IF2

11 The United States adopted the gold standard in a) 1776. b) 1879. c) 1864. d) 1973.

B

17 Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = £1. What should an ounce of gold be worth in U.S. dollars? a) $29.40 b) $30.00 c) $0.83 d) $1.20

B

19 The majority of countries got off gold in 1914 when a) the American Civil War ended. b) World War I broke out. c) World War II started. d) none of the above

B

10 Suppose that your country officially defines gold as ten times more valuable than silver (i.e. the central bank stands ready to redeem the currency in gold and silver and the official price of gold is ten times the official price of silver). If the market price of gold is only eight times as much as silver. a) The central bank could go broke if enough arbitrageurs attempt to take advantage of the pricing disparity. b) The central bank will make money since they are overpricing gold.

A

12 The gold standard still has ardent supporters who believe that it provides a) an effective hedge against price inflation. b) fixed exchange rates between all currencies. c) monetary policy autonomy. d) all of the above

A

13 One potential drawback of the gold standard is that a) the world economy can be subject to deflationary pressure due to the limited supply of monetary gold. b) the world economy can be subject to inflationary pressure without changes in the supply of monetary gold. c) gold is scarce. d) all of the above

A

14 The first full-fledged gold standard a) was not established until 1821 in Great Britain, when notes from the Bank of England were made fully redeemable for gold. b) was not established until 1780 in the United States, when notes from the Continental Army were made fully redeemable for gold. c) was established in 986 during the Han dynasty in China. d) none of the above

A

20 Assume that a country is on the gold standard. In order to support unrestricted convertibility into gold, banknotes need to be backed by a gold reserve of some minimum stated ratio. In addition, a) the domestic money stock should rise and fall as gold flows in and out of the country. b) the central bank can control the money supply by buying or selling the foreign currencies. c) Both a) and b)

A

26 The core of the Bretton Woods system was the a) World Bank. b) IMF. c) United Nations. d) Interstate Commerce Commission.

A

32 Under the Bretton Woods system, Each country was responsible for maintaining its exchange rate within ±1 percent of the adopted par value by a) buying or selling foreign exchanges as necessary. b) buying or selling gold as necessary. c) expanding or contracting the supply of loanable funds as necessary. d) increasing or decreasing their money supply as necessary.

A

33 Under the Bretton Woods system, a) the U.S. dollar was the only currency that was fully convertible to gold; other currencies were not directly convertible to gold. b) all currencies of member states were fully convertible to gold. c) all currencies of member states were fully convertible to gold or silver. d) none of the above.

A

34 The growth of the Eurodollar market, which is a transnational, unregulated fund market a) was encouraged by U.S. legislation designed to stem the outflow of dollars from the U.S. b) was discouraged by U.S. legislation designed to stem the outflow of dollars from the U.S.

A

4 In the United States, bimetallism was adopted by the Coinage Act of 1792 and remained a legal standard until 1873, a) when Congress dropped the silver dollar from the list of coins to be minted. b) when Congress dropped the twenty-dollar gold piece from the list of coins to be minted. c) when gold from the California gold rush drove silver out of circulation. d) when gold from the California gold rush drove gold out of circulation.

A

40 Since the SDR is a "portfolio" of currencies a) its value tends to be more stable than the value of any of the individual currencies included in the SDR. b) its value tends to be less stable than the value of any of the individual currencies included in the SDR. c) its value tends to be as stable as the average of the individual currencies included in the SDR. d) none of the above

A

41 The G-7 is composed of a) Canada, France, Japan, Germany, Italy, the U.K., and the United States. b) Switzerland, France, Japan, Germany, Italy, the U.K., and the United States. c) Switzerland, France, North Korea, Germany, Italy, the U.K., and the United States. d) Switzerland, France, Japan, Germany, Canada, the U.K., and the United States.

