POL 202 chapter 9

Put the steps of a typical currency crisis in order from first to last.

- The government commits itself to a fixed exchange rate. -The Government faces difficultly in sticking to its promised exchange rate -People, especially investors, lose faith in the government's ability to keep its exchange rate -Investors sell off the nations currency, exchanging it for a more reliable foreign currencies -The government devalues its currency

What does it most commonly mean for a country to manipulate its currency?

A country keeps the value of its currency artificially low

Which of the following best captures the relationship between interest rates and exchange rates?

A country with higher interest rates will have a stronger currency.

Which of the following were features of the gold-standard international monetary regime? Choose all that are correct.

Correct Answer: -It proved contentious in places like the United States -The system relied on major financial powers being willing to stabilize each other through emergency loans Incorrect Answer: -The system ended in the 1970s -Currency was backed by national government commitments rather than being tied to the value of a precious metal

Choose all of the following that are reasons a country might want a weak currency relative to other currencies.

Correct Answers: -A weaker currency encourages foreigners to buy its goods -A weaker currency allows groups such as domestic farmers to be more competitive on the international market Incorrect Answers: -A weaker currency allows a country's citizens to purchase more with their currency when abroad -A weaker currency increases the purchasing power of domestic consumers and importers.

Why might a government want a fixed exchange rate? Choose all that apply.

Correct Answers: -Fixed exchange rates facilitate international trade -Fixed exchange rates keep prices stable. IncorrectAnswers: -Governments have more flexibility in monetary policy with fixed exchange rates -Currency manipulation is easier with a fixed exchange rate.

Choose all of the following that are reasons a government might want a floating exchange rate.

Correct Answers: -Floating exchange rates allow economic policies to have greater flexibility -Central banks have more authority with floating exchange rates Incorrect Answer: -A floating exchange rate ties a currency's value to the value of gold or other precious metals -Trade is simplified with a floating exchange rate.

Choose all of the following that accurately characterize China's monetary policy over the past few decades.

Correct Answers: -The government has purchased and kept large reserves of U.S. dollars -The government has kept its currency artificially weak. -One of China's main monetary goals has been to encourage the growth of domestic manufacturers Incorrect Answers: -The government has raised interest rates to attract foreign investment.

What reasons did supporters give for wanting to move the United States from the gold standard to the silver standard in the late 1800s and early 1900s?

Correct answer: -It would make American exports more competitive by devaluing the dollar -It would have helped debtors Incorrect Answers: -It would have lowered domestic prices for goods. -It would have helped creditors.

Why did many European countries face difficult currency decisions in 1991 and 1992?

Correct answer: -They had pegged their currency to Germany's, and Germany was engaging in rapid interest rate increases. Incorrect answers: -They wanted to remove their currency from its ties to the gold standard, but the United States would not allow them to. -They were suffering from internal political strife that made investors hesitant to invest in their currencies. -They had large government debts they could no longer afford to pay off

Choose all of the following that are principal features of an international monetary regime.

Correct answers: -an understanding of whether currencies are fixed, floating, or a combination thereof -agreement on what benchmark or standard currency value will be based on Incorrect Answers: -rules about allowable trade barriers between states -funding for international organizations to help set exchange rates

Match each currency crisis with the events or circumstances that helped cause it.

Europe 2011/2015: - Caused in part by states borrowing heavily after the creating of the euro Europe 92: - Caused by Germany raising interest rates while other European national had tied their currencies to the Deutschmark East Asia 97: - Spread rapidly form country to country, cause in part by lagging export and rising inflation Mexico 94: - Caused in part by political unrest and uncertainty tied to an assassination

Which groups or individuals would benefit more from a floating currency, and which would benefit more from a fixed currency?

Floating Currency: -central banks -businesses that are entirely domestic in nature Fixed Currency: -businesses that conduct international trade

A serious currency crisis broke out in ____________ in 1994. The government tried to keep the peso pegged to the value of ___________________ but domestic political instability, narrow election results, and currency-trader skittishness prevented them from being able to do so. This currency crisis later spread throughout Latin America

Mexico The U.S. Dollar

This kind of policy is used by national governments to influence macroeconomic conditions such as unemployment and economic growth. It is based on changes to the interest rate and money supply of an economy.

Monetary Policy

In the modern international monetary order, currencies are backed by which of the following?

The commitment of issuing governments to maintain their values

Which of the following was one of the most important lessons of the late 1990s currency crisis in East Asia?

How quickly currency crises can spread from country to country

Identify the following as either groups who want their government to devalue during a currency crisis or groups who want their government to stay on a fixed exchange rate.

Stay fixed: -Companies and individuals who have borrowed in a foreign currency -Consumers Devalue: -Farmers and Manufacturers

The fictional state of Atlantis contains many groups within it. Some of these groups would prefer that Atlantis have a strong currency while others would prefer a weak currency. Indicate which type of currency the following groups would prefer.

Strong Currency: -Domestic Consumers -Tourists who travel overseas Weak Currency: -Domestic manufacturers who sell overseas -Farmers

The ________________ came into effect after the end of World War II. Under this regime, most currencies were pegged to _________________ although countries were periodically allowed to adjust their exchange rates.

The Bretton Woods System The U.S Dollar