Question 1

The Bretton Woods system was a fixed exchange rate regime in which central banks bought and sold their own currencies to keep their exchange rates fixed.

Accepted Answer

A) True 
 B)False  True

Question 2

What is the bookkeeping system for recording all receipts and payments that have a direct bearing on the movement of funds between a nation and foreign countries?

Accepted Answer

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

Question 3

Which of the following are true statements about the Bretton Woods system?

Accepted Answer

A)  The Bretton Woods system was a fixed exchange rate regime, in which central banks bought and sold their own currencies to keep their exchange rates fixed.
B)  To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the IMF would loan deficit countries international reserves contributed by other members.
C)  The German mark was called a reserve currency because it was used to denominate the securities central banks held as international reserves.
D)  All of the above are true.
E)  Only A and B of the above are true. E

Question 4

When it acts as a lender of last resort, the IMF may increase the likelihood that financial institutions take excessive risks and thus increase moral hazard.

Accepted Answer

A) True 
 B)False

Question 5

Under a fixed exchange rate regime, when the domestic currency is overvalued, the central bank must ________ the domestic currency to keep the exchange rate fixed; as a result, it ________ international reserves.

Accepted Answer

A)  purchase; loses
B)  sell; loses
C)  purchase; gains
D)  sell; gains

Question 6

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

Accepted Answer

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

Question 7

A Federal Reserve decision to sell dollars in order to buy foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply.

Accepted Answer

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

Question 8

A balance of payments ________ is associated with a ________ of international reserves.

Accepted Answer

A)  deficit; loss
B)  deficit; gain
C)  surplus; loss
D)  balance; gain

Question 9

An unsterilized intervention in which domestic currency is purchased by selling foreign assets leads to a rise in international reserves, a decrease in the money supply, and an appreciation of the domestic currency.

Accepted Answer

A) True 
 B)False

Question 10

(I)Controls on capital outflows may increase capital flight by weakening confidence in the government. (II)Controls on capital outflows are an inadequate substitute for financial reform to deal with currency crises.

Accepted Answer

A)  (I) is true; (II) false.
B)  (I) is false; (II) true.
C)  Both are true.
D)  Both are false.

Question 11

A disadvantage of dollarization is that it

Accepted Answer

A)  prevents a central bank from creating inflation.
B)  avoids the possibility of a speculative attack on the domestic currency.
C)  does not allow a country to pursue its own independent monetary policy.
D)  is a strong commitment to exchange rate stability.

Question 12

If a country's central bank eventually runs out of international reserves, it cannot keep its currency from ________ and a ________ must occur in which the par exchange value is reset at a ________ level.

Accepted Answer

A)  appreciating; revaluation; higher
B)  depreciating; revaluation; higher
C)  depreciating; devaluation; lower
D)  appreciating; devaluation; lower

Question 13

By the end of 2010, China had accumulated more than $2 trillion of international reserves. How did China accomplish this? Is the policy sustainable?

Accepted Answer

The answer of By the end of 2010, China had...

Question 14

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

Accepted Answer

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

Question 15

Policymakers may not want to see their country's currency appreciate because

Accepted Answer

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

Question 16

Which of the following statements is correct?

Accepted Answer

A)  current account balance = capital account balance
B)  current account balance = capital account balance + net change in government international reserves
C)  current account balance + capital account balance = net change in government international reserves
D)  current account balance + net change in government international reserves = capital account balance

Question 17

How does a fixed exchange rate regime differ from a system of floating exchange rates?

Accepted Answer

The answer of How does a fixed exchange rate regime...

Question 18

Under dollarization, a country

Accepted Answer

A)  backs its currency 100 percent with foreign reserves.
B)  earns seigniorage because it no longer bears the cost of issuing its own currency.
C)  abandons its own currency and adopts the money of another country.
D)  must worry about a speculative attack on its currency.

Question 19

A Federal Reserve decision to purchase dollars by selling foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply.

Accepted Answer

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

Question 20

A current account ________ indicates that the United States is ________ its claims on foreign wealth.

Accepted Answer

A)  deficit; decreasing
B)  deficit; increasing
C)  surplus; decreasing
D)  balance; increasing

Exam 16: The International Financial System

The Bretton Woods system was a fixed exchange rate regime in which central banks bought and sold their own currencies to keep their exchange rates fixed.

What is the bookkeeping system for recording all receipts and payments that have a direct bearing on the movement of funds between a nation and foreign countries?

Which of the following are true statements about the Bretton Woods system?

When it acts as a lender of last resort, the IMF may increase the likelihood that financial institutions take excessive risks and thus increase moral hazard.

Under a fixed exchange rate regime, when the domestic currency is overvalued, the central bank must the domestic currency to keep the exchange rate fixed; as a result, it international reserves.

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

A Federal Reserve decision to sell dollars in order to buy foreign assets in the foreign exchange market has the same effect as an open market of bonds to the monetary base and the money supply.

A balance of payments is associated with a of international reserves.

An unsterilized intervention in which domestic currency is purchased by selling foreign assets leads to a rise in international reserves, a decrease in the money supply, and an appreciation of the domestic currency.

(I) Controls on capital outflows may increase capital flight by weakening confidence in the government. (II) Controls on capital outflows are an inadequate substitute for financial reform to deal with currency crises.

A disadvantage of dollarization is that it

If a country's central bank eventually runs out of international reserves, it cannot keep its currency from and a must occur in which the par exchange value is reset at a level.

By the end of 2010, China had accumulated more than $2 trillion of international reserves. How did China accomplish this? Is the policy sustainable?

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

Policymakers may not want to see their country's currency appreciate because

Which of the following statements is correct?

How does a fixed exchange rate regime differ from a system of floating exchange rates?

Under dollarization, a country

A Federal Reserve decision to purchase dollars by selling foreign assets in the foreign exchange market has the same effect as an open market of bonds to the monetary base and the money supply.

A current account indicates that the United States is its claims on foreign wealth.