Test Bank CH 19

The account that shows international transactions involving currently produced goods and services is called the

B) current account.

The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been known as the

b)Bretton Woods system.

Which of the following does not appear in the current account part of the balance of payments?

A) A loan of $1 million from Bank of America to Brazil.

Countries with surpluses in their balance of payments frequently do not want to see their currencies ________ because it makes their goods ________ expensive abroad.

B) appreciate; more

Under the Bretton Woods system, when a country adopted an expansionary monetary policy, thereby causing a balance of payments ________, the country would eventually be forced to implement ________ monetary policy.

B) deficit; contractionary

Under the current managed float exchange rate regime, countries with balance of payments ________ frequently do not want to see their currencies ________ because it makes foreign goods more expensive for domestic consumers and can stimulate inflation.

B) deficits; depreciate

Under a fixed exchange rate regime, a central bank that does not want to acquire international reserves to keep its currency from ________ will decide to ________ its currency.

C) appreciating; revalue

To keep from running out of international reserves under the Bretton Woods system, a country had to implement ________ monetary policy to ________ its currency.

C) contractionary; strengthen

11) Because it provides some indication of what is happening to U.S. claims on foreign wealth and the demand for imports and exports, the ________ is closely followed by economists wanting information on the future movement of exchange rates.

C) current account balance

Because central banks have not been willing to give up their option of intervening in the foreign exchange market, the current international financial system can best be described as a

C) hybrid of a fixed exchange rate and flexible exchange rate system.

A current account surplus indicates that America is ________ its claims on foreign wealth, while a deficit indicates that this country is ________ its claims on foreign wealth.

C) increasing; reducing

Under a fixed exchange rate system, countries that ran large, persistent balance of payments deficits would ________ international reserves, thereby pressuring them into ________ their exchange rate.

C) lose; devaluing

Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves.

C) marks; pounds; gaining

1) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant.

C) purchase; sale

Under a fixed exchange rate regime, if a central bank must intervene to purchase the domestic currency by selling foreign assets, then, like an open market sale, this action ________ the monetary base and the money supply, causing the interest rate on domestic assets to ________.

C) reduces; rise

When gold production was low in the 1870s and 1880s, the money supply grew ________ causing ________.

C) slowly; deflation

A weakness of the Bretton Woods system was that the ________ had no way to force surplus countries to either revalue their exchange rates upwards or pursue more expansionary policies.

A) IMF

The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.

A) IMF

To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the ________ would loan ________ countries international reserves contributed by other members.

A) IMF; deficit

Suppose that the Bank of Japan buys U.S. dollar assets with yen -denominated assets. Everything else held constant, this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base.

A) an increase; an increase

When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called

A) an unsterilized foreign exchange intervention.

) In September 1992, the Bundesbank attempted to keep the mark from appreciating relative to the British pound, but it failed because participants in the foreign exchange market came to expect the

A) appreciation of the mark.

The Bretton Woods system was one in which central banks

A) bought and sold their own currencies to keep their exchange rates fixed.

The Bretton Woods system broke down in the early 1970s for all but one of the following reasons:

A) deficit countries losing international reserves were not willing to devalue their currencies.

Because the United States was the reserve-currency country under the Bretton Woods system, it could run large balance of payments ________ without ________ significant amounts of international reserves.

A) deficits; losing

Under a fixed exchange rate regime, if a countryʹs central bank runs out of international reserves, it cannot keep its currency from

A) depreciating.

Under the Bretton Woods system, if IMF loans were insufficient to prevent ________ of a currency, then the country was allowed to devalue its currency by setting a new, ________ exchange rate.

A) depreciation; lower

Under a fixed exchange rate regime, if a central bank must intervene to purchase the ________ currency by selling ________ assets, then, like an open market sale, this action reduces the monetary base and the money supply, causing the interest rate on domestic assets to rise.

A) domestic; foreign

Under a fixed exchange rate regime, if the domestic currency is initially overvalued, that is, below par, the central bank must intervene to purchase the ________ currency by selling ________ assets.

A) domestic; foreign

Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is, above par, the central bank must intervene to sell the ________ currency by purchasing ________ assets.

A) domestic; foreign

The current international financial system is a managed float exchange rate system because

A) exchange rates fluctuate in response to, but are not determined solely by, market forces.

If the United States has a current account deficit with England of $1 million, and the Bank of England sells $1 million worth of pounds in the foreign exchange market, then England ________ $1 million of international reserves and its monetary base ________ by $1 million.

A) gains; rises

Under the current managed float exchange rate regime; countries with surpluses in their balance of payments frequently do not want to see their currencies appreciate because it makes their goods ________ expensive abroad and foreign goods ________ in their countries.

A) more; cheaper

If the current account balance shows a surplus, and the capital account also shows a surplus, then the official reserve transactions balance

A) must be positive.

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to purchase the domestic currency by selling foreign assets.

A) overvalued; below

Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves.

A) pounds; marks; losing

When the domestic currency is initially overvalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________.

A) purchase; decline

12) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will depreciate.

A) purchase; increase

Under the Bretton Woods system, the United States was designated as the

A) reserve-currency country.

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base, everything else held constant.

A) sale; purchase

19) Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bankʹs attempt to keep its currency from appreciating will result in a ________ of international reserves.

A) undervalued; gain

Which of the following appears in the capital account part of the balance of payments?

B) A purchase by the Honda corporation of a U.S. Treasury bill.

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called

B) a sterilized foreign exchange intervention.

