Question 1

When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base,it is called

Accepted Answer

A)  an unsterilized foreign exchange intervention. 
B)  a sterilized foreign exchange intervention. 
C)  an exchange rate feedback rule. 
D)  a money neutral foreign exchange intervention.

Question 2

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 3

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 4

When the domestic currency is initially undervalued in a fixed exchange rate regime,the central bank must intervene in the foreign exchange market to ________ the domestic currency,thereby allowing the money supply to ________.

Accepted Answer

A)  purchase; decline 
B)  sell; decline 
C)  purchase; increase 
D)  sell; increase

Question 5

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 6

Under a fixed exchange rate regime,if the domestic currency is initially undervalued,that is,above par,the central bank must intervene to sell the ________ currency by purchasing ________ assets.

Accepted Answer

A)  domestic; foreign 
B)  domestic; domestic 
C)  foreign; foreign 
D)  foreign; domestic

Question 7

The account that shows international transactions involving currently produced goods and services is called the

Accepted Answer

A)  trade balance. 
B)  current account. 
C)  balance of payments. 
D)  capital account.

Question 8

A country that dollarizes

Accepted Answer

A)  maximizes its seignorage. 
B)  earns the same amount of seignorage as it would with a currency board. 
C)  earns the same amount of seignorage as it would with exchange-rate targeting. 
D)  eliminates its seignorage. 
E)  must pay seignorage to other governments to use their currency.

Question 9

Because sterilized interventions mean offsetting open market operations,there is no impact on the monetary base and the money supply,and therefore a sterilized intervention

Accepted Answer

A)  causes the exchange rate to overshoot in the short run. 
B)  causes the exchange rate to undershoot in the short run. 
C)  causes the exchange rate to depreciate in the short run, but has no effect on the exchange rate in the long run. 
D)  has no effect on the exchange rate.

Question 10

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 11

Under the current managed float exchange rate regime,countries with ________ in their balance of payments frequently do not want to see their currencies ________ because it makes their goods more expensive abroad and foreign goods cheaper in their countries.

Accepted Answer

A)  surpluses; depreciate 
B)  deficits; depreciate 
C)  surpluses; appreciate 
D)  deficits; appreciate

Question 12

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

Accepted Answer

A)  loss; loss 
B)  loss; gain 
C)  gain; loss 
D)  gain; gain

Question 13

The monetary policy strategy that provides an automatic rule for the conduct of monetary policy is

Accepted Answer

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

Question 14

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

Accepted Answer

A)  expansionary; strengthen 
B)  expansionary; weaken 
C)  contractionary; strengthen 
D)  contractionary; weaken

Question 15

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

Accepted Answer

A)  hurt consumers in their country by making foreign goods more expensive. 
B)  hurt domestic businesses by making foreign goods cheaper in their country. 
C)  increase inflation in their country. 
D)  decrease the wealth of the country.

Question 16

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.

Accepted Answer

A)  IMF 
B)  World Bank 
C)  European Exchange Rate Mechanism (ERM) 
D)  Bank of International Settlements

Question 17

Under a fixed exchange rate regime,if a country has an undervalued exchange rate,then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves.

Accepted Answer

A)  depreciating; gain 
B)  depreciating; loss 
C)  appreciating; gain 
D)  appreciating; loss

Question 18

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 19

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

Accepted Answer

A)  lost; expansionary 
B)  lost; contractionary 
C)  gained; expansionary 
D)  gained; contractionary

Question 20

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.

Accepted Answer

A)  depreciating; revalue 
B)  depreciating; devalue 
C)  appreciating; revalue 
D)  appreciating; devalue

Exam 18: The International Financial System

When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base,it is called

The revenue a government gains from issuing money is

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?

When the domestic currency is initially undervalued in a fixed exchange rate regime,the central bank must intervene in the foreign exchange market to the domestic currency,thereby allowing the money supply to .

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

Under a fixed exchange rate regime,if the domestic currency is initially undervalued,that is,above par,the central bank must intervene to sell the currency by purchasing assets.

The account that shows international transactions involving currently produced goods and services is called the

A country that dollarizes

Because sterilized interventions mean offsetting open market operations,there is no impact on the monetary base and the money supply,and therefore a sterilized intervention

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.

Under the current managed float exchange rate regime,countries with in their balance of payments frequently do not want to see their currencies because it makes their goods more expensive abroad and foreign goods cheaper in their countries.

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

The monetary policy strategy that provides an automatic rule for the conduct of monetary policy is

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

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

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.

Under a fixed exchange rate regime,if a country has an undervalued exchange rate,then its central bank's attempt to keep its currency from will result in a of international reserves.

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.

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

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.