Chapter 2 Finance

A __________-_____________ exchange rate is one which is allowed to change or float based on changes in currency supply and demand, but in which governments may occasionally alter the outcome.

Managed-float system

From the following list, select all the examples of cryptocurrencies. -Ethereum -Litecoin -Bitcoin -PayPal

-Ethereum -Litecoin -Bitcoin

No separate legal tender Currency board Conventional peg Floating Free floating -An explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate -Only the currency of another country circulates -Largely market determined -Currency set at a fixed rate to another currency or a basket of currencies and keeps within a narrow band of that rate -Intervention occurs only exceptionally

No separate legal tender- Only the currency of another country circulates Currency board- An explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate Conventional peg- Currency set at a fixed rate to another currency or a basket of currencies and keeps within a narrow band of that rate Floating- Largely market determined Free floating- Intervention occurs only exceptionally

Which statements about the euro zone are correct?

Only countries in the European Union are in the euro zone.

Digital currencies that use distributed ledgers and cryptographic puzzles to verify transactions are known as

cryptocurrency

As illustrated in the exhibit, the Bretton Woods system can be described as a ________-based, __________-exchange standard.

dollar-based, gold-exchange

The banks and other financial institutions (particularly in Thailand and South Korea) that borrowed heavily, did so in ______ and then made loans in ______.

dollars and yen; local currency

What are the advantages of flexible exchange rates relative to fixed exchange rates?

easier external adjustments national policy autonomy

In 1973, under the Smithsonian Agreement II, the exchange rate boundaries were ______ and the exchange rates of the major currencies were allowed to ________.

eliminated; float freely

The countries that have joined the European Monetary Union and are together known as euro zone adopted a common currency called the

euro

The Bretton Woods era ended when the United States would not control its monetary ______ and the convertibility of the dollar into ______ was suspended.

expansion; gold

True or false: A Tobin tax is a large tax on capital flow transactions

false: Tobin tax is a small tax on capital flow transactions.

Monetary policy for the euro zone countries is now conducted by the institution referred to by the initials ______

ECB

Many of the developing countries of Southeast and East Asia had currencies whose real exchange-rate values were:

over-valued.

The incompatible trinity, or "trilemma," states that it is impossible to have what at the same time?

An independent monetary policy A fixed exchange rate Free international flows of capital

An international gold standard can be said to exist when which of the following hold? -Private citizens may not own gold other than through currency. -Gold may be freely exported or imported. -There is two-way convertibility between gold and national currencies at a stable ratio. -Gold alone is assured of unrestricted coinage.

-Gold may be freely exported or imported. -There is two-way convertibility between gold and national currencies at a stable ratio. -Gold alone is assured of unrestricted coinage.

Key institutions developed at Bretton Woods in 1944 included the -Asian Development Bank (ADB) -International Monetary Fund (IMF) -International Bank for Reconstruction and Development (World Bank) -European Central Bank (ECB) -Interamerican Development Bank (IDB)

-International Monetary Fund (IMF) -International Bank for Reconstruction and Development (World Bank)

Which of the following statements are true about bitcoin? -It is less secure than a credit card purchase. -It cannot be converted to traditional currency. -It is a type of digital cash. -It does not have a traditional cash equivalent.

-It is a type of digital cash. -It does not have a traditional cash equivalent.

If under the gold standard, Great Britain exported more to France than it imported, what would be true about the resulting flow of gold and the price level? -There would be a net flow of gold from France to Great Britain. -The price level in France would rise. -There would be no change in price levels. -There would be no net flow of gold. -The price level in Britain would rise.

-There would be a net flow of gold from France to Great Britain. -The price level in Britain would rise.

In 1973, under the Smithsonian Agreement II, the exchange rate boundaries were ______ and the exchange rates of the major currencies were allowed to________. -widened again; appreciate -narrowed; depreciate -eliminated; float freely -eliminated; move together

-eliminated; float freely

What are benefits of monetary union?

-promotion of greater investment and trade within the union -reduced transaction costs -elimination of exchange rate uncertainty within the union

Historically, China maintained a fixed exchange rate of ______ RMB per U.S. dollar.

8.27

Which countries have free floating exchange rates? (Recall that free floating is defined differently than floating.)

Japan Mexico

Which of the following is a new form of digital central bank money that can be distinguished from reserves or settlement balances held by commercial banks at central banks?

CBDCs

Central bank _________ currencies are a new form of digital central bank money that can be distinguished from reserves or settlement balances held by commercial banks at central banks.

Central Bank Digital Currency

Which of the following is a disadvantage of a common currency such at the Euro?

Countries lose control over their own monetary policy.

To establish a "zone of monetary stability" in Europe, the EEC countries in 1979 launched the:

European Monetary System (EMS).

The "basket" currency used in the European Monetary System and replaced by the euro was known by the acronym .

European currency unit (ECU)

True or false: The first real test of the euro will come when the euro zone experiences major symmetric shocks.

False

True or false: A weak peso hurt exports from Argentina and caused a protracted economic downturn that eventually led to the abandonment of the peso-dollar parity in January 2002

False, A strong peso hurt exports from Argentina and caused a protracted economic downturn that eventually led to the abandonment of the peso-dollar parity in January 2002.

Rescue packages to the afflicted nations (primarily Thailand, Indonesia, and South Korea) were put together by the:

IMF.

The primary objective of the European Central Bank (ECB) is to maintain

Price stability

The first gold standard was established in 1821 when notes from where were made fully redeemable for gold? Multiple choice question.

The bank of England

A tax on financial transactions that would both generate revenue and restrict capital flows is known as a ______ tax.

Tobin tax

True or false: Mexico abandoned the fixed exchange rate system in 1994 and as a consequence, the value of the peso fell.

True

The ECB's monetary policy would be most effective with _____ factor mobility.

a high amount of

The Smithsonian Agreement came about in response to the uncertainty and speculation generated by the surprise U.S. decision to:

abandon the gold-dollar link.

Although there is no clear consensus on the causes of the Argentine crisis, there are at least three factors that are related to the collapse of the economic crisis. Which of the following is not considered a possible factor?

contagion from the financial crises in the United States

An optimum currency area comprises two or more countries that maintain ______ exchange rates between each other but ______ exchange rates with trading partners outside the area.

fixed; flexible

Beginning in 2005, the RMB was allowed to do what?

gradually appreciate against the dollar for the next three years

The situation in which "bad" money drives out "good" money is called _________'s Law.

gresham

Exchange rates under the gold system were:

highly

A good ______ should provide (i) liquidity, (ii) adjustment, and (iii) confidence.

international monetary system

An optimal currency area within which exchange rates are fixed is ______ an individual country.

not necessarily

The countries afflicted by the Asian financial crisis suffered:

severe multiyear recessions.

The Smithsonian Agreement proved to be a Blank______ fix that Blank______.

temporary; soon unraveled

The Smithsonian Agreement proved to be a ______ fix that ______.

temporary; soon unraveled

During the Mexican peso crisis,

the United States and the International Monetary Fund lent Mexico around $50 billion to stabilize their foreign reserves.

What is the automatic balance-of-payments adjustment under the gold standard known as?

the price-specie-flow mechanism