CHAPTER 13

CHAPTER 13 - Chapter 13 The International Financial System...

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Unformatted text preview: Chapter 13 The International Financial System 13.1 Multiple Choice 1) A central bank sale of _____ to purchase ______ in the foreign exchange market results in an equal rise in its international reserves and the monetary base. A) foreign assets; domestic currency B) foreign assets; foreign currency C) domestic currency; foreign assets D) domestic currency; domestic currency Answer: C 2) A central bank sale of _____ to purchase ______ in the foreign exchange market results in an equal decline in its international reserves and the monetary base. A) foreign assets; domestic currency B) foreign assets; foreign currency C) domestic currency; foreign assets D) domestic currency; domestic currency Answer: A 3) 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) sale; purchase; decline B) sale; sale; increase C) purchase; sale; increase D) purchase; sale; decline Answer: D 4) 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) sale; purchase; increase B) sale; sale; decline C) purchase; sale; increase D) purchase; purchase; decline Answer: A 5) When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called 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. Answer: A 165 6) A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called 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. Answer: B 7) An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to A) a gain in international reserves. B) an increase in the money supply. C) an appreciation in the domestic currency. D) all of the above. E) only (A) and (B) of the above. Answer: E 8) An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to A) a gain in international reserves. B) a decrease in the money supply. C) an appreciation in the domestic currency. D) all of the above. E) only (A) and (B) of the above. Answer: A 9) If the Federal Reserve decides to sell dollars in order to buy foreign assets in the foreign exchange market, the effect is the same as A) an open market sale of bonds to decrease the monetary base and the money supply. B) an open market purchase of bonds to decrease the monetary base and the money supply. C) an open market sale of bonds to increase the monetary base and the money supply. D) an open market purchase of bonds to increase the monetary base and the money supply. Answer: D 166 10) If the Federal Reserve decides to purchase dollars by selling foreign assets in the foreign exchange market, the effect is the same as A) an open market sale of bonds to decrease the monetary base and the money supply. B) an open market purchase of bonds to decrease the monetary base and the money supply. C) an open market sale of bonds to increase the monetary base and the money supply. D) an open market purchase of bonds to increase the monetary base and the money supply. Answer: A 11) An unsterilized intervention in which the domestic currency is sold to purchase foreign assets results in an expected _____ of the domestic currency that shifts the F R schedule to the _____ A) depreciation; right. B) appreciation; right. C) depreciation; left. D) appreciation; left. Answer: A 12) An unsterilized intervention in which the domestic currency is purchased by selling foreign assets results in an expected _____ of the domestic currency that shifts the F R schedule to the _____ A) depreciation; right. B) appreciation; right. C) depreciation; left. D) appreciation; left. Answer: D 13) An expected appreciation of the domestic currency that shifts the R schedule to the left is caused by A) a sterilized intervention in which the domestic currency is sold to purchase foreign assets. B) a sterilized intervention in which the domestic currency is purchased by selling foreign assets. C) an unsterilized intervention in which the domestic currency is sold to purchase foreign assets. D) an unsterilized intervention in which the domestic currency is purchased by selling foreign assets. Answer: D F 14) 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 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. Answer: D 15) Because sterilized interventions mean offsetting open market operations, A) there is no impact on the monetary base. B) there is no impact on the money supply. C) there is no effect on the exchange rate. D) all of the above occur. E) only (A) and (B) of the above occur. Answer: D 16) In the balance of payments bookkeeping system, payments from foreigners to Americans are entered in the A) “Receipts” column with a plus (+) sign to reflect that they are credits. B) “Receipts” column with a minus (-) sign to reflect that they are debits. C) “Payments” column with a minus (-) sign to reflect that they are debits. D) “Payments” column with a plus (+) sign to reflect that they