quiz 9

Which of the following statements is true about the various exchange rate systems?

Under the Bretton Woods system, currency devaluations over 10 percent were allowed only with the approval of the IMF.

The architects of the Bretton Woods agreement built limited flexibility into the fixed exchange rate system in order to

avoid high unemployment.

Which of the following describes a country when the income its residents earn from exports is equal to the money its residents pay to other countries for imports?

balance-of-trade equilibrium

In terms of the gold standard, the amount of currency needed to purchase one ounce of gold was referred to as the

gold par value.

Which of the following refers to the institutional arrangements that govern exchange rates?

international monetary system

A pegged exchange 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.

true

According to the Bretton Woods agreement, if a currency became too weak to defend, a devaluation of up to 10 percent would be allowed without any formal approval by the International Monetary Fund.

true

Given a common gold standard, the value of any currency in units of any other currency (the exchange rate) was easy to determine.

true

Under a floating exchange rate regime, market forces have produced a volatile dollar exchange rate.

true

Under the fixed exchange rate system, the dollar could be devalued only if all countries agreed to simultaneously revalue against the dollar.

true

Certovia and Norkland are two neighboring countries that actively trade goods and services with each other. Under the gold standard, there will be a net flow of gold from Norkland to Certovia when

Certovia is in trade surplus with Norkland.

Many of the world's developing nations peg their currencies, primarily to the

U.S. Dollar

One unit of Maruna's currency (druba) was defined as equivalent to 16 grains of "fine" (pure) gold, while one unit of its neighbor, Rashumba's currency (troon) was defined as equivalent to 24 grains of "fine" (pure) gold. Using the gold par value concept (with 480 grains in an ounce), the exchange rate for converting the druba to the troon is

1 troon = 1.5 druba.

How does the International Monetary Fund (IMF) provide loans to deficit-laden countries?

A pool of gold and currencies contributed by its members provides the resources for lending operations.

Under a currency board system, the government has the absolute authority to set interest rates.

false -Currency boards have their drawbacks. Under a currency board system, government lacks the ability to set interest rates.

The International Monetary Fund can force countries to adopt the policies required to correct economic mismanagement.

false -The International Monetary Fund (IMF) cannot force countries to adopt the policies required to correct economic mismanagement. While a government may commit to taking corrective action in return for an IMF loan, internal political problems may make it difficult for a government to act on that commitment.

The international monetary system refers to a system to regulate fixed exchange rates before the introduction of the euro.

false -The international monetary system refers to the institutional arrangements that govern exchange rates.

As the only currency that could be converted into gold, the British pound occupied a central place in the fixed exchange rate system.

false -The system of fixed exchange rates established at Bretton Woods worked well until the late 1960s, when it began to show signs of strain. As the only currency that could be converted into gold, and as the currency that served as the reference point for all others, the dollar occupied a central place in the system.

When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a pegged exchange rate regime.

false -When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a floating exchange rate regime. Four of the world's major trading currencies—the U.S. dollar, the European Union's euro, the Japanese yen, and the British pound—are all free to float against each other.

Which of the following was the initial mission of the World Bank?

financing the building of Europe's economy by providing low-interest loans