A

42 Gold was officially abandoned as an international reserve asset a) in the January 1976 Jamaica Agreement. b) in the 1971 Smithsonian Agreement. c) in the 1944 Bretton Woods Agreement. d) none of the above

A

43 Following the demise of the Bretton Woods system, the IMF a) created a new role for itself, providing loans to countries facing balance-of-payments and exchange rate difficulties. b) ceased to exists, since the era of fixed exchange rates had ended. c) became the sole agent responsible for maintaining fixed exchange rates. d) became the central bank of the United Nations.

A

44 Under a flexible exchange rate regime, governments can retain monetary policy independence because the external balance will be achieved by a) the exchange rate adjustments. b) the price-specie flow mechanism. c) the Triffin paradox. d) none of the above

A

45 The choice between the alternative exchange rate regimes (fixed or floating) is likely to involve a trade-off between a) national monetary policy autonomy and international economic integration. b) exchange rate uncertainty and national policy autonomy. c) Balance of Payments autonomy and inflation. d) unemployment and inflation.

A

46 Under a purely flexible exchange rate system a) supply and demand set the exchange rates. b) governments can set the exchange rate by buying or selling reserves. c) governments can set exchange rates with fiscal policy. d) answers b) and c) are correct.

A

49 With regard to the current exchange rate arrangement between the U.S. and the U.K., it is best characterized as a) independent floating (market determined). b) managed float. c) currency board. d) pegged exchange rate within a horizontal band.

A

6 Gresham's Law states that a) bad money drives good money out of circulation. b) good money drives bad money out of circulation. c) if a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate. d) none of the above.

A

61 The main cost of European monetary union is a) the loss of national monetary and exchange rate policy independence. b) increased exchange rate uncertainty. c) lessened political integration. d) none of the above

A

62 The euro zone remarkably comparable to the United States in terms of a) population size. b) GDP. c) international trade share. d) all of the above

A

64 Once the changeover to the euro was completed by July 1, 2002, the legal-tender status of national currencies in the euro zone a) was canceled, leaving the euro as the sole legal tender in the euro zone countries. b) was affirmed at the fixed exchange rate. c) was tied to gold. d) none of the above

A

65 According to the theory of optimum currency areas, a) the relevant criterion for identifying and designing a common currency zone is the degree of factor (i.e. capital and labor) mobility within the zone. b) exchange rates should reflect the degree to which workers are willing to move to get a better job. c) exchange rates are determined by portfolio managers seeking the highest return. d) none of the above.

A

67 In the EU, there is a a) low degree of fiscal integration among EU countries. b) high degree of fiscal integration among EU countries.

A

7 Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment. a) Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360. b) Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce. c) a) and b) both work d) None of the above

A

74 According to the "Trilemma" a country can attain only two of the following three conditions: 1) A fixed exchange rate, (2) Free international flows of capital, (3) An independent monetary policy. This difficulty is also known as a) the incompatible (or impossible) trinity. b) the Trilemma. c) the Tobin tax. d) all three can be had at the same time

A

79 A booming economy with a fixed or stable nominal exchange rate a) inevitably brings about an appreciation of the real exchange rate. b) inevitably brings about a depreciation of the real exchange rate. c) inevitably brings about a stabilization of the real exchange rate. d) inevitably brings about increased volatility of the real exchange rate.

A

83 Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate. Why? a) The market forces may be stronger than the exchange rate intervention that the government can muster. b) Portfolio managers will not invest in countries with fixed exchange rates. c) Because of the Tobin Tax. d) None of the above

A

9 Suppose that the United States is on a bimetallic standard at $30 to one ounce of gold and $2 for one ounce of silver. If new silver mines open and flood the market with silver, a) only the silver currency will circulate. b) only the gold currency will circulate. c) no change will take place since citizens could exchange their gold currency for silver currency at any time. d) none of the above

A

23 During the period between World War I and World War II, many central banks followed a policy of sterilization of gold a) by restricting the rate of growth in the supply of gold. b) by matching inflows and outflows of gold respectively with reductions and increases in domestic money and credit. c) by matching inflows and outflows of gold respectively with increases and reductions in domestic money and credit. d) none of the above.