are credits. Answer: A 17) In the balance of payments bookkeeping system, all payments to foreigners are entered in the A) “Receipts” column with a plus (+) sign to reflect that they are credits. B) “Receipts” column with a minus (-) sign to reflect that they are debits. C) “Payments” column with a minus (-) sign to reflect that they are debits. D) “Payments” column with a plus (+) sign to reflect that they are credits. Answer: C 18) Which of the following appear as credits in the U.S. balance of payments? A) Capital outflows B) Foreign aid C) Merchandise exports D) All of the above Answer: C 19) Which of the following appear as debits in the U.S. balance of payments? A) Capital inflows B) Merchandise and service exports C) Foreign aid D) All of the above Answer: C 168 167 20) In the balance of payments accounting system, the sale of Compaq computers abroad are entered in the _____ column with a _____ sign. A) receipts; negative B) receipts; positive C) payments; negative D) payments; positive Answer: B 21) In the balance of payments accounting system, American purchases of BMW automobiles are entered in the _____ column with a _____ sign. A) receipts; negative B) receipts; positive C) payments; negative D) payments; positive Answer: C 22) In the balance of payments accounting system, American gifts to foreigners are entered in the _____ column with a _____ sign. A) receipts; negative B) receipts; positive C) payments; negative D) payments; positive Answer: C 23) In the balance of payments accounting system, foreign aid is entered in the _____ column with a _____ sign. A) receipts; negative B) receipts; positive C) payments; negative D) payments; positive Answer: C 24) In the balance of payments accounting system, capital inflows are entered in the _____ column with a _____ sign. A) receipts; negative B) receipts; positive C) payments; negative D) payments; positive Answer: B 25) In the balance of payments accounting system, capital outflows are entered in the _____ column with a _____ sign. A) receipts; negative B) receipts; positive C) payments; negative D) payments; positive Answer: C 169 26) The difference between merchandise exports and imports is called the A) current account balance. B) capital account balance. C) official reserve transactions balance. D) trade balance. E) Answer: D 27) An examination of the U.S. balance of payments indicates that the current account balance can A) show a surplus only if the trade balance shows a surplus. B) show a deficit only if the trade balance shows a deficit. C) show a deficit even if the trade balance shows a surplus. D) only (A) and (B) of the above. Answer: C 28) A current account _____ indicates that the United States is _____ its claims on foreign wealth. A) surplus; increasing B) surplus; decreasing C) deficit; increasing D) balance; decreasing Answer: A 29) A current account _____ indicates that the United States is _____ its claims on foreign wealth. A) deficit; decreasing B) deficit; increasing C) surplus; decreasing D) balance; increasing Answer: A 30) Holding other factors constant, which of the following would increase the size of the U.S. current account deficit? A) An increase in the amount of services purchased from foreigners B) An increase in unilateral transfers from Americans to foreigners C) An increase in Americans’ net investment income D) Only (A) and (B) of the above Answer: B 170 31) Holding other factors constant, which of the following would increase the size of the U.S. current account surplus? A) Payments by the U.S. government to help emerging democracies in Eastern Europe B) Increasing travel by American college students to Japan C) Payments by foreign governments to the U.S. to help pay for the Persian Gulf war D) Both (A) and (B) of the above Answer: C 32) Economists closely follow the current account balance because they believe it can provide information on the future movement of A) interest rates. B) gold flows. C) exchange rates. D) special drawing rights. Answer: C 33) The capital account describes the flow of capital between the United States and other countries. Capital inflows are A) American purchases of foreign assets. B) foreign purchases of American assets. C) both (A) and (B) of the above. D) neither (A) nor (B) of the above. Answer: B 34) Which of the following appears in the capital account part of the balance of payments? A) A gift to an American from his English aunt B) A purchase by the Honda corporation of a U.S. Treasury bill C) A purchase by the Bank of England of a U.S. Treasury bill D) Income earned by the Honda corporation on its automobile plant in Ohio Answer: B 35) Given the size of the statistical discrepancy needed to balance the balance of payments account, one can infer that A) hidden capital flows into the U.S. are inconsequential. B) items in the balance of payments are