IB320F - Ch 11 The International Monetary System
When a country pegs its currency to gold, it is using the _____.
gold standard
A fixed rate system can ensure that ______ do not respond to political pressures by expanding the monetary system too quickly and causing inflation.
governments
Smaller nations prefer pegged rates because these exchange rates
impose monetary discipline and lead to low inflation.
The use of currency management instruments such as swaps and the forward market has ______ since 1973.
increased
During the 1980s and 1990s, exchange rate movements were not strongly influenced relative to ______ which was contrary to the purchasing power parity theory.
inflation rates
The ______ refers to the institutional arrangements that govern exchange rates.
international monetary system
The goal of Bretton Woods was to design a new ______ that would encourage growth after the war.
international monetary system
In 1934, the U.S. raised the dollar price of gold by nearly $15 an ounce, implying that the dollar was worth ______.
less
The IMF lends money to nations experiencing financial crisis in return for
macroeconomic policy implementation.
When a country does NOT adopt a formal pegged rate, but tries to keep its currency within some range of a reference currency, a(n) ______ system exists.
managed-float
A fixed exchange rate discourages competitive devaluations and imposes ______ discipline.
monetary
An argument against a fixed rate system is that this system limits countries' abilities to use ______ policy to expand or contract their economies.
monetary
One argument for a floating exchange rate system is that a country regains control of its ______ policy.
monetary
What is the term used to define the situation where people act without due thought because they believe they will be rescued when things go wrong?
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
Many smaller nations prefer ______ rates because these exchange rates lead to low inflation.
pegged
When the value of a currency is fixed relative to a reference currency, a ______ exchange rate exists.
pegged
The forward market tends to cover _____ exchange rate changes.
short-term (The forward market tends to cover exchange rate changes that are a few months (not years) ahead.)
By 2002, when foreign investors became less interested in U.S. stocks and bonds, the inflow of money into the United States
slowed down
Advocates of a fixed exchange rate contend that a fixed system will limit the destabilizing effects of
speculation
In 1987, the Group of Five met over concerns that ______ and the result was the creation of the Louvre Accord.
the dollar might decline too far
A dirty-float system is said to exist in a nation when _____ frequently intervene(s) in the foreign exchange market.
the government
The Louvre Accord resulted in an agreement
to support the stability of exchange rates around their current level by intervening when necessary.
According to the IMF study of countries from 1975 to 1997 noted in the text, developing nations were ______ to experience currency and banking crises as compared to developed nations.
twice as likely
In 1944, representatives from 44 countries met in ______ to create a new international monetary system.
Bretton Woods
The international monetary system establishes the rules and regulations that govern ______.
Exchange rates
True or false: Businesses do not have the ability to influence government policy toward the international monetary system.
False
True or false: About 25 percent of IMF member countries have no separate legal tender of their own.
False (Only about 5 percent of IMF member countries have no separate legal tender of their own.)
True or false: A balance-of-trade equilibrium exists when the income residents earn from exports exceed the money residents pay to other countries for imports.
False (The income must be equal to what residents pay to other countries for imports.)
True or false: One argument, in favor of a floating rate system, is that, under a fixed system, a country's ability to expand or contract the money supply is unlimited.
False (Under a fixed system, a country's ability to expand or contract the money supply is limited by the need to maintain exchange rate parity.)
True or False: When foreign exchange traders see a currency that is depreciating, they are most likely to buy.
False (When foreign exchange traders see a currency that is depreciating, they are most likely to sell, expecting that the currency will continue to depreciate.)
______ exchange rates are determined by market forces; they vary against each other from one day to another.
Floating
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.
International Monetary Fund
What statement accurately describes the corporate-government relationship and the foreign exchange market?
It is in the best interests of international businesses to promote an international monetary system that minimizes volatile exchange rate movements.
The ______ Agreement revised the IMF's Articles of Agreement and addressed floating exchange rates. Multiple choice question.
Jamaica
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?
The World Bank
The balance of trade is the difference between the monetary value of a nation's exports and imports over a certain period. What occurs when a balance-of-trade equilibrium exists?
