Question 1

An advantage of an international lender of last resort is its ability to prevent ________,in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of ________ if creditors expect to be protected if a crisis occurs.

Accepted Answer

A) contagion; moral hazard 
B) contagion; adverse selection 
C) currency virus; moral hazard 
D) currency virus; adverse selection

Question 2

The Bretton Woods agreement created the ________,which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.

Accepted Answer

A) IMF 
B) World Bank 
C) Central Settlements Bank 
D) Bank of International Settlements

Question 3

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 4

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 5

Under the Bretton Woods system,the organization assigned the task of making loans to countries that were experiencing balance of payments difficulties is known as the

Accepted Answer

A) World Bank. 
B) International Development Association. 
C) International Monetary Fund. 
D) Federal Reserve System.

Question 6

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

Accepted Answer

A) lose; decreasing 
B) lose; increasing 
C) acquire; decreasing 
D) acquire; increasing

Question 7

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

Accepted Answer

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

Question 8

The monetary policy strategy that directly ties down the price of internationally traded goods is

Accepted Answer

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

Question 9

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 10

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

Accepted Answer

A) gain; devaluing 
B) gain; revaluing 
C) lose; devaluing 
D) lose; revaluing

Question 11

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 12

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged 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 13

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

Accepted Answer

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

Question 14

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

Accepted Answer

A) U.S.dollar. 
B) German mark. 
C) Swiss franc. 
D) Euro.

Question 15

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 16

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 17

Everything else held constant,if a central bank makes a sterilized sale of foreign assets,then the domestic currency will ________.

Accepted Answer

A) appreciate 
B) depreciate 
C) either appreciate,depreciate,or remain constant 
D) not be affected

Question 18

Under the Exchange Rate Mechanism of the European Monetary System,when the German mark depreciated below its lower limit against the British pound,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 19

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.

Accepted Answer

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

Question 20

When the domestic currency is initially overvalued 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

Exam 18: The International Financial System

An advantage of an international lender of last resort is its ability to prevent ,in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of if creditors expect to be protected if a crisis occurs.

The Bretton Woods agreement created the ________,which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.

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

Under the Bretton Woods system,the organization assigned the task of making loans to countries that were experiencing balance of payments difficulties is known as the

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

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

The monetary policy strategy that directly ties down the price of internationally traded goods is

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.

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

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?

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called

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

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 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.

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

Everything else held constant,if a central bank makes a sterilized sale of foreign assets,then the domestic currency will ________.

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

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.

When the domestic currency is initially overvalued 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 .