Chapter 7 The International Monetary System and the Balance of Payments

The World Bank and the International Monetary Fund were created as part of the ________.

Bretton Woods Agreement

Country X paid a quota to the IMF worth the equivalent of $50 million. Now, Country X needs to borrow money from the IMF. What is the maximum amount that Country X may borrow?

$12.5 million

Executives at Octagon Telecom, a global telecommunications firm, are considering investing in a telephone company located in Rwanda. However, many stockholders have expressed concerns about the political risk involved in such an investment. Which of the following would most likely provide political risk insurance to Octagon?

Multilateral Investment Guarantee Agency

The international monetary system provides a mechanism for ________.

correcting imbalances between a country's international payments and its receipts

Under the gold standard ________.

countries agreed to buy or sell their paper currencies for gold

Under the Jamaica Agreement ________.

countries were free to adopt any exchange rate system

The Bretton Woods conference sought to do which of the following?

create the International Monetary Fund

When the gold standard ended ________.

currency values were determined by supply and demand

The ________ records exports and imports of goods and services, investment income, and gifts.

current account

When did the sterling-based gold standard begin to unravel?

during World War I

Between 1821 and 1918, why was the international monetary system also known as the sterling-based gold standard?

economic dominance of the United Kingdom

An ________ is the price of one currency in terms of a second currency.

exchange rate

What was the initial goal of the World Bank?

finance reconstruction of war-torn economies

Under the gold standard, when the United States and the United Kingdom exchanged their currencies at a rate of the $20.67/₤£4.247, the exchange rate was a ________.

fixed exchange rate

The balance of payments is useful to international business people for which of the following reasons?

warning of new policies that could affect a country's business climate

Which of the following is calculated daily as a weighted average of the market value of four major currencies?

special drawing rights

A country can borrow up to ________ percent of its quota from the IMF?

25

Executives at FDX Industries, an MNE that manufactures automotive parts, want to expand into emerging markets. Which of the following would most likely identify potential emerging markets and indicate reductions in a country's foreign-exchange reserves?

BOP statistics

Todd, an analyst for the U.S. government, has been given the task of assessing the economic performance of Country X in the international marketplace. Todd will most likely review the ________ of Country X.

BOP statistics

From 1821 until the end of World War I in 1918, the most important currency in international commerce was the ________.

British pound sterling

A managed float differs from a dirty float because under a managed float exchange rates move as a result of central bank intervention and supply and demand, while a dirty float involves black market intervention.

False

Country X uses a crawling peg system, which means that the currency of Country X is fixed to either the U.S. dollar or the current gold standard.

False

During the gold standard, most firms preferred their payment in gold rather than in currency.

False

The Bretton Woods system did not allow for the adjustment of a currency's par value.

False

The country members of the World Bank each have one equal vote in decisions.

False

The gold standard effectively created a floating exchange rate system.

False

Truman officially ended the Bretton Woods system when he announced that the United States would no longer redeem gold at $35 per ounce.

False

Under the Bretton Woods system, all countries agreed to peg the value of their currency to the U.S. dollar.

False

Which of the following was created by the Bretton Woods Agreement to facilitate the expansion and balanced growth of international trade and to promote exchange stability?

International Monetary Fund

Which agreement resulted in each country adopting its own exchange rate system?

Jamaica

________ are those that bear significant risk of not being repaid.

Soft loans

A convertible currency is one that can be freely exchanged for other currencies without legal restrictions.

True

Because countries pegged their currencies to gold, the gold standard was a fixed exchange rate system.

True

Gold was used as a medium of international exchange in ancient times because of its strength and value.

True

Quotas to the IMF must be paid in a combination of gold and a country's own currency.

True

The BOP is a useful tool for detecting signs of trouble that could lead to governmental trade restrictions.

True

The International Finance Corporation is charged with promoting the development of the private sector in developing countries.

True

The Smithsonian agreement established a fixed exchange rate system.

True

The balance of payments accounting system is a double entry system.

True

The official settlements balance records the net impact of the central bank's interventions in the foreign-exchange market in support of the local currency.

True

Which currency played a central role in the Bretton Woods system?

U.S. dollar

Which country was the first to adopt the gold standard?

United Kingdom

What was created by the Bretton Woods system?

a fixed exchange rate system

The ________ is a double-entry bookkeeping system designed to measure and record all economic transactions between residents of one country and residents of all countries during a particular time period.

balance of payments

Carmen is a vice president at TechWorks, an MNE that manufactures computer chips. TechWorks is considering expansion, and Carmen is responsible for identifying potential locations. Which of the following would best help Carmen assess the competitiveness of a country's manufacturing sector?

balance on merchandise trade

The ________ shows the difference between a country's exports of services and its imports of services.

balance on services trade

The ________ records the purchases and sales of assets between residents of one country and those of another country.

capital account

AeroTech, a German firm, deposits a check in a U.S. bank. The deposit will be recorded as a ________.

capital inflow in the U.S. BOP

Under a managed float ________.

central banks sometime manipulate exchange rates

Which of the following is a typical short-term foreign portfolio investments included in the capital account?

checking accounts

Under a ________, the price of a given currency does not change relative to other currency.

fixed exchange rate system

Special drawing rights, SDRs, are sometimes called ________.

paper gold

A ________ refers to the official price of a currency in terms of gold.

par value

Which term refers to linking a currency value to the value of gold?

pegging

What is the primary purpose of the International Finance Corporation?

promote private sector development in developing countries

What is the primary purpose of the Multilateral Investment Guarantee Agency?

provide investors with political risk insurance

What did the Bretton Woods conferees agree to do in 1944?

renew the gold standard on a greatly modified basis

Dell Computers invests excess cash balances overnight in a London bank to earn a higher interest rate than it could earn in a New York bank. Dell is most likely making a(n) ________.

short-term portfolio investment

Which of the following is a form of asset included in the official reserves account?

special drawing rights

What resulted from the Smithsonian Conference?

the U.S. dollar was devalued

Which country controls the largest bloc of votes in the IMF?

the United States

Which country holds the largest bloc of votes in the World Bank?

the United States

The U.S. balance of payments for 2017 shows ________.

the leading import for the United States was automobiles and parts

Country X has requested and received a loan from the World Bank. Country X may not use the money to finance ________.

trade deficits