The income residents earn from exports equal the money its residents pay to other countries for imports.
How can the dollar exchange rate BEST be described under the floating exchange regime?
Volatile
In the 1950s, the ______ concentrated on lending money for public sector projects in third world countries.
World Bank
In 1971, the OPEC oil crisis increased the inflation rate in the United States, which led to negative effects on the country's trade position and
a decline in the value of the dollar.
An example of ______ is when banks lend too much money to over-extended companies, expecting bail-out help from their government.
a moral hazard
A currency crisis occurs when
a speculative attack on the currency exchange value creates a sharp depreciation in the value of currency.
A criticism of the IMF is that it lacks ______ because there is no one who oversees its actions and decisions.
accountability
Because the IMF does NOT have oversight over its decisions, a criticism of this institution is that it lacks
accountability
A ______ crisis occurs when businesses and people lose confidence in their financial institutions and withdraw their deposits.
banking
When news reports indicated a massive stock market crash, many individuals went directly to the bank and withdrew their savings because they weren't confident in the financial system. This response is an example of a(n) _____ crisis.
banking
The unpredictability of exchange rate movements in the post-Bretton Woods era has resulted in which two issues?
1) Added risk to exporting and importing 2) Made international business planning difficult
What are two elements of the Jamaica Agreement?
1) Gold was abandoned as a reserve asset 2) Floating exchange rates were acceptable
According to the text, what two things have been key in determining the value of the dollar since 1973?
1) Government intervention 2) Market forces
Under what two conditions would the Bretton Woods system work?
1) If the US inflation rate remained low 2) If the US did not have a balance-of-payments deficit
Imposing a fixed exchange rate affects countries in which two ways?
1) It imposes monetary discipline and curtails price inflation. 2) It prevents competitive devaluations and brings stability to global trade.
The dollar became less attractive to foreign investments in 2002 for what three reasons?
1) US government officials "talking down" the dollar 2) Continued growth in the US trade deficit 3) Increasing US budget deficits
What are three different exchange rate policies in effect today around the world?
1) free float 2) fixed 3) pegged
The gold standard was adopted by the world's major trading nations by the late _____.
1800s
Since the 1970s, developed countries like Great Britain and the United States have tended to finance their deficits by
borrowing private money
A(n) ______ is a monetary authority which converts domestic currency on demand into another currency at a fixed exchange rate.
currency board
A(n) ______ occurs when a speculative attack on the exchange rate leads to a large depreciation in that country's legal tender.
currency crisis
According to the critics of the floating exchange rate, the uncertainty of exchange rates tends to _____ the growth of international trade and investment.
dampen
The OPEC oil crisis in 1971 increased the U.S. inflation rate, which led to negative effects on the trade position. This led to a(n) _____ in the value of the dollar.
decrease
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
Since the mid-1970s, the IMF's loan activities have been mostly targeted toward _____.
developing nations
A currency can be determined by market forces, yet managed in the sense that -- if it depreciates too rapidly -- the government will step in. This is known as a ______ system.
dirty-float
When a government intervenes in the currency market to limit volatility of its currency, a(n) ______ system exists.
dirty-float
One way a company can successfully hedge against currency fluctuations is to
disperse production to different locations around the world.
In the fixed rate system that existed before 1973, the ______ was the key currency.
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
In recent years, the IMF's activities have ______.
expanded
A ______ exchange rate is a country's exchange rate regime under which the values of a set of currencies are set against each other at some mutually agreed on exchange rate.
fixed
When the values of a set of currencies are set against each other at some mutually agreed on exchange rate, a _____ exchange rate exists.
fixed
A currency board holds reserves of foreign currency equal to all of the domestic currency at a
fixed rate
A pegged exchange rate means the value of a currency is
fixed relative to a reference currency, such as the US dollar.
A(n) _____ crisis occurs when a country cannot repay what they owe to private sector investors of other countries or other governments.
foreign debt
Greece's inability in 2010 to service its foreign debt obligations in either the private sector or government, resulted in a(n) ______.
foreign debt crisis
A floating exchange rate exists when the ______ determine(s) the relative value of a currency.
foreign exchange markets
