Florida Atlantic University - MAN 3600

ch11

1)The international monetary system refers to a system to regulate fixed exchange rates before the introduction of the euro.

True    False

2. When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a pegged exchange rate regime.

True    False

3. A pegged exchange rate means the value of the currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

True    False

4. In a fixed exchange rate system, the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency.

True    False

5. As the volume of international trade expanded in the wake of the Industrial Revolution, shipping large quantities of gold around the world to finance international trade became impractical.

True    False

6. Given a common gold standard, the value of any currency in units of any other currency (the exchange rate) was easy to determine.

True    False

7. A country is said to be in balance-of-trade equilibrium when the income its residents earn from exports is greater than the money its residents pay to other countries for imports.

True    False

8. Under the gold standard, a country in balance-of-trade equilibrium will experience a net flow of gold from other countries.

True    False

9. If more dollars are needed to buy an ounce of gold than before, the implication is that the dollar is worth more.

True    False

10. The major problem with the gold standard was that no multinational institution could stop countries from engaging in competitive devaluations.

True    False

11. According to the Bretton Woods agreement, if a currency became too weak to defend, a devaluation of up to 10 percent would be allowed without any formal approval by the International Monetary Fund.

True    False

12. The architects of the Bretton Woods agreement wanted to avoid high unemployment, so they built the fixed exchange rate system to be highly inflexible.

True    False

13. When the Bretton Woods participants established the World Bank, the need to lend money to third world nations was foremost in their minds.

True    False

14. Under the International Bank for Reconstruction and Development scheme, the World Bank offers low- interest loans to risky customers whose credit rating is often poor.

True    False

15. As the only currency that could be converted into gold, the British pound occupied a central place in the fixed exchange rate system.

True    False

16. Under the fixed exchange rate system, the dollar could be devalued only if all countries agreed to simultaneously revalue against the dollar.

True    False

17. The Bretton Woods system could work only as long as the U.S. inflation rate remained low and the United States did not run a balance-of-payments deficit.

True    False

18. Since March 1973, currency exchange rates have become less volatile and more predictable than they were between 1945 and 1973.

True    False

19. Under a floating exchange rate regime, market forces have produced a volatile dollar exchange rate. True         False
20. Under a floating exchange rate system, a country’s ability to expand or contract its money supply as it sees fit is limited by the need to maintain exchange rate parity.

True    False

21. Under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade, it would require the International Monetary Fund to agree to a currency devaluation.

True    False

22. Under a pegged exchange rate regime, a country will peg the value of its currency to that of a major currency, so that if the reference currency rises in value, its own currency rises too.

True    False

23. The disadvantage of a pegged exchange rate regime is that it aggravates inflationary pressures in a country.

True    False

24. It can be very difficult for a small country to maintain a peg against another currency if capital is flowing out of the country and foreign exchange traders are speculating against the currency.

True    False

25. A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.

True    False

26. Under a currency board system, the government has the absolute authority to set interest rates. True            False
27. The activities of the International Monetary Fund have declined after the collapse of the Bretton Woods system in 1973.

True    False

28. At times, elements of currency, banking, and debt crises may be present simultaneously in a region. True         False
29. All International Monetary Fund loan packages come with conditions attached. True      False

30. A benefit of the International Monetary Fund is that it does not have a mechanism for accountability.

True    False

31. The International Monetary Fund can force countries to adopt the policies required to correct economic mismanagement.

True    False

32. Some economists argue that higher inflation rates might be good if the consequence is greater growth in aggregate demand.

True    False

33. The forward exchange market is an accurate predictor of future exchange rates. True            False
34. In the face of unpredictable exchange rate movements, a firm should pursue strategies that reduce its economic exposure.

True    False

35. Contracting out manufacturing may be more appropriate for high-value-added manufacturing. True        False
36. Which of the following refers to the institutional arrangements that govern exchange rates?
    1. Generally accepted accounting principles
    2. General agreement on tariffs and trade
    3. International monetary system
    4. General agreement on trade in services
    5. Financial management information system
37.             refers to a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand.
    1. Fixed exchange rate
    2. Floating exchange rate
    3. Flexible exchange rate
    4. Pegged exchange rate
    5. Nominal exchange rate
38. A              means the value of the currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

38. 1. flexible exchange rate
    2. pegged exchange rate
    3. real exchange rate
    4. dirty float exchange rate
    5. floating exchange rate
39. Many of the world’s developing nations peg their currencies, primarily to the          .
    1. U.S. dollar
    2. Saudi riyal
    3. Japanese yen
    4. Chinese yuan
    5. German deutsche marks
40. In a floating exchange rate, the relative value of a currency:
    1. is more predictable and less volatile.
    2. is determined by market forces.
    3. changes infrequently only under a specific set of circumstances.
    4. is set against other currencies at some mutually agreed on exchange rate.
    5. does not depend on the free play of market forces.