Under a fixed exchange rate regime, a country that depletes its international reserves in an attempt to keep its currency from ________ will be forced to ________ its currency.

B) depreciating; devalue

Under a fixed exchange rate regime, if a country has an overvalued exchange rate, then its central bankʹs attempt to keep its currency from ________ will result in a ________ of international reserves.

B) depreciating; loss

Under the current managed float exchange rate regime, countries with balance of payments deficits frequently do not want to see their currencies depreciate because it makes ________ goods more expensive for ________ consumers and can stimulate inflation.

B) foreign; domestic

Under a fixed exchange rate system, countries that ran large, persistent balance of payments surpluses would ________ international reserves, thereby pressuring them into ________ their exchange rate.

B) gain; revaluing

Policymakers in a country with a balance of payments surplus may not want to see their countryʹs currency appreciate because this would

B) hurt domestic businesses by making foreign goods cheaper in their country.

Of the following, the one that appears in the current account of the balance of payments is

B) income earned by U.S. subsidiaries of Barclayʹs Bank of London.

Everything else held constant, if a central bank makes an unsterilized purchase of foreign assets, then the domestic money supply will ________ and the domestic currency will ________.

B) increase; depreciate

A balance of payments deficit is associated with a ________ of international reserves, while a balance of payments surplus is associated with a ________.

B) loss; gain

Under the Bretton Woods system, a country running a balance of payments deficit ________ international reserves, and had to implement ________ monetary policy to strengthen its currency.

B) lost; contractionary

The World Bank is an international organization that:

B) makes loans to countries to finance projects such as dams and roads.

Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves.

B) pounds; marks; gaining

Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will increase and the domestic currency will ________.

B) purchase; depreciate

Under the Bretton Woods system, the IMF could encourage deficit countries to pursue contractionary monetary policies that would ________ their currency or eliminate their balance of payment ________.

B) strengthen; deficits

Under the Bretton Woods system, the organization assigned the task of making loans to countries that were experiencing balance of payments difficulties is known as the

C) International Monetary Fund.

Which of the following is true?

C) Special drawing rights are a paper substitute for gold.

Under a fixed exchange rate regime, if a country has an undervalued exchange rate, then its central bankʹs attempt to keep its currency from ________ will result in a ________ of international reserves.

C) appreciating; gain

Everything else held constant, if a central bank makes an unsterilized sale of foreign assets, then the domestic money supply will ________ and the domestic currency will ________.

C) decrease; appreciate

As a result of its power to dictate loan terms to borrowing countries (under the Bretton Woods system), the IMF could encourage ________ countries to pursue ________ monetary policies that would strengthen their currency or eliminate their balance of payments deficits.

C) deficit; contractionary

A balance of payments ________ is associated with a loss of international reserves, while a balance of payments ________ is associated with a gain.

C) deficit; surplus

Economists closely follow the current account balance because they believe it can provide information on the future movement of

C) exchange rates.

Under the Bretton Woods system, a country running a balance of payments surplus ________ international reserves, and had to implement ________ monetary policy to weaken its currency.

C) gained; expansionary

Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will decrease and the domestic currency will ________.

C) sale; appreciate

Under the current managed float exchange rate regime, countries with ________ in their balance of payments frequently do not want to see their currencies ________ because it makes their goods more expensive abroad and foreign goods cheaper in their countries.

C) surpluses; appreciate

Under a gold standard in which one dollar could be turned in to the U.S. Treasury and exchanged for 1/20th of an ounce of gold and one German mark could be exchanged for 1/100th of an ounce of gold, an exchange rate of ________ marks to the dollar would stimulate a flow of gold from the United States to Germany.

D) 4

Suppose that the Bank of Japan buys yen-denominated assets with U.S. dollar assets. Everything else held constant, this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base.

D) a decrease; a decrease

An ECU was

D) a monetary unit created by the European Monetary System.

The account that shows international transactions involving financial transactions (stocks, bonds, bank loans, etc.) is called the

D) capital account.

Under the Bretton Woods system, a country running a balance of payments ________ lost international reserves, and had to implement ________ monetary policy to strengthen its currency.

D) deficit; contractionary

Under the Bretton Woods system, the IMF could encourage ________ countries to pursue ________ monetary policies that would strengthen their currency or eliminate their balance of payment deficits.

D) deficit; contractionary

Countries with balance of payments deficits do not want to see their currencies ________ because it makes foreign goods ________ expensive for domestic consumers.

D) depreciate; more

Because sterilized interventions mean offsetting open market operations, there is no impact on the monetary base and the money supply, and therefore a sterilized intervention

D) has no effect on the exchange rate.

Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves.

D) marks; pounds; losing

Everything else held constant, if a central bank makes a sterilized purchase of foreign assets, then the domestic currency will ________.

D) not be affected

Everything else held constant, if a central bank makes a sterilized sale of foreign assets, then the domestic currency will ________.

D) not be affected

The net amount of international reserves that move between governments to finance international transactions is called the ________ balance.

D) official reserve transactions

Capital ________ are American purchases of foreign assets, and capital ________ are foreign purchases of American assets.

D) outflows; inflows

Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bankʹs attempt to keep its currency from depreciating will result in a ________ of international reserves.

D) overvalued; loss

Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will appreciate.

D) sale; decrease

When the domestic currency is initially undervalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________.

D) sell; increase

The difference between merchandise exports and imports is called the ________ balance.

D) trade

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets.

D) undervalued; above