Chapter 11

Currency Crisis

Occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate.

Smaller nations prefer pegged rates because these exchange rates ________.

Smaller nations prefer pegged rates because these exchange rates ________.

What is the best description of the value of the US dollar against trading currencies from 1973 to now?

The dollar has had numerous rapid increases and subsequent downfalls.

Most pegged exchange rates are tied to the _____.

dollar

The Jamaica agreement was a way to recognize current trends and adjust for _____ exchange rates. Multiple choice question.

floating

The US raised the dollar price of gold by nearly $15 an ounce in 1934. By doing so, this implied that the dollar was worth _____.

less

Foreign exchange rates have been very _____ since 1973 due to the many crises that have occurred in this period, such as the OPEC oil crises and the Asian currency crisis. Multiple choice question.

volatile

Gold Standard

A monetary system in which paper money and coins are equal to the value of a certain amount of gold

What financial institution was tasked with assisting in rebuilding Europe after World War II, but ended up helping third-world countries with public sector projects?

world bank

The policy position of the ______ is that when this institution lends money to countries, it imposes a tight macroeconomic policy that is not always considered appropriate by critics.

IMF

Which institution was established at Bretton Woods to maintain order in the international monetary system? Multiple choice question.

International Monetary Fund

The ______ Agreement revised the IMF's Articles of Agreement to allow floating exchange rates. Multiple choice question.

Jamaica

currency board

Means of controlling a country's currency

pegged exchange rate

Value of the currency is fixed relative to a reference currency, such as the US dollar, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

Since the 1970s, developed countries like Great Britain and the US have tended to finance their deficits by ________. Multiple choice question.

borrowing private money

The US dollar and the Japanese yen are free to float against each other. This means that their exchange rates _____ fluctuate.

constantly

A(n) _______ board holds reserves of foreign currency equal to the fixed exchange, and commits itself to converting its domestic currency on demand to another currency at a fixed exchange rate.

currency

When Great Britain returned to the gold standard in 1925, it placed the pound at the prewar gold parity level and, as a result, placed the country in a period of

depression

When a country does not adopt a formal pegged rate, but tries to keep its currency within some range of a reference currency, this is called a(n) ______ system.

dirty float

A _______ system is when a government intervenes in the currency market to limit volatility of its currency exchange rate.

dirty-float

A fixed exchange rate system is supported by monetary ______ while the floating exchange rate system supports the monetary ____ argument. Multiple choice question.

discipline; autonomy

What are the three main elements supporting a floating exchange rate system?

economic recovery following a crisis monetary policy autonomy automatic trade balance adjustments

When the current account of a country's balance of payments is in balance it is called the balance-of-trade _____. Multiple choice question.

equilibrium

Some smaller states in Africa and the Caribbean have no domestic currency. These states rely on which two foreign currencies?

euro US dollar

The IMF was initially established to allow members to borrow short term to adjust their balance-of-payments position and maintain their ______.

exchange rate

A ______ exchange rate discourages competitive devaluations and imposes monetary discipline. Multiple choice question.

fixed

The most common exchange rate regime used today is the _______ arrangement, used by 43% of the nations.

fixed peg

When the foreign exchange market determines the relative value of a currency in a country, that country is using a(n) ______ exchange rate regime. Multiple choice question.

floating

Following the Industrial Revolution, to allow for the use of paper currencies to finance trade, governments agreed to convert the paper currency into _______ on demand at a fixed rate.

gold

Under the agreement at Bretton Woods, all countries were to fix the value of their currencies in terms of _____. Multiple choice question.

gold

A dirty float results when _____ intervention is used to maintain the value of a currency.

gov

The start of the demise of the fixed exchange rate system was notable in 1971 when the US was _____ more than _____. Multiple choice question.

importing, exporting

Another name for a dirty-float system is a(n) _____ system. Multiple choice question.

managed-float

The institutional arrangements that have reign over exchange rates are referred to as the international _______.

monetary system

Setting a fixed exchange rate imposes discipline on countries in two ways. What are those two ways? Multiple select question.

prevents competitive devaluations and brings stability to global trade imposes monetary discipline on countries

The value of the US dollar declined during the OPEC oil crisis in 1971 when the price of oil _____.

quadrupled

balance-of-trade equilibrium

reached when the income a nation's residents earn from exports equals money paid for imports

While it is hard to determine which side is right in the debate over fixed exchange rates and floating exchange rates, it is evident that the fixed exchange rate regime of the Bretton Woods era probably will not work since _____ broke the system originally. Multiple choice question.

speculation

Governments tying currencies to gold and guaranteeing convertibility to gold is known as the gold _____. Multiple choice question.

standard

The gold standard was embraced by most of the world's major trading countries in the late _____.

1800s

International Monetary Fund

a United Nations agency to promote trade by increasing the exchange stability of the major currencies

Banking Crisis

a loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits

The OPEC oil crisis in 1971 increased the US inflation rate, which led to negative effects on the trade position, and this led to a(n) ______ in the value of the dollar.

decrease

Between 1985 and 1988, the U.S. dollar ______ in value relative to major trading currencies.

decreased

An example of a ______ is when banks lend too much money to over-extended companies, expecting bail-out help from their government. When people behave recklessly because they know they will be bailed out if things don't go as planned, it is an example of ______. Multiple choice question.

moral hazard

A major criticism of the IMF is that it imposes tight macroeconomic policy on any country it lends money to. This is referred to as a(n) ______ approach.

one-size-fits-all

A(n) _____ exchange rate implies that the value of the currency is fixed relative to a reference currency. Multiple choice question.

pegged

Many smaller nations prefer _____ rates because these exchange rates assist in moderating inflationary pressures in these countries.

pegged

managed float system

system under which some currencies are allowed to float freely, but the majority are either managed by government intervention or pegged to another currency