41.             refers to a system under which a country's currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value.
    1. Fixed float
    2. Clean float
    3. Pegged float
    4. Dirty float
    5. Capital float
42. Which of the following statements is true about the various exchange rate systems?
    1. In a fixed exchange rate system, the value of a currency is adjusted according to the day to day market forces.

B In a clean float, the central bank of a country will intervene in the foreign exchange market to try to

. maintain the value of its currency.

C After the collapse of the Bretton Woods system of floating exchange rates in 1973, the world has

. operated with a fixed exchange rate system.

DAccording to the Bretton Woods system, the value of most currencies in terms of U.S. dollars was

. allowed to change only under a specific set of circumstances.

E In dirty float, the exchange rate between a currency and other currencies is relatively fixed against a

. reference currency exchange rate.

43. The           refers to a system to regulate fixed exchange rates before the introduction of the euro.
    1. European Free Trade Association
    2. European Monetary System
    3. international monetary system
    4. International Finance Corporation
    5. European Federation of Accountants
44. The values of a set of currencies are set against each other at some mutually agreed on exchange rate in a

           exchange rate system.

44. 1. clean float
    2. floating
    3. fixed
    4. dirty float
    5. pegged
45. The 1944 Bretton Woods conference created two major international institutions that play a role in the international monetary system—the International Monetary Fund (IMF) and the .
    1. United Nations
    2. European Union
    3. World Trade Organization
    4. World Bank
    5. G20
46. The 1944 Bretton Woods system called for             exchange rates against the U.S. dollar.
    1. flexible
    2. floating
    3. fixed
    4. dirty float
    5. pegged
47. Which of the following refers to the gold standard?
    1. Pegging currencies to gold and guaranteeing convertibility
    2. Conducting international trade by physically exchanging gold
    3. The most valuable currency in the world at any given point in time
    4. The common global standard of gold quality to be maintained
    5. The quality of merchandise to be maintained for it to be exportable

48. Which of the following is a reason for the emergence of the gold standard?
    1. Expansion in the volume of international trade due to the Industrial Revolution
    2. Inability of governments to convert gold into paper currency on demand at a fixed rate
    3. Widening gap between the developed and the developing nations
    4. Failure of the Bretton Woods fixed exchange rate system
    5. Failure of the U.S. dollar to act as a reference currency
49. In terms of the gold standard, the amount of currency needed to purchase one ounce of gold was referred to as the .
    1. gold to bond ratio
    2. gold reserve ratio
    3. gold mix ratio
    4. gold par value
    5. gold net value
50. A country is said to be in             when the income its residents earn from exports is equal to the money its residents pay to other countries for imports.
    1. a currency crisis
    2. balance-of-trade equilibrium
    3. balance-of-payments deficit
    4. a banking crisis
    5. free trade area
51. Which of the following is a great strength of the gold standard?
    1. It helped establish the dollar as a predominant vehicle currency.
    2. It helped governments raise foreign exchange reserves thereby increasing economic stability.
    3. It contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries.
    4. It helped reduce inflation to near-zero levels in all countries engaged in international trade.
    5. It helped to establish a common currency across the globe to fund international trade.
52. Which of the following statements is true about the gold standard?
    1. Given a common gold standard, the value of any currency in units of any other currency was easy to determine.

B Establishing a gold standard seemed impractical as the volume of international trade expanded in the

. wake of the Industrial Revolution.

C A drawback of the gold standard was that it failed to provide a mechanism for achieving balance-of-

. trade equilibrium by all countries.

D Under the gold standard, when a country has a trade deficit, there will be a net flow of gold from the

. other countries to that country.

E. The gold standard refers to the use of gold coins as a medium of exchange between countries involved in international trade.

53. In the 1930s, confidence in the             was shattered because countries were devaluing their currencies at will in order to boost exports.
    1. floating exchange rate system
    2. gold standard system
    3. fixed exchange system
    4. Bretton Woods system
    5. managed-float system
54. Certovia and Norkland are two neighboring countries that actively trade goods and services with each other. Under the gold standard, there will be a net flow of gold from Norkland to Certovia when:
    1. Certovia is in trade deficit with Norkland.
    2. Norkland is in balance-of-trade equilibrium with Certovia.
    3. Certovia is in trade surplus with Norkland.
    4. Certovia imports more than it exports to Norkland.
    5. Norkland’s balance of payment to Certovia is favorable.

