Chapter 11 International Business

A country bases the valuation of its currency on a reference currency. The value of the country's currency is changed based on the changes in the value of the reference currency. This is an example of a _____ exchange rate system.

Pegged. Under a pegged exchange rate regime, a country will attach the value of its currency to that of a major currency so that, for example, as the U.S. dollar rises in value, its own currency rises too.

A currency board can issue additional domestic notes and coins only when there are foreign exchange reserves to back it.

True. A currency board can issue additional domestic notes and coins only when there are foreign exchange reserves to back it.

The Bretton Woods agreement called for a system of fixed exchange rates that would be policed by the International Monetary Fund.

True. The Bretton Woods agreement called for a system of fixed exchange rates that would be policed by the IMF.

Speculative buying and selling of currencies can create volatile movements in exchange rates under the present foreign exchange system.

True. Under the present foreign exchange system, speculative buying and selling of currencies can create very volatile movements in exchange rates.

Which of the following elements does not support the argument for floating exchange rates?

Uncertainty. The case in support of floating exchange rates has three main elements: monetary policy, automatic trade balance adjustments, and economic recovery following a severe economic crisis.

A(n) _____ 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.

currency crisis. A 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.

A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a _____.

fixed exchange rate. A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate. To make this commitment credible, the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100 percent of the domestic currency issued.

The Bretton Woods agreement implemented a system of _____ exchange rates.

fixed. The Bretton Woods agreement called for a system of fixed exchange rates that would be policed by the IMF.

Increasingly, the International Monetary Fund (IMF) has been acting as the macroeconomic police of the world economy by

insisting that countries seeking significant borrowings adopt IMF-mandated macroeconomic policies.

A managed float is the exchange rate policy where the government

intervenes in the exchange rate system only in a limited way. In a managed float system, governments intervene in only a limited way. About 26 percent of IMF's members use this system.

A banking crisis refers to

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

The International Monetary Fund was established at the Bretton Woods conference to

maintain order in the international monetary system. The agreement reached at Bretton Woods established two multinational institutions—the International Monetary Fund (IMF) and the World Bank. The task of the IMF was to maintain order in the international monetary system.

The idea that each country should be allowed to choose its own inflation rate is called the _____ agreement.

monetary autonomy. Advocates of floating rates argue that each country should be allowed to choose its own inflation rate. This is called the monetary autonomy argument.

A _____ rate means the value of the currency is fixed relative to a reference currency and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

pegged exchange. A pegged exchange rate means the value of the currency is fixed relative to a reference currency, such as the U.S. dollar, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

If a country increases its money supply rapidly under a fixed exchange rate regime

the country will face high levels of price inflation. A fixed exchange rate regime imposes monetary discipline on countries and curtails price inflation. For example, if a country increases its money supply by printing more currency, the increase in money supply would lead to price inflation.

Under the gold standard, when United States has a trade surplus

there will be a net flow of gold from other countries to the United States. Under the gold standard, when a country has a trade surplus, there will be a net flow of gold from the other countries to that country.

A pegged exchange rate means the value of a currency is floating against a set of currencies.

False. A pegged exchange rate means the value of the currency is fixed relative to a reference currency, such as the U.S. dollar, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

Fixed exchanged rates can help a country deal with economic crises.

False. Advocates of floating exchange rates argue that exchange rate adjustments can help a country deal with economic crises.

Small government deficits are an underlying cause of a foreign debt crisis.

False. Foreign debt crises tend to have common underlying macroeconomic causes: high relative price inflation rates, a widening of current account deficit, excessive expansion of domestic borrowing, high government deficits, and asset price inflation (such as sharp increases in stock and property prices).

The Jamaica agreement banned International Monetary Fund members from entering the foreign exchange market to even out fluctuations.

False. IMF members were permitted to enter the foreign exchange market to even out "unwarranted" speculative fluctuations in the Jamaica agreement.