to prop up the baht. 
D) impose capital controls.

Question 7

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.

Accepted Answer

A) pounds; marks; losing 
B) pounds; marks; gaining 
C) marks; pounds; gaining 
D) marks; pounds; losing

Question 8

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

Accepted Answer

A) fall; strengthening 
B) fall; weakening 
C) rise; strengthening 
D) rise; weakening

Question 9

Assume that a fixed exchange rate is overvalued.Describe the situation of a speculative crisis against this currency.What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

Accepted Answer

The answer of Assume that a fixed exchange rate is...

Question 10

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.

Accepted Answer

A) depositors; debtors 
B) depositors; creditors 
C) borrowers; debtors 
D) borrowers; creditors

Question 11

Countries with surpluses in their balance of payments frequently do not want to see their currencies ________ because it makes their goods ________ expensive abroad.

Accepted Answer

A) appreciate; less 
B) appreciate; more 
C) depreciate; less 
D) depreciate; more

Question 12

When a domestic currency is completely backed by a foreign currency and the note-issuing authority establishes a fixed exchange rate to this foreign currency,then the country is said to have

Accepted Answer

A) created a currency board. 
B) undergone dollarization. 
C) adopted a managed exchange system. 
D) adopted an exchange rate monetary system.

Question 13

Which of the following does not appear in the current account part of the balance of payments?

Accepted Answer

A) A loan of $1 million from Bank of America to Brazil. 
B) Foreign aid to El Salvador. 
C) An Air France ticket bought by an American. 
D) Income earned by General Motors from its plants abroad.

Question 14

Capital ________ are American purchases of foreign assets,and capital ________ are foreign purchases of American assets.

Accepted Answer

A) inflows; outflows 
B) inflows; inflows 
C) outflows; outflows 
D) outflows; inflows

Question 15

When gold production was low in the 1870s and 1880s,the money supply grew ________ causing ________.

Accepted Answer

A) rapidly; inflation 
B) rapidly; disinflation 
C) slowly; deflation 
D) slowly; disinflation

Question 16

The revenue a government gains from issuing money is

Accepted Answer

A) interest. 
B) rent. 
C) seignorage. 
D) the national dividend. 
E) the inflation tax.

Question 17

The monetary policy strategy that does not allow the policy to focus on domestic considerations is

Accepted Answer

A) exchange-rate targeting. 
B) monetary targeting. 
C) inflation targeting. 
D) the implicit nominal anchor.

Question 18

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

Accepted Answer

A) sale; purchase 
B) sale; sale 
C) purchase; sale 
D) purchase; purchase

Question 19

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

Accepted Answer

A) moral hazard 
B) adverse selection 
C) public choice 
D) strategic choice

Question 20

The monetary policy strategy that results in the loss of an independent monetary policy is

Accepted Answer

A) exchange-rate targeting. 
B) monetary targeting. 
C) inflation targeting. 
D) the implicit nominal anchor.

Exam 18: The International Financial System

A capital can promote financial instability in an emerging-market country because it is what forces a country to its currency.

Under the Bretton Woods system,the IMF could encourage deficit countries to pursue contractionary monetary policies that would their currency or eliminate their balance of payment .

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

The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been known as the

Everything else held constant,if a central bank makes an unsterilized of foreign assets,then the domestic money supply will and the domestic currency will appreciate.

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

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.

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

Assume that a fixed exchange rate is overvalued.Describe the situation of a speculative crisis against this currency.What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

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.

Countries with surpluses in their balance of payments frequently do not want to see their currencies because it makes their goods expensive abroad.

When a domestic currency is completely backed by a foreign currency and the note-issuing authority establishes a fixed exchange rate to this foreign currency,then the country is said to have

Which of the following does not appear in the current account part of the balance of payments?

Capital are American purchases of foreign assets,and capital are foreign purchases of American assets.

When gold production was low in the 1870s and 1880s,the money supply grew causing .

The revenue a government gains from issuing money is

The monetary policy strategy that does not allow the policy to focus on domestic considerations is

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

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

The monetary policy strategy that results in the loss of an independent monetary policy is