B

25 At the outbreak of World War I a) major countries such as Great Britain, France, Germany and Russia suspended redemption of banknotes in gold. b) major countries such as Great Britain, France, Germany and Russia imposed embargoes on the export of gold. c) the classical gold standard was abandoned. d) all of the above

B

27 The Bretton Woods system was named after a) the treasury secretary of the United States in 1945, Bretton Woods. b) Bretton Woods, New Hampshire, where the Articles of Agreement of the International Monetary Fund (IMF) were hammered out. c) none of the above.

B

28 The Bretton Woods agreement resulted in the creation of a) the bancor as an international reserve asset. b) the World Bank. c) the Eximbank. d) the Federal Reserve Bank.

B

3 The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: (i)- Bimetallism (ii)- Bretton Woods system (iii)- Classical gold standard (iv)- Flexible exchange rate regime (v)- Interwar period The chronological order that they actually occurred is: a) (iii), (i), (iv), (ii), and (v) b) (i), (iii), (v), (ii), and (iv) c) (vi), (i), (iii), (ii), and (v) d) (v), (ii), (i), (iii), and (iv)

B

31 Under the Bretton Woods system each country established a par value for its currency in relation to the dollar. And the U.S. dollar was pegged to gold at a) $1 per ounce. b) $35 per ounce. c) $350 per ounce. d) $900 per ounce.

B

35 In the years leading to the collapse of the Bretton Woods system a) it became clear that the dollar was undervalued. b) it became clear that the dollar was overvalued.

B

38 The Bretton Woods system ended in a) 1945. b) 1973. c) 1981. d) 2001.

B

39 Since the end of the fixed exchange rate system of the Smithsonian agreement a) exchange rates were revalued in the Bretton Woods agreement. b) exchange rates have been allowed to float. c) the United States returned to a gold standard. d) the zone of monetary stability has been limited to the U.S., Canada, and Mexico.

B

52 The advent of the euro marks the first time that sovereign countries have voluntarily given up their a) national borders to foster economic integration. b) monetary independence to foster economic integration. c) fiscal policy independence to foster economic integration. d) national debt to foster economic integration.

B

66 Willem Duisenberg, the first president of the European Central Bank, defined "price stability" as an annual inflation rate of a) "no more than five percent." b) "less than but close to 2 percent." c) "absolutely no more than zero percent." d) "no more than three percent."

B

69 The Mexican Peso Crisis was touched off by a) an unsurprising announcement by the Mexican government to devalue to peso against the dollar by 14 percent. b) an unexpected announcement by the Mexican government to devalue to peso against the dollar by 14 percent. c) an announcement by the Mexican government to enact a currency board arrangement with the U.S. dollar. d) contagion from other Latin American and Asian financial markets.

B

72 The Asian Currency Crisis a) happened just prior to the Mexican peso crisis. b) turned out to be far more serious than the Mexican peso crisis in terms of the extent of contagion. c) was limited to Asian currencies. d) was almost over before anyone outside the pacific rim noticed.

B

73 Generally speaking, liberalization of financial markets when combined with a weak, underdeveloped domestic financial system tends to a) strengthen the domestic financial system in the short run. b) create an environment susceptible to currency and financial crises. c) raise interest rates and lead to domestic recession. d) none of the above

B

78 A central bank can fix an exchange rate a) in perpetuity. b) only for as long as the market believes that it has the political will to do so. c) only for as long as it has reserves of gold. d) only for as long as it has independence of monetary policy.

B

8 Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.60 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment. a) Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360. b) Start with $350. Exchange the dollars for pounds at the current rate of $1.60 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce. c) a) and b) both work d) None of the above

B

82 Generally speaking, a country would be more prone to asymmetric shocks a) the more diversified and less trade-dependent its economy is. b) the less diversified and more trade-dependent its economy is. c) the less diversified and less trade-dependent its economy is. d) the more diversified and more trade-dependent its economy is.