55. Argonia Republic is in trade surplus with Kamboly. Under the gold standard, which of the following statements is true until a balance-of-trade equilibrium is achieved?
    1. There will be a net flow of gold from Argonia Republic to Kamboly
    2. The money supply in Kamboly will reduce due to the flow of gold to Argonia Republic
    3. The prices of the traded goods in Kamboly will increase
    4. The demand for traded goods in Argonia Republic will increase
    5. Kamboly will start to buy more goods from Argonia Republic
56. Which of the following was a reason that led to the collapse of the gold standard in 1939?
    1. Difficulty and complexity in using the gold standard to determine the exchange rate
    2. Agreement by governments to convert paper currency into gold on demand at a fixed rate
    3. A cycle of competitive currency devaluations by various countries
    4. Expansion in the volume of international trade in the wake of the Industrial Revolution
    5. The inability of the gold standard to act as a mechanism for achieving balance-of-trade equilibrium by all countries
57. According to the             in 1944, all countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold.
    1. Bretton Woods agreement
    2. Washington Consensus
    3. World Bank treaty
    4. Group of Five treaty
    5. United Nations agreement
58. The objective of establishing the World Bank was to:
    1. revive the gold standard.
    2. promote general economic development.
    3. control and manage the International Monetary Fund.
    4. promote a floating exchange rate system.
    5. approve large currency devaluations.
59. According to the Bretton Woods agreement of 1944, which was the only currency that remained convertible into gold?
    1. U.S. dollar
    2. British pound
    3. Japanese yen
    4. German deutsche mark
    5. Chinese yuan
60. Which of the following observations is true of the Bretton Woods agreement?
    1. The participating countries were required to exchange their currencies for gold.
    2. Devaluation was accepted as a tool of competitive trade policy.
    3. The agreement called for a system of floating exchange rates.

D For weak currencies, devaluation of up to 10 percent was allowed without any formal approval by the

. International Monetary Fund.

E. A fixed exchange rate system was deemed impractical.

61. An aspect of the Bretton Woods agreement was a commitment not to use:
    1. the system of fixed exchange rates.
    2. devaluation as a weapon of competitive trade policy.
    3. gold as a measure to fix the value of currencies.
    4. funds from the International Monetary Fund and the World Bank.
    5. the U.S. dollar as a reference currency.

62. Under a fixed exchange rate regime, what would be the result if a country rapidly increased its money supply by printing currency?
    1. It would lead to increase in the worth of the currency.
    2. The prices of imports would become more attractive in the country.
    3. The country’s goods would be highly competitive in world markets.
    4. Trade surplus in the country would increase.
    5. It would lead to price deflation in the country.
63. The architects of the Bretton Woods agreement built limited flexibility into the fixed exchange rate system in order to:
    1. avoid high unemployment.
    2. facilitate competitive currency devaluations.
    3. widen balance-of-payments gap between countries.
    4. increase money supply and thereby price inflation.
    5. avoid balance-of-trade equilibrium between countries.
64. The architects of the Bretton Woods agreement wanted to avoid high unemployment, so they built limited flexibility into the fixed exchange rate system. Which of the following is a major feature of the International Monetary Fund (IMF) Articles of Agreement that fostered this flexibility?
    1. Competitive currency devaluations
    2. Lending facilities
    3. Communist ideologies
    4. Floating exchange rates
    5. Unrestricted authority to print currency
65. Which of the following statements is true about the role of the International Monetary Fund?
    1. It never interfered in the monetary and fiscal conditions of its member countries.
    2. It was authorized to approve currency devaluations of only up to 10 percent.
    3. It required member countries to adhere to specific agreements irrespective of the amount of funds the countries borrowed.

DIt lent money under the International Bank for Reconstruction and Development (IBRD) scheme and a

. second scheme which is overseen by the International Development Association (IDA).

E. It helped deficit-laden countries bring down inflation rates by providing short-term foreign currency loans.

66. How does the International Monetary Fund (IMF) provide loans to deficit-laden countries?
    1. It prints the required currencies, thereby increasing money supply in those countries.
    2. It acts as a market, buying goods from these countries and selling it to developed countries.
    3. A pool of gold and currencies contributed by its members provides the resources for the lending operations.
    4. The World Bank lends the required amount to the IMF at a low interest rate.
    5. It collects money from those countries that wish to devaluate their currencies.
67. Which term was not defined in the International Monetary Fund's Articles of Agreement but was intended to apply to countries that had suffered permanent adverse shifts in the demand for their products?
    1. Competitive disadvantage
    2. Capital flight
    3. Fundamental disequilibrium
    4. Break-even point
    5. Diseconomies of scale
68. The system of adjustable parities allowed for the devaluation of a country’s currency by more than 10 percent if the International Monetary Fund (IMF) agreed that a:
    1. country was in a trade surplus with the other member countries.
    2. country’s balance of payments was in "fundamental disequilibrium."
    3. country had achieved balance-of-trade equilibrium.
    4. country’s imports were lower than its exports.
    5. country was facing price inflation.