measured quite accurately. C) many international transactions go unrecorded. D) all of the above. Answer: C 36) Many believe that the statistical discrepancy is primarily the result of A) large hidden capital flows into the U.S. B) large hidden capital flows out of the U.S. C) measurement errors due to exchange rate calculations. D) none of the above. Answer: A 37) The current account balance plus the capital account balance equals A) the official reserve transactions balance. B) the trade balance. C) the change in government reserve assets. D) both (A) and (C) of the above. Answer: D 38) If the current account balance shows a surplus, and capital account receipts exceed capital account payments, then the official reserve transactions balance A) must be positive, indicating an increase in U.S. international reserves or a decrease in foreign central banks’ international reserves. B) must be negative, indicating an increase in U.S. international reserves or a decrease in foreign central banks’ international reserves. C) must be negative, indicating a decrease in U.S. international reserves or a decrease in foreign central banks’ international reserves. D) must be negative, indicating a decrease in U.S. international reserves or an increase in foreign central banks’ international reserves. Answer: A 39) A balance of payments _____ is associated with a _____ of international reserves. A) deficit; loss B) deficit; gain C) surplus; loss D) balance; gain Answer: A 40) A balance of payments _____ is associated with a _____ of international reserves. A) surplus; loss B) surplus; gain C) deficit; gain D) balance; loss Answer: B 41) The official reserve transactions balance A) equals the current account balance plus the items in the capital account. B) tells us the net amount of international reserves that must move between central banks in order to finance international transactions. C) has an important impact on the money supply. D) all of the above. Answer: D 172 171 42) Because other countries hold dollars as international reserves, a U.S. official reserve transactions deficit can be financed by A) an increase in U.S. international reserves. B) an increase in foreign holdings of dollars. C) a decrease in foreign holdings of dollars. D) only (A) and (B) of the above. Answer: B 43) When a reserve currency country runs a balance of payments deficit and a nonreserve currency country buys the reserve currency to finance the reserve country’s deficits, the monetary base in the nonreserve country ______ and the monetary base in the reserve country _____ A) increases; decreases. B) increases; does not change. C) decreases; does not change. D) decreases; increases. Answer: B 44) Under the gold standard, if a country’s currency appreciated, the country would _____ international reserves (gold), causing its monetary base to _____ and putting downward pressure on its currency. A) gain; rise B) gain; fall C) lose; rise D) lose; fall Answer: A 45) Under the gold standard, if a country’s currency depreciated, the country would _____ international reserves (gold), causing its monetary base to _____ and putting upward pressure on its currency. A) gain; rise B) gain; fall C) lose; rise D) lose; fall Answer: D 46) Under a gold standard in which one dollar could be turned in to the U S. Treasury and exchanged for 1/20th of an ounce of gold and one German mark could be exchanged for 1/100th of an ounce of gold, an exchange rate of _____ marks to the dollar would stimulate a flow of gold from Germany to the United States. A) 6 B) 5 C) 4 D) 3 Answer: A 47) Under a gold standard in which one dollar could be turned in to the U.S. Treasury and exchanged for 1/20th of an ounce of gold and one German mark could be exchanged for 1/100th of an ounce of gold, an exchange rate of _____ marks to the dollar would stimulate a flow of gold from the United States to Germany. A) 7 B) 6 C) 5 D) 4 Answer: D 48) Before World War I, the economy operated under a gold standard. Under this international financial system, if the British pound began to appreciate relative to the dollar, A) American importers would increasingly purchase British imports with gold. B) Britain would gain international reserves. C) the British monetary base would begin to fall. D) all of the above. E) only (A) and (B) of the above. Answer: E 49) Before World War I, the economy operated under a gold standard. Under this international financial system, if the British pound began to depreciate relative to the dollar, A) gold would flow from the United States to Great Britain. B) the money supply in the United States would rise. C) the money supply in Great Britain would rise. D) all of the above would occur. Answer: B 50) Under the gold standard, a country that abided by the “rules of the game” A) lost control over its monetary policy because its money supply was