B

2 Corporations today are operating in an environment in which exchange rate changes may adversely affect their competitive positions in the marketplace. This situation, in turn, makes it necessary for many firms to a) carefully manage their exchange risk exposure. b) carefully measure their exchange risk exposure. c) both a) and b)

C

21 Under the gold standard, international imbalances of payment will be corrected automatically under the a) Gresham Exchange Rate regime. b) European Monetary System. c) Price-specie-flow mechanism. d) Bretton Woods Accord.

C

22 During the period between World War I and World War II, a) the major European powers and the U.S. returned to the gold standard and fixed exchange rates. b) while most countries abandoned the gold standard during World War I, international trade and investment flourished during the interwar period under a coherent international monetary system. c) the U.S. dollar emerged as the dominant world currency, gradually replacing the British pound for the role. d) None of the above.

C

24 During the period between World War I and World War II, the political reality was characterized by a) halfhearted attempts and failure to restore the gold standard. b) political instabilities and bank failures. c) panicky flights of capital across borders. d) all of the above

C

47 A currency board arrangement is a) when the currency of another country circulates as the sole legal tender. b) when the country belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. c) a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. d) where the country pegs its currency at a fixed rate to a major currency where the exchange rate fluctuates within a narrow margin of less than one percent.

C

5 The monetary system of bimetallism is unstable. Due to the fluctuation of the commercial value of the metals, a) the metal with a commercial value lower than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). b) the metal with a commercial value higher than the currency value tends to be used as money (Gresham's Law). c) the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). d) none of the above

C

50 With regard to the current exchange rate arrangement between Italy and Germany, it is best characterized as a) independent floating (market determined). b) managed float. c) an exchange arrangement with no separate legal tender. d) pegged exchange rate within a horizontal band.

C

55 The Exchange Rate Mechanism (ERM) is a) the procedure by which ERM member countries collectively manage their exchange rates. b) based on a "parity-grid" system, which is a system of par values among ERM countries. c) a and b d) none of the above

C

57 The single European currency, the euro, was adopted by 11 member nations on January 1 of what year? a) 1984 b) 1991 c) 1999 d) 2001

C

59 Monetary policy for the countries using the euro as a currency is now conducted by a) the Federal Reserve. b) the Bundesbank. c) European Central Bank. d) none of the above

C

63 Which country is NOT using the euro? a) Greece b) Italy c) Sweden d) Portugal

C

68 When money can move freely across borders, policy makers must choose between a) exchange-rate stability and an economic growth. b) exchange-rate stability and inflation. c) exchange-rate stability and an independent monetary policy. d) exchange-rate stability and capital controls.

C

1 The international monetary system can be defined as the institutional framework within which a) international payments are made. b) movement of capital is accommodated. c) exchange rates among currencies are determined. d) all of the above

D

15 An "international" gold standard can be said to exist when a) gold alone is assured of unrestricted coinage. b) there is two-way convertibility between gold and national currencies at stable ratios. c) gold may be freely exported or imported. d) all of the above

D

16 Under a gold standard, if Britain exported more to France than France exported to Great Britain, a) such international imbalances of payment will be corrected automatically. b) this type of imbalance will not be able to persist indefinitely. c) net export from Britain will be accompanied by a net flow of gold in the opposite direction. d) all of the above

D

18 During the period of the classical gold standard (1875-1914) there were a) highly volatile exchange rates. b) volatile exchange rates. c) moderately volatile exchange rates. d) stable exchange rates. e) no exchange rates.

D

29 The Triffin paradox a) was first proposed by Professor Robert Triffin. b) warned that the gold-exchange system of the Bretton Woods agreement was programmed to collapse in the long run. c) was indeed responsible for the eventual collapse of the dollar-based gold-exchange system in the early 1970s. d) all of the above are correct

D

30 Under the Bretton Woods system a) there was an explicit set of rules about the conduct of international monetary policies. b) each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary. c) the U.S. dollar was the only currency that was fully convertible to gold. d) all of the above

D

36 Under the Bretton Woods system a) each country established a par value for its currency in relation to the dollar. b) the U.S. dollar was pegged to gold at $35 per ounce. c) each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary. d) all of the above