69. Without currency devaluation, a country in "fundamental disequilibrium" would experience:
    1. a persistent trade surplus.
    2. a balance-of-payments equilibrium.
    3. an increase in exports.
    4. high unemployment.
    5. deflation.
70. Which of the following was the initial mission of the World Bank?
    1. Maintaining order in the international monetary system
    2. Financing the building of Europe's economy by providing low-interest loans
    3. Taking over as the successor to the International Monetary Fund
    4. Reviving the gold standard system
    5. Enforcement of the floating exchange rate system
71. Which of the following was responsible for the World Bank shifting its focus from Europe to third world nations?
    1. The Great Depression
    2. The Jamaica agreement
    3. World War II
    4. The Marshall Plan
    5. The Bretton Woods agreement
72. Which of the following is true according to the provisions of the Marshall plan?
    1. The United States lent money directly to European nations to help them rebuild their economies.
    2. Member countries of the International Monetary Fund were free to engage in competitive currency devaluations.
    3. The World Bank lent funds to reconstruct the war-torn economies of Europe. DMoney was lent to European countries under the International Bank for Reconstruction

. and Development scheme and the International Development Association scheme.

E. The World Bank lent money to the International Monetary Fund so that it could finance deficit-laden countries.

73. Which of the following is true of the International Bank for Reconstruction and Development (IBRD) scheme of the World Bank?
    1. Resources to fund IBRD loans are raised through subscriptions from wealthy members.
    2. The interest rate charged by the World Bank is higher than the commercial banks' market rate.
    3. Borrowers have to pay the bank's cost of funds plus a margin for expenses.
    4. The bank avoids offering low-interest loans to risky customers whose credit rating is often poor.
    5. It was established to approve currency devaluations that are beyond 10 percent.
74. Which of the following observations about the International Development Association (IDA) scheme of the World Bank is true?
    1. Money is raised through bond sales in the international capital market.
    2. Borrowers have up to 50 years to repay at an interest rate of less than1 percent a year.
    3. IDA loans go only to European countries.
    4. Grants and interest-free loans are denied to governments of underdeveloped nations.
    5. The bank offers loans only to customers with a satisfactory credit rating.
75. Which of the following is being used after the collapse of the fixed exchange rate system established at Bretton Woods?
    1. Clean float exchange rate system
    2. Managed-float system
    3. Pegged exchange rate system
    4. Gold standard system
    5. Dirty float system

76. The collapse of the fixed exchange rate system has been traced to the:
    1. U.S. macroeconomic policy package of 1965-1968.
    2. inflexibility of the fixed exchange rate system that led to high unemployment.
    3. Marshall Plan, under which the United States lent money heavily to European nations.
    4. failure of the International Monetary Fund to impose monetary discipline.
    5. increased taxes in the U.S. to finance its welfare programs.
77. Under the U.S. macroeconomic policy package of 1965-1968, President Lyndon Johnson backed an increase in U.S. government spending that was financed by:
    1. the sale of gold reserves.
    2. borrowing from the International Monetary Fund.
    3. an increase in the money supply.
    4. an increase in taxes.
    5. selling bonds in the international capital market.
78. Under the U.S. macroeconomic policy package of 1965-1968, President Lyndon Johnson backed an increase in U.S. government spending that was financed by an increase in the money supply. This resulted in    .
    1. increased exports
    2. a rise in price inflation
    3. increased taxes
    4. a positive trade balance
    5. increase in the worth of currency
79. In 1971, U.S. trade figures showed that for the first time since 1945, the United States was importing more than it was exporting. This set off massive purchases of         in the foreign market by speculators.
    1. U.S. dollars
    2. German deutsche marks
    3. British pounds
    4. Japanese yen
    5. Chinese yuan
80. Which of the following was an announcement made by U.S. President Nixon to enable the devaluation of the dollar during the increase in inflation in 1971 in the United States?
    1. The IMF member countries would adopt the gold standard to fix exchange rates.
    2. The United States would no longer support the World Bank.
    3. A new 10 percent tax would be charged on U.S. exports.
    4. The dollar was no longer convertible into gold.
    5. German deutsche marks would be the new reference currency.
81. Which of the following was the weakness of the Bretton Woods system?
    1. It could be wrecked by heavy borrowings from the World Bank and the International Monetary Fund.
    2. It could not work if the U.S. dollar was under speculative attack.
    3. The inflexibility of the system resulted in high unemployment.
    4. It forced fiscal and monetary discipline on participating nations.
    5. It allowed the countries to engage in competitive currency devaluations.
82. In January 1976, the             revised the International Monetary Fund's Articles of Agreement to reflect the new reality of floating exchange rates.
    1. Jamaica agreement
    2. Bretton Woods agreement
    3. Marshall Plan
    4. General agreement on Tariffs and Trade
    5. Plaza Accord