largely determined by gold flows between countries. B) would experience deflation when world gold production slowed. C) would experience inflation when world gold production increased. D) would experience all of the above. E) would experience only (A) and (B) of the above. Answer: D 51) Under the gold standard, a country that abided by the “rules of the game” A) lost control over its monetary policy because its money supply was largely determined by gold flows between countries. B) would experience deflation when world gold production increased. C) would experience inflation when world gold production slowed. D) would experience only (A) and (B) of the above. Answer: A 173 174 52) The Bretton Woods system was one in which central banks A) bought and sold their own currencies to keep their exchange rates fixed. B) agreed not to intervene in the foreign exchange market to maintain a fixed exchange rate regime that had existed prior to World War I. C) agreed to limit domestic money growth to the average of the five largest industrial nations. D) agreed to limit domestic money growth to the average of the seven largest industrial nations. Answer: A 53) 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) IMF B) World Bank C) Central Settlements Bank D) Bank of International Settlements E) European Exchange Rate Mechanism (ERM) Answer: A 54) The Bretton Woods agreement set up the _____, which currently provides long-term loans to assist developing countries to build dams, roads, and other physical capital that contributes to economic development. A) International Monetary Fund B) World Bank C) Central Settlements Bank D) Bank of International Settlements E) European Exchange Rate Mechanism (ERM) Answer: B 55) Which of the following are true statements about the Bretton Woods system? 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. Answer: E 56) Which of the following are true statements about the Bretton Woods system? A) The Bretton Woods system was a flexible exchange rate regime, in which central banks allowed their currencies to float within a wide trading band. B) The U.S. dollar was called a reserve currency because it was used to denominate the securities central banks held as international reserves. C) The Bretton Woods agreement broke down in 1945. D) Only (A) and (B) of the above are true. Answer: B 57) When the domestic currency is undervalued, A) the central bank must purchase the domestic currency to keep the exchange rate fixed, but as a result it gains international reserves. B) the central bank must sell the domestic currency to keep the exchange rate fixed, but as a result it gains international reserves. C) the central bank must purchase the domestic currency to keep the exchange rate fixed, but as a result it loses international reserves. D) the central bank must sell the domestic currency to keep the exchange rate fixed, but as a result it loses international reserves. Answer: B 58) Under a fixed exchange rate regime, when the domestic currency is overvalued, A) the central bank must purchase the domestic currency to keep the exchange rate fixed, but as a result it loses international reserves. B) the central bank must sell the domestic currency to keep the exchange rate fixed, but as a result it loses international reserves. C) the central bank must purchase the domestic currency to keep the exchange rate fixed, but as a result it gains international reserves. D) the central bank must sell the domestic currency to keep the exchange rate fixed, but as a result it gains international reserves. Answer: A 59) 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. A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above Answer: C 60) If the domestic currency is initially undervalued, that is below par, the central bank must intervene to sell the _____ currency by purchasing _____ assets. A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic Answer: A 176 175 61) If a central bank does not want to see its currency fall in value, it may pursue _____ monetary policy to _____ the domestic interest rate, thereby strengthening its currency. A) expansionary; raise B) contractionary; raise C) expansionary; lower D) contractionary; lower Answer: B 62) If a central bank does not want to see its currency rise in value, it may pursue _____ monetary policy to _____ the domestic interest rate, thereby weakening its currency. A) expansionary; raise B) contractionary; raise C) expansionary; lower D) contractionary; lower Answer: C 63) If a country’s central bank eventually runs out of international reserves, A) it cannot keep its currency from appreciating and a revaluation must occur in which the par exchange rate is reset at a higher level. B) it cannot keep its currency from depreciating and a revaluation must occur in which the par exchange rate is reset at a higher level. C) it