D

37 Special Drawing Rights (SDR) are a) an artificial international reserve allotted to the members of the International Monetary Fund (IMF), who can then use it for transactions among themselves or with the IMF. b) a "portfolio" of currencies, and its value tends to be more stable than the currencies that it is comprised of. c) used in addition to gold and foreign exchanges, to make international payments. d) all of the above

D

48 Ecuador does not have its own national currency, circulating the U.S. dollar instead. About how many countries do not have their own national currency? a) 10 b) 20 c) 30 d) 40

D

51 On January 1, 1999, an epochal event took place in the arena of international finance when a) all EU countries adopted a common currency called the euro. b) eight of 15 EU countries adopted a common currency called the euro. c) nine of 15 EU countries adopted a common currency called the euro. d) eleven of 15 EU countries adopted a common currency called the euro.

D

53 To pave the way for the European Monetary Union, the member countries of the European Monetary System agreed to achieve a convergence of their economies. Which of the following is NOT a condition of convergence: a) keep the ratio of government budget deficits to GDP below 3 percent. b) keep gross public debts below 60 percent of GDP. c) achieve a high degree of price stability. d) maintain its currency at a fixed exchange rate to the ERM.

D

54 The European Monetary System (EMS) has the chief objective(s) a) to establish a "zone of monetary stability" in Europe. b) to coordinate exchange rate policies vis-à-vis the non-EMS currencies. c) to pave the way for the eventual European monetary union. d) all of the above

D

56 The Maastricht Treaty a) irrevocably fixed exchange rates among the member currencies. b) commits the members of the European Union to political union as well as monetary union. c) was signed and subsequently ratified by the 12 member states. d) all of the above

D

58 Benefits from adopting a common European currency include a) reduced transaction costs. b) elimination of exchange rate risk. c) increased price transparency will promote Europe-wide competition. d) all of the above

D

60 Following the introduction of the euro, the national central banks of the euro-12 nations a) disbanded. b) formed the ESCB, which is analogous to the Federal Reserve System in the U.S. c) continue to perform important functions in their jurisdictions. d) b) and c) are correct

D

70 Prior to the peso crisis, Mexico depended on foreign portfolio capital to finance its economic development. This foreign capital influx a) caused higher domestic inflation. b) led to an overvalued peso. c) helped Mexico's trade balances. d) a) and b) are correct

D

71 The Mexican peso crisis is significant in that a) it is perhaps the first serious international financial crisis touched off by cross-border flight of portfolio capital. b) selling by international portfolio managers had a highly destabilizing, contagious effect on the world financial system. c) it provides a cautionary tale that as the world's financial markets are becoming more integrated, this type of contagious financial crisis is likely to occur more often. d) all of the above.

D

75 To avoid currency crisis in the face of fully integrated capital markets, a country can have a a) floating exchange rate. b) fixed exchange rate. c) fixed exchange rate that adjusts. d) a) and b) can both help to avoid currency crises.

D

76 Which factors are related to the collapse of the Argentine currency board system and ensuing economic crisis? a) The lack of fiscal discipline on the part of the Argentine government b) Labor market inflexibility c) Contagion from the financial crises in Russia and Brazil d) All of the above

D

77 Prior to the Argentine Peso Crisis a) Argentina had a "dirty float" where the government allowed the exchange rate to float within wide bands. b) Argentina had a currency board arrangement with the peso pegged to the U.S. dollar at parity. c) the Argentine government defaulted on its international debts. d) weakening of the U.S. dollar led the Argentine government to abandon dollarization.

D

80 Advantages of a flexible exchange rates include which of the following? a) National policy autonomy b) Easier external adjustments c) The government can use monetary and fiscal policies to pursue whatever economic goals it chooses. d) All of the above

D

81 Advantages of a fixed exchange rates include a) reduction in exchange rate risk for businesses. b) reduction in transactions costs. c) reduction in trading frictions. d) all of the above

D