83. Which of the following was abandoned as per the Jamaica agreement of 1976?
    1. Floating exchange rate system
    2. U.S. dollar as the reference currency
    3. Gold as a reserve asset
    4. Membership to the International Monetary Fund
    5. Granting International Monetary Fund loans to less developed countries
84. Which of the following is a main element of the Jamaica agreement of 1976?
    1. The establishment of the International Monetary Fund
    2. The adoption of fixed exchange rates
    3. The increase in the total annual IMF quotas to $41 billion
    4. The declaration of gold as the reserve asset
    5. The decrease in the total membership of the International Monetary Fund
85. Which of the following statements is true about the changes in the world monetary system since March 1973?
    1. The value of the U.S. dollar has never seen a fall ever since.
    2. Exchange rates have become much more volatile.
    3. Exchange rates have become more predictable.
    4. The fixed rate system was adopted to calculate exchange rates.
    5. The European monetary system as an institution has gained more prominence.
86. Which of the following is one of the reasons for the rapid rise in the value of the dollar between 1980 and 1985 despite a large trade deficit?
    1. Political stability in all other parts of the world
    2. Heavy capital outflows from the United States
    3. Low real interest rates in the United States
    4. Slow economic growth in the developed countries of Europe
    5. Increasing exports against decreasing imports in the United States
87. The fall in the value of the U.S. dollar between 1985 and 1988 was caused by:
    1. the economic growth in the developed countries of Europe.
    2. a fall in prices of exported U.S. goods.
    3. a trade surplus in the U.S. during the previous years.
    4. a combination of government intervention and market forces.
    5. the protectionism measures adopted by the European countries.
88. Under the Plaza Accord of 1985, the Group of Five major industrial countries concluded that it would be desirable if:
    1. the countries returned to a system of fixed exchange rates.
    2. the participating members reverted to the gold standard.
    3. the United States adopted protectionism to improve its trade balance.
    4. most major currencies appreciated vis-à-vis the U.S. dollar.
    5. governments did not regulate the buying and selling of currency.
89. According to the             of 1987, the Group of Five major industrial nations agreed that exchange rates had been realigned sufficiently and pledged to support the stability of exchange rates around their current levels by intervening in the foreign exchange markets when necessary to buy and sell currency.
    1. Uruguay round
    2. Bretton Woods system
    3. Marshall plan
    4. Louvre Accord
    5. Jamaica agreement

90. Which of the following explains the rise of the dollar against most major currencies in the late 1990s, even though the United States was still running a significant balance-of-payments deficit?
    1. Reduced government intervention in the foreign exchange market
    2. Increased foreign investments in U.S. financial assets
    3. Low real interest rates in the United States compared to the rest of the world
    4. Increased exports as opposed to the imports
    5. Increased communism in the United States
91. From mid-2008 through early 2009, the value of the dollar moderately increased against major currencies, despite the fact that the American economy was suffering from a serious financial crisis. Which of the following was a reason for this phenomenon?

A High real interest rates in the United States compared to any other developed region in the world

. sparked an inflow of funds into the country.

B. U.S. assets were characterized by a high-risk, high-return payoff which prompted foreign investors to park their funds.

3. Foreign investors were excited at the possibility of high returns following the government bail-out of financial institutions.
4. Foreign investors put their money in low-risk U.S. assets such as low-yielding U.S. government bonds.
5. Foreign investors saw opportunities in the United States as the level of indebtedness had begun to reduce.

92. The frequency of government intervention in the foreign exchange market explains why the current system is sometimes thought of as a(n) .
    1. fixed exchange rate system
    2. managed-float system
    3. gold standard system
    4. flexible exchange rate system
    5. pegged exchange rate system
93. A              refers to a system under which some currencies are allowed to float freely, but the majority are either managed by government intervention or pegged to another currency.
    1. managed-float system
    2. pegged exchange rate system
    3. fixed exchange rate system
    4. floating exchange rate system
    5. gold standard system
94. Which of the following is a characteristic of the floating exchange rate regime?
    1. It allows for automatic trade balance adjustments.
    2. The use of monetary policy by the government is restricted.
    3. It allows for greater monetary discipline.
    4. It limits the destabilizing effects of exchange rate speculation.
    5. It eliminates volatility and uncertainty associated with exchange rates.
95. Which of the following is an argument for a fixed exchange rate system?
    1. Governments can contract their money supply without worrying about the need to maintain parity.
    2. Trade balance adjustments do not require the intervention of the International Monetary Fund.
    3. It ensures that governments do not expand the monetary supply too rapidly, thus causing high price inflation.
    4. Speculations in exchange rates boost exports and reduce imports.
    5. Each country should be allowed to choose its own inflation rate.

96. Which of the following is true of monetary contraction in a fixed exchange rate system?
    1. It requires low interest rates.
    2. It increases the demand for money.
    3. It puts downward pressure on a fixed exchange rate.
    4. It leads to an inflow of money from abroad.
    5. It can lead to high price inflation.
97. Under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, this would require the:
    1. country to import more than it exports.
    2. country to make its exports more expensive.
    3. International Monetary Fund to agree to a currency devaluation.
    4. government to expand monetary supply in the economy.
    5. government to involve in activities that led to exchange rate appreciation.
98. Which of the following is an argument for a floating exchange rate system?
    1. Each country should be allowed to choose its own inflation rate.
    2. Speculation in exchange rates dampens the growth of international trade and investment.
    3. Unpredictability of exchange rate movements makes business planning difficult.
    4. Removal of the obligation to maintain exchange rate parity destroys a government's monetary control. E Trade deficits can be determined by the balance between savings and investment in a country, not by

. the external value of its currency.