cannot keep its currency from depreciating and a devaluation must occur in which the par exchange rate is reset at a lower level. D) it cannot keep its currency from appreciating and a devaluation must occur in which the par exchange rate is reset at a lower level. Answer: C 64) To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, A) the IMF would loan deficit countries international reserves contributed by other members. B) the IMF would loan surplus countries international reserves contributed by other members. C) the World Bank would loan deficit countries international reserves contributed by other members. D) the World Bank would loan surplus countries international reserves contributed by other members. Answer: A 65) Under the Bretton Woods system, the IMF could encourage _____ countries to pursue _____ monetary policies that would strengthen their currencies or eliminate their balance of payment deficits. A) surplus; expansionary B) surplus; contractionary C) deficit; expansionary D) deficit; contractionary Answer: C 177 66) Under the Bretton Woods system, a country running a balance of payments _____ lost international reserves and had to implement _____ monetary policy to strengthen its currency. A) surplus; expansionary B) surplus; contractionary C) deficit; expansionary D) deficit; contractionary Answer: D 67) Under the Bretton Woods system, a country running a balance of payments surplus _____ international reserves and had to implement _____ monetary policy to weaken its currency. A) lost; expansionary B) lost; contractionary C) gained; expansionary D) gained; contractionary Answer: C 68) Which of the following were weaknesses of the Bretton Woods system? A) The IMF had no way to force surplus countries to either revalue their exchange rates upwards or pursue more expansionary policies. B) The reserve-currency country, the United States, could not devalue its currency even if the dollar was overvalued. C) The IMF could not loan deficit countries international reserves. D) All of the above. E) Only (A) and (B) of the above. Answer: E 69) Which of the following were weaknesses of the Bretton Woods system? A) The IMF had no way to force surplus countries to either revalue their exchange rates upwards or pursue more expansionary policies. B) The reserve-currency country, the United States, could not devalue its currency even if the dollar was overvalued. C) Currencies that were either significantly over- or undervalued were prone to speculative attacks that led to large revaluations. D) All of the above. E) Only (A) and (C) of the above. Answer: D 178 70) The Bretton Woods system broke down in the early 1970s for all but one of the following reasons: A) deficit countries losing international reserves were not willing to devalue their currencies. B) surplus countries were not willing the revalue their currencies upwards. C) surplus countries were not willing to pursue more expansionary policies. D) the United States had been pursuing an inflationary monetary policy to reduce domestic unemployment. Answer: A 71) Policy makers in a country with a balance of payments surplus may not want to see their country’s currency appreciate because 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. Answer: B 72) Under the current managed float exchange rate regime, countries with balance of payments deficits frequently do not want to see their currencies depreciate because it makes _____ goods more expensive for _____ consumers and can stimulate inflation. A) foreign; foreign B) foreign; domestic C) domestic; foreign D) domestic; domestic Answer: B 73) Which of the following is true? 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. Answer: C 74) Special Drawing Rights (SDRs) A) are a paper substitute for gold that have been issued by the IMF since 1970. B) function as international reserves. C) are backed by gold, and issue is limited to the gold stocks issued to the IMF by member countries. D) all of the above. E) only (A) and (B) of the above. Answer: E 75) In the European Monetary System, A) intervention must be symmetric when a currency falls outside the limits, but may be asymmetric if a currency is inside the limits. B) intervention may be symmetric when a currency falls outside the limits, but must be asymmetric if a currency is inside the limits. C) intervention must be symmetric when a currency falls outside the limits, and no intervention is allowed if a currency is inside the limits. D) intervention must be asymmetric when a currency falls outside the limits, but no intervention is allowed if a currency is inside the limits. Answer: A 76) In 1979, members of the European Monetary System agreed A) to fix their exchange rates against the dollar and float against each other. B) to fix their exchange rates against one another and against the dollar. C) to fix their