Question 1

The difference between merchandise exports and imports is called the ________ balance.

Accepted Answer

A) current account 
B) capital account 
C) official reserve transactions 
D) trade

Question 2

Which of the following is not a disadvantage of exchange-rate targeting?

Accepted Answer

A) It relies on a stable money-inflation relationship. 
B) The targeting country gives up an independent monetary policy. 
C) The targeting country is left open for a speculative attack. 
D) It can weaken the accountability of policymakers.

Question 3

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

Accepted Answer

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

Question 4

Since the abandonment of the Bretton Woods system, balance of payments considerations have become ________ important, and exchange rate considerations ________ important in the conduct of monetary policy.

Accepted Answer

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

Question 5

Which of the following is true?

Accepted Answer

A) Special drawing rights are loans to countries made by the IMF. 
B) Changes in the quantity of special drawing rights are tied to changes in the quantity of gold. 
C) Special drawing rights are a paper substitute for gold. 
D) Special drawing rights are not held as international reserves.

Question 6

The World Bank is an international organization that ________.

Accepted Answer

A) promotes the growth of trade by setting rules for how tariffs and quotas are set by countries 
B) makes loans to countries to finance projects such as dams and roads 
C) makes loans to countries with balance of payment difficulties 
D) helps developing countries that have been having difficulties in repaying their loans to come to terms with lenders in the West

Question 7

If the current account balance shows a surplus, and the capital account also shows a surplus, then the official reserve transactions balance ________.

Accepted Answer

A) must be positive 
B) must be negative 
C) must be zero 
D) can either be positive, negative, or zero

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

Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the German central bank 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 10

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 11

Because the United States was the reserve-currency country under the Bretton Woods system, it could run large balance of payments ________ without ________ significant amounts of international reserves.

Accepted Answer

A) deficits; losing 
B) deficits; gaining 
C) surpluses; losing 
D) surpluses; gaining

Question 12

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

Accepted Answer

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

Question 13

Exchange-rate targeting allows a central bank to ________, thus this will ________ the probability of policy developing a time-inconsistency problem.

Accepted Answer

A) be governed by a policy rule; decrease 
B) follow discretionary policy; decrease 
C) be governed by a policy rule; increase 
D) follow discretionary policy; increase

Question 14

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 15

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

Accepted Answer

A) overvalued; below 
B) overvalued; above 
C) undervalued; below 
D) undervalued; above

Question 16

To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the ________ would loan ________ countries international reserves contributed by other members.

Accepted Answer

A) IMF; deficit 
B) IMF; surplus 
C) World Bank; deficit 
D) World Bank; surplus

Question 17

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 18

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 19

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 20

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

Exam 19: The International Financial System

The difference between merchandise exports and imports is called the ________ balance.

Which of the following is not a disadvantage of exchange-rate targeting?

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

Since the abandonment of the Bretton Woods system, balance of payments considerations have become important, and exchange rate considerations important in the conduct of monetary policy.

Which of the following is true?

The World Bank is an international organization that ________.

If the current account balance shows a surplus, and the capital account also shows a surplus, then the official reserve transactions balance ________.

A country that dollarizes ________.

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

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

Because the United States was the reserve-currency country under the Bretton Woods system, it could run large balance of payments without significant amounts of international reserves.

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

Exchange-rate targeting allows a central bank to , thus this will the probability of policy developing a time-inconsistency problem.

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?

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

To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the would loan countries international reserves contributed by other members.

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

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

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

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.