99. In comparison to a floating exchange rate regime, a fixed exchange rate system is characterized by:
    1. smoother trade balance adjustments.
    2. increased destabilizing effects of exchange rate speculation.
    3. greater autonomy in terms of monetary policy.
    4. higher monetary discipline.
    5. greater exchange rate uncertainty and volatility.
100. Critics of floating exchange rates claim that trade deficits are determined by the:
     1. balance between savings and investment in a country.
     2. external value of the currency of a country.
     3. exchange rates of other currencies.
     4. valuations made by International Monetary Fund and the World Bank.
     5. mechanism of competitive currency devaluation.
101. Which of the following has some aspects of the pre-1973 Bretton Woods exchange rate system?
     1. Pure “free float” exchange rate system
     2. Dirty float exchange rate system
     3. Nominal exchange rate system
     4. Pegged exchange rate system
     5. Real exchange rate system

102.A(n)             system refers to an exchange rate system under which a country's exchange rate is allowed to fluctuate against other currencies within a target zone.

1. free float
2. fixed peg
3. adjustable peg
4. pure float
5. capital float

103. An advantage of a pegged exchange rate system is that it imposes monetary discipline on a country and leads to low .
     1. monetary discipline
     2. price inflation
     3. exchange rate predictability
     4. trade surplus
     5. exports

104. Which of the following holds true for a pegged exchange rate system?
     1. Adopting a pegged exchange rate regime increases inflationary pressures in a country.
     2. It is necessary for a country whose currency is chosen for the peg to pursue a sound monetary policy.
     3. Pegged exchange rates are popular among many of the world’s largest and developed nations.
     4. The value of a pegged currency falls when the reference currency rises in value.
     5. It is similar to a floating exchange rate system rather than a fixed system.
105. It has been shown that adopting a           exchange rate regime moderates inflationary pressures in a country.
     1. nominal
     2. pegged
     3. pure "free float"
     4. clean float
     5. real
106. A country that introduces a            commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.
     1. free float exchange rate system
     2. clean float exchange rate system
     3. pure float exchange rate system
     4. currency board
     5. gold standard
107. How does a country that introduces a currency board make its commitment to converting its domestic currency on demand into another currency at a fixed exchange rate credible?
     1. By borrowing funds from the International Monetary Fund and the World Bank
     2. By maintaining a trade surplus with the foreign countries
     3. By holding foreign currency reserves equal at the fixed exchange rate to at least 100 percent of the domestic currency issued
     4. By importing more goods from foreign countries than it exports
     5. By printing foreign currencies
108. Which of the following statements is true about a currency board system?
     1. Under a strict currency board system, interest rates adjust automatically based on the supply and demand of domestic currency.

B To convert domestic currency on demand into another currency, a currency board takes grants from the

. International Monetary Fund.

C. This system is a true fixed exchange rate regime, because the domestic currency is fixed against other currencies.

D. A currency board can issue additional domestic currency even when there are no foreign exchange reserves to back it.

E. A currency board authorizes the government to print money and set interest rates.

109. During the 1997 Asian currency crisis, the currency board of            maintained the value of its currency against the U.S. dollar.
     1. Japan
     2. Taiwan
     3. Hong Kong
     4. Indonesia
     5. China

110. Which of the following is a drawback of the currency board system?
     1. The ease with which governments can set and manipulate interest rates acts as a limitation.

B Higher domestic inflation rates compared to the inflation rate in the country to which the currency is

. pegged can make the currency uncompetitive.

3. The currency board can issue additional domestic notes and coins even when there are no foreign exchange reserves to back it.
4. The system is a true fixed exchange rate regime, because the domestic currency is fixed against other currencies.
5. The system lacks commitment to convert domestic currency on demand into another currency.

111. Since the early 1970s, developed countries such as Great Britain and the United States have financed their trade deficits by:
     1. borrowing from the World Bank.
     2. borrowing private money.
     3. selling their gold reserves.
     4. drawing on grants from the International Monetary Fund.
     5. increasing their imports.
112. Which of the following is a reason why Great Britain and the United States could finance their deficits by borrowing private money since the early 1970s?
     1. The rapid development of global capital markets
     2. Shortage of International Monetary Fund grants available for disbursal
     3. High interest rate charged by the International Monetary Fund
     4. Establishment of currency boards in these countries
     5. Decline of the Bretton Woods system
113. Which of the following observations about the International Monetary Fund (IMF) is true?
     1. With the collapse of the Bretton Woods system, the membership of the IMF has reduced.
     2. The IMF has been criticized for granting loans to the governments without enacting any macroeconomic policies.
     3. The IMF has refused to lend money to troubled economies experiencing financial crises.