exchange rates against one another and float against the dollar. D) to float their exchange rates against the dollar and float against each other. Answer: C 77) Under the Exchange Rate Mechanism of the European Monetary System, when the Italian lira depreciates below its lower limit against the German mark, the Bank of Italy must buy _____ and sell _____, thereby _____ international reserves. A) lira; marks; losing B) lira; marks; gaining C) marks; lira; gaining D) marks; lira; losing Answer: A 78) Under the Exchange Rate Mechanism of the European Monetary System, when the Italian lira depreciates below its lower limit against the German mark, the German central bank must buy _____ and sell _____, thereby _____ international reserves. A) lira; marks; losing B) lira; marks; gaining C) marks; lira; gaining D) marks; lira; losing Answer: B 79) A weakness of fixed exchange rate systems such as those in the Bretton Woods system or the European Monetary System is that there is no way to force _____ countries to either revalue their exchange rates upwards or pursue _____ expansionary policies. A) surplus; less B) surplus; more C) deficit; less D) deficit; more Answer: B 179 180 80) Leading up to the foreign exchange crisis of September 1992, A) both the Bank of England and the Bundesbank wanted to pursue an expansionary monetary policy. B) the Bank of England wanted to pursue an expansionary monetary policy and the Bundesbank wanted to pursue a contractionary monetary policy. C) the Bank of England wanted to pursue a contractionary monetary policy and the Bundesbank wanted to pursue an expansionary monetary policy. D) both the Bank of England and the Bundesbank wanted to pursue a contractionary monetary policy. Answer: B 81) When the Bundesbank lowered German mark interest rates in September 1992, A) there was a massive sell-off of German marks, requiring intervention to support the value of the mark. B) there was a massive sell-off of British pounds, requiring intervention to support the value of the pound. C) there was a gradual sell-off of German marks, which avoided the need for intervention to support the value of the mark. D) there was a gradual sell-off of British pounds, which avoided the need for intervention to support the value of the pound. Answer: B 82) In September 1992, the Bundesbank attempted to keep the mark from appreciating relative to the British pound, but it failed because A) participants in the foreign exchange market came to expect the appreciation of the mark. B) participants in the foreign exchange market came to expect the depreciation of the mark. C) participants in the foreign exchange market came to expect the revaluation of the dollar. D) participants in the foreign exchange market came to expect the end of the Exchange Rate Mechanism. Answer: A 83) Under the Bretton Woods system, when a nonreserve-currency country was running a balance of payments deficit, A) it gained international reserves. B) it lost international reserves. C) it was necessary for the policymakers to implement a contractionary monetary policy. D) both (A) and (C) of the above. E) both (B) and (C) of the above. Answer: E 84) Under the Bretton Woods system, when a nonreserve-currency country was running a balance of payments deficit, A) it gained international reserves. B) it lost international reserves. C) it was necessary for the policymakers to implement an expansionary monetary policy. D) both (A) and (C) of the above. Answer: B 85) To keep from running out of international reserves under the Bretton Woods system, a country had to implement _____ monetary policy to _____ its currency. A) expansionary; strengthen B) expansionary; weaken C) contractionary; strengthen D) contractionary; weaken Answer: C 86) 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. A) deficits; losing B) deficits; gaining C) surpluses; losing D) surpluses; gaining Answer: A 87) In 1970 and early 1971, the United States ran large balance of payments _____, causing an ______ dollar and an _____ German mark. A) deficits; undervalued; overvalued B) deficits; overvalued; undervalued C) surpluses; undervalued; overvalued D) surpluses; overvalued; undervalued Answer: B 88) The German central bank gained international reserves in the early 1970s because it sold A) marks to prevent mark appreciation. B) dollars to prevent mark appreciation. C) marks to prevent mark depreciation. D) dollars to prevent mark depreciation. Answer: A 181 182 89) In response to the overvalued dollar in early 1971, the German Bundesbank bought _____ and sold _____ to keep the exchange rate fixed, gaining international reserves. A) marks; dollars B) marks; pounds C) dollars; marks D) dollars; pounds Answer: C 90) In response to the overvalued dollar in early 1971, the German Bundesbank bought dollars and sold marks to keep the exchange rate