D The IMF's activities have expanded because periodic financial crises have continued to hit many

. economies in the post-Bretton Woods era.

EUnder the International Development Association scheme, the IMF offers long-term loans to

. governments of underdeveloped nations whose credit rating is poor.

114. Which of the following is an implication of a currency crisis?
     1. It occurs due to a sharp appreciation in the value of a currency.
     2. It forces authorities to block large volumes of international currency reserves.
     3. A country in currency crisis will not be eligible for loans from the International Monetary Fund.
     4. It results in the government sharply increasing interest rates to defend the prevailing exchange rate.
     5. A country in currency crisis will face sharp decreases in stock and property prices.
115. Which of the following is true of a banking crisis?
     1. Individuals and companies withdraw their deposits from banks.
     2. It results in a sharp appreciation in the value of the currency.
     3. It happens due to a decline in domestic borrowing.
     4. It occurs due to asset price deflation.
     5. Banks tend to decrease interest rates during a banking crisis.

116. Which of the following statements is true about financial crises?
     1. The elements of currency, banking, and debt crises do not present themselves simultaneously.
     2. A currency crisis forces authorities to hold large volumes of international currency reserves.

C.A foreign debt crisis occurs when a country's foreign debt obligations in private-sector government debt cannot be serviced.

D. A banking crisis occurs when individuals and companies increase their deposits due to increasing interest rates.

E. The International Monetary Fund does not grant loans to countries that face the risks of financial crises.

117. Which of the following is a common underlying macroeconomic cause of financial crises?
     1. Low relative price inflation rates
     2. Narrowing current account deficit
     3. Increases in stock and property prices
     4. Decline in domestic borrowing
     5. Increases in the value of domestic currency
118. Most of the International Monetary Fund’s loan activities since the mid-1970s have been targeted toward developing nations typically because:
     1. developed nations are not willing to enact certain macroeconomic policies in return for money.
     2. developing nations are more than twice as likely to experience financial crises as developed nations.
     3. it does not have enough funds to lend to large and developed countries.
     4. only developing nations are allowed to be its beneficiaries.
     5. of relatively slow economic growth in the developed countries of Europe.
119. According to the agreement reached between the International Monetary Fund and the South Korean government in 1997, in return for funding, the South Koreans were required to:
     1. adopt communist ideologies.
     2. reduce their imports by enforcing restrictive import licensing.
     3. open their economy to greater foreign competition.
     4. oppose the ideologies of the World Trade Organization.
     5. engage in competitive currency devaluation.
120. All International Monetary Fund (IMF) loan packages come with conditions attached. Which of the following is prevented due to these policies of the IMF?
     1. Trade liberalization
     2. Elimination of restrictive import licensing
     3. Excessive government spending and debt
     4. Privatization of state-owned assets
     5. Deregulation of the economy to increase competition
121. In the context of the 1997 Asian crisis, how did the International Monetary Fund's “one-size-fits-all” approach to macroeconomic policy affect South Korea?
     1. It led to a decrease in the interest rates of short-term loans.
     2. It made it difficult for companies to service their excessive short-term debt obligations.
     3. It decreased the probability of widespread corporate defaults.
     4. South Korea failed to recover from its financial crises.
     5. South Korea was forced to increase restrictions on foreign direct investment.
122.           arises when people behave recklessly because they know they will be saved if things go wrong.
     1. Systemic risk
     2. Moral hazard
     3. Ethical dilemma
     4. Tragedy of the commons
     5. Risk compensation

123. Jade, a working professional, began driving rashly ever since she got her car insured against damage. She believed that the insurance claim would cover her in case of any accidents. Jade’s behavior is due to a situation known as .
     1. cognitive dissonance
     2. conflict of interest
     3. systemic risk
     4. moral hazard
     5. tragedy of the commons
124. The International Monetary Fund been criticized for:
     1. its lack of “one-size-fits-all” approach to macroeconomic policy.
     2. encouraging moral hazard among banks.
     3. its lack of power and authority.
     4. using external experts to gain knowledge about a country.
     5. keeping its operations open to outside scrutiny.
125. According to the critics of the International Monetary Fund (IMF), how should the problem of moral hazard exhibited by banks be resolved?
     1. The IMF should use a “one-size-fits-all” approach to macroeconomic policy.
     2. The IMF should establish a mechanism for accountability.
     3. The IMF should free all banks from the obligation of financial reporting.
     4. The banks should be forced to pay the price for their rash lending policies.
     5. The IMF should bail out the banks whose loans gave rise to financial crises.
126. According to the noted economist Jeffrey Sachs, the International Monetary Fund should:
     1. not be accountable to anyone as it is a powerful institution.
     2. bail out the banks that have rash lending policies.
     3. have a “one-size-fits-all” approach to macroeconomic policy.
     4. keep its operations open to greater outside scrutiny.
     5. lend only to countries with safe credit ratings.
127. The International Monetary Fund programs have been counterproductive, or only had limited success in

          .