fixed, gaining international reserves. The huge purchase of international reserves meant that the German monetary base began to _____, leading to a _____ growth in the German money supply. A) decline; sluggish B) decline; rapid C) grow; sluggish D) grow; rapid Answer: D 91) 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. A) more; less B) more; more C) less; less D) less; more Answer: D 92) The euro is unlikely to seriously challenge the dollar as a reserve currency as long as A) the European Union’s share of world GDP remains significantly smaller than that of the United States. B) the European Union’s share of world exports remains significantly smaller than that of the United States. C) Europe neglects to integrate its financial markets. D) the European Union is unable to function as a cohesive political entity. Answer: D 93) Under dollarization a country A) abandons its own currency and adopts the money of another country. B) backs its currency 100 percent with foreign reserves. C) earns seignorage because it no longer bears the cost of issuing its own currency. D) must worry about a speculative attack on its currency. Answer: A 94) A disadvantage of dollarization is that it A) prevents a central bank from creating inflation. B) avoids the possibility of a speculative attack on the domestic currency. C) it does not allow a country to pursue its own independent monetary policy. D) is a strong commitment to exchange rate stability.. Answer: C 95) (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) (I) is true; (II) false. B) (I) is false; (II) true. C) Both are true. D) Both are false. Answer: C 96) The most effective way to deal with currency crises is to A) impose controls on capital inflows. B) impose controls on capital outflows. C) impose controls on both capital inflows and outflows. D) improve bank regulation and supervision. Answer: D 97) An argument in supports of the view that the world needs an international lender of last resort such as the IMF is that A) central banks in emerging-market countries lack credibility as inflation fighters. B) an international lender of last resort creates a safety net that protects bank depositors. C) the IMF is slow to lend, which ultimately reduces the amount that must be borrowed. D) the IMF imposes requirements that borrowing countries must enact microeconomic policies to reform their financial systems. Answer: A 183 184 13.2 True/False 1) An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to a gain in international reserves. Answer: TRUE 2) The difference between merchandise exports and imports is called the current account balance. Answer: TRUE 3) The current account balance plus the capital account balance equals the official reserve transactions balance. Answer: TRUE 4) In the balance of payments accounting system, capital inflows are entered in the receipts column with a positive sign. Answer: TRUE 5) In contrast to other countries’ currencies, the Japanese yen and yen-denominated assets are the major component of international reserves held by countries. Answer: TRUE 6) Tying currencies to gold resulted in an international financial system with fixed exchange rates between countries. Answer: TRUE 7) The Bretton Woods agreement created the International Development Association. Answer: TRUE 8) 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. Answer: TRUE 9) If a country’s central bank eventually runs out of international reserves, it cannot keep its currency from depreciating and a devaluation must occur. Answer: TRUE 10) Special drawing rights are loans to countries made by the IMF. Answer: TRUE 13.3 Essay 1) Briefly explain what it means to be a “reserve-currency” country. What are the advantages? Can you think of any disadvantages? 2) Describe the mechanism involving flows of gold that enables the gold standard to keep exchange rates fixed at par value. What does this mechanism indicate about the ability of a country to control its monetary policy under a gold standard? 3) One outcome of the establishment of the Bretton Woods system is that the United States became the reserve-currency country. Why did the United States obtain this unique position? 4) What international considerations affect the conduct of monetary policy? Are these considerations as influential for the United States as for other countries? Why or why not? 5) Do you believe that returning to the gold standard would be beneficial to the world economy? Discuss the pros and cons of such a move. 6) Explain graphically how a country must intervene in the foreign exchange market under a fixed exchange rate regime if its currency is undervalued. 7) Explain graphically the speculative attacks that occurred against the British pound in 1992, the Mexican peso in 1994, and the Thai baht in 1997. 185 186 ...
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