127. 1. Turkey
     2. Iceland
     3. Greece
     4. Ireland
     5. Latvia
128. In response to the global financial crisis of 2008–2009, the International Monetary Fund began to:
     1. exercise tight controls on fiscal policy of the borrowing countries.
     2. encourage activities that resulted in high inflation rates.
     3. display inflexibility in policy responses.
     4. urge countries to adopt policies that included fiscal stimulus and monetary easing.
     5. adopt a “one-size-fits-all” approach to macroeconomic policy.
129. Which of the following observations about the International Monetary Fund (IMF) is true?
     1. The IMF can force countries to adopt the policies required to correct economic mismanagement.
     2. Internal political problems can affect a government's commitment to taking corrective action in return for an IMF loan.
     3. In recent years, the IMF has begun to make its policies more tight and inflexible.

D In response to the global financial crisis of 2008–2009, the IMF began to adopt a “one-size-fits-all”

. approach to macroeconomic policy.

E. In recent years, the IMF has begun to urge countries to oppose fiscal stimulus and monetary easing.

130. Which of the following poses a problem for international businesses in the long run?
     1. Using exchange rate instruments like the forward market and swaps
     2. Volatility of global exchange rate regime
     3. Anti-inflationary monetary policies
     4. Maintaining strategic flexibility by dispersing production to different locations
     5. A policy of reduction in government spending
131. Which of the following statements is true about the current monetary system?
     1. Use of instruments such as the forward market and swaps has decreased since the breakdown of the Bretton Woods system.
     2. The present monetary system lacks the volatile movements in exchange rates that existed in a fixed exchange rate system.
     3. The current foreign exchange market works exactly as depicted in the purchasing power parity theory.
     4. Instruments such as the forward market and swaps increase the foreign exchange risk a company faces.
     5. A combination of government intervention and speculative activity drives the current foreign exchange market.
132. Which of the following is a feature of the current monetary system?
     1. It is free from government intervention.
     2. It is free from volatile movements in exchange rates.
     3. It has increased foreign exchange risk for businesses.
     4. It has made it easier to get insurance coverage against exchange rate changes.
     5. Instruments like forward market and swaps have lost their importance in the present system.
133. Vornoda Inc., a multinational clothing and accessory brand, has been facing huge economic losses due to unpredictable exchange rate movements. In order to gain considerable immunity against such currency fluctuations, Vornoda Inc. should:
     1. pursue strategies that increase its economic exposure.
     2. avoid using instruments like forward market and swaps.
     3. disperse production to different locations around the globe.
     4. not contract out manufacturing.
     5. restrict its low-value-added manufacturing to one location.
134. It is most appropriate for a firm to contract out manufacturing when:
     1. individual manufacturers have few firm-specific skills that contribute to the value of their product.
     2. the value of the host country currency is expected to appreciate.
     3. supplier switching costs are correspondingly high.
     4. firm-specific technology and expertise add significant value to the product.
     5. the currency used for pricing a product is anticipated to stay weak in the long run.
135. Which of the following is true regarding the implications for international businesses in the present monetary system?

A In the long run, the monetary policies imposed by the International Monetary Fund on borrowing

. countries hampers economic growth.

B. In the short run, the anti-inflationary monetary policies of the International Monetary Fund result in contraction of demand.

C.Businesses should not use their influence to alter an international monetary system to promote international trade and investment.

DExchange rate volatility such as the world experienced during the 1980s and 1990s creates an

. environment more conducive to international trade and investment.

E It is in the interests of international business to promote an international monetary system that

. maximizes volatile exchange rate movements.

136. Differentiate between a floating exchange rate and a pegged exchange rate.

137. Describe gold standard and a balance-of-trade equilibrium.

138. Briefly describe the Bretton Woods agreement of 1944.

139. What was the drawback of the Bretton Woods system?

140. Describe the Jamaica agreement of 1976. What were the main elements of this agreement?

141. The rise in the value of the dollar between 1980 and 1985 occurred when the United States was running a large and growing trade deficit. Explain the factors that led to this rise.

142. In terms of monetary policy autonomy, how does a floating exchange rate system differ from a fixed system?

143. In terms of speculation, describe the arguments for a fixed exchange rate system.

144. Briefly describe the pegged exchange rate regime.

145. Explain the concept of a currency board.

146. Describe the three broad types of financial crises that have occurred in the post-Bretton Woods era.

147. All International Monetary Fund loan packages come with conditions attached. Elaborate.

148. Elaborate on the main criticisms of the International Monetary Fund’s approach to financial crises.

149. What changes have occurred in the International Monetary Fund in the recent years?

150. How has the volatility of the current global exchange rate regime affected international businesses? How can the problem be tackled?