41) Leading up to the foreign exchange crisis of September 1992, the Bank of England wanted to
pursue a(n) ________ monetary policy and the German Bundesbank wanted to pursue a(n)
________ monetary policy.
A) expansionary, expansionary
B) expansionary; contractionary
C) contractionary; expansionary
D) contractionary; contractionary
42) When the Bundesbank lowered German mark interest rates in September 1992,
A) there was a massive sell-off of German marks, requiring intervention to support the value of
the mark.
B) there was a massive sell-off of British pounds, requiring intervention to support the value of
the pound.
C) there was a gradual sell-off of German marks, which avoided the need for intervention to
support the value of the mark.
D) there was a gradual sell-off of British pounds, which avoided the need for intervention to
support the value of the pound.
43) 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.
B) depreciation of the mark.
C) revaluation of the dollar.
D) the end of the Exchange Rate Mechanism.
44) Under the Bretton Woods system, when a nonreserve-currency country was running a
balance of payments deficit,
A) it gained international reserves.
B) it lost international reserves.
C) it was necessary for the policymakers to implement a contractionary monetary policy.
D) both A and C of the above occurred.
E) both B and C of the above occurred.
45) Under a fixed exchange rate system,
A) an anchor country loses control over its monetary policy.
B) a country that ties its currency to that of another country gains control of the other country’s
monetary policy.
C) a country that ties its currency to that of another country loses control over its monetary
policy.
D) a country that ties its currency to that of another country acquires greater control over its
monetary policy.
46) The euro is unlikely to seriously challenge the dollar as a reserve currency as long as
A) the European Union’s share of world GDP remains significantly smaller than that of the
United States.
B) the European Union’s share of world exports remains significantly smaller than that of the
United States.
C) Europe neglects to integrate its financial markets.
D) the European Union is unable to function as a cohesive political entity.
47) Under dollarization, a country
A) backs its currency 100 percent with foreign reserves.
B) earns seigniorage because it no longer bears the cost of issuing its own currency.
C) abandons its own currency and adopts the money of another country.
D) must worry about a speculative attack on its currency.
48) A disadvantage of dollarization is that it
A) prevents a central bank from creating inflation.
B) avoids the possibility of a speculative attack on the domestic currency.
C) does not allow a country to pursue its own independent monetary policy.
D) is a strong commitment to exchange rate stability.
49) (I) Controls on capital outflows may increase capital flight by weakening confidence in the
government. (II) Controls on capital outflows are an inadequate substitute for financial reform to
deal with currency crises.
A) (I) is true; (II) false.
B) (I) is false; (II) true.
C) Both are true.
D) Both are false.
50) The most effective way to deal with currency crises is to
A) impose controls on capital inflows.
B) impose controls on capital outflows.
C) impose controls on both capital inflows and outflows.
D) improve bank regulation and supervision.
51) An argument that supports the view that the world needs an international lender of last resort
such as the IMF is that
A) central banks in emerging-market countries lack credibility as inflation fighters.
B) an international lender of last resort creates a safety net that protects bank depositors.
C) the IMF is slow to lend, which ultimately reduces the amount that must be borrowed.
D) the IMF imposes requirements that borrowing countries must enact microeconomic policies
to reform their financial systems.
52) The capital account describes the flow of capital between the United States and other
countries. Capital inflows are
A) American purchases of foreign assets.
B) foreign purchases of American assets.
C) both A and B of the above.
D) neither A nor B of the above.
53) Which of the following appears in the capital account part of the balance of payments?
A) A gift to an American from his English aunt
B) A purchase by the Honda corporation of a U.S. Treasury bill
C) A purchase by the Bank of England of a U.S. Treasury bill
D) Income earned by the Honda corporation on its automobile plant in Ohio
54) Given the size of the statistical discrepancy needed to balance the balance of payments
account, one can infer that
A) hidden capital flows into the U.S. are inconsequential.
B) items in the balance of payments are measured quite accurately.
C) many international transactions go unrecorded.
D) all of the above occur.
55) Many believe that the statistical discrepancy is primarily the result of
A) large hidden capital flows into the United States.
B) large hidden capital flows out of the United States.
C) measurement errors due to exchange rate calculations.
D) none of the above.
56) A balance of payments ________ is associated with a ________ of international reserves.
A) deficit; loss
B) deficit; gain
C) surplus; loss
D) balance; gain
57) A balance of payments ________ is associated with a ________ of international reserves.
A) surplus; loss
B) surplus; gain
C) deficit; gain
D) balance; loss
58) The official reserve transactions balance
A) equals the current account balance plus the items in the capital account.
B) tells us the net amount of international reserves that must move between central banks in
order to finance international transactions.
C) has an important impact on the money supply.
D) is all of the above.
59) Because other countries hold dollars as international reserves, a U.S. official reserve
transactions deficit can be financed by
A) an increase in U.S. international reserves.
B) an increase in foreign holdings of dollars.
C) a decrease in foreign holdings of dollars.
D) only A and B of the above.
60) When a reserve currency country runs a balance of payments deficit and a nonreserve
currency country buys the reserve currency to finance the reserve country’s deficits, the monetary
base in the nonreserve country ________ and the monetary base in the reserve country
________.
A) increases; decreases
B) increases; does not change
C) decreases; does not change
D) decreases; increases
61) The current account shows ________.
A) international transactions that involve currently produced goods and services
B) the flow of capital between the U.S. and other countries
C) payments between the U.S. and other countries
D) current IOUs of the U.S.
62) The capital account describes ________.
A) international transactions that involve currently produced goods and services
B) the flow of capital between the U.S. and other countries
C) payments between the U.S. and other countries
D) current IOUs of the U.S.
63) ________ is when the domestic currency is backed 100% by a foreign currency and in which
the note-issuing authority establishes a fixed exchange rate to this foreign currency and stands
ready to exchange domestic currency for the foreign currency at this rate whenever the public
requests it.
A) dollarization
B) currency board
C) devaluation
D) revaluation
64) What shows international transactions that involve currently produced goods and services?
A) Current account
B) Balance of payments
C) Trade balance
D) Capital account
65) What is the bookkeeping system for recording all receipts and payments that have a direct
bearing on the movement of funds between a nation and foreign countries?
A) Current account
B) Capital account
C) Balance of payments
D) Trade balance
66) The official reserve transactions balance is referred to as
A) the capital account.
B) the current account.
C) the trade balance.
D) the net change in government international reserves.
67) A dirty float is
A) when the value of a currency is pegged relative to the value of one other currency.
B) when the value of a currency is allowed to fluctuate against all other currencies.
C) when countries intervene in foreign exchange markets in an attempt to influence their
exchange rates by buying and selling foreign assets.
D) when the value of a currency is pegged relative to an anchor currency.
68) Seigniorage is
A) when a country abandons its currency altogether and adopts that of another country.
B) when a country loses the revenue that it received by issuing money.
C) when the par exchange rate is reset at a lower level.
D) when the domestic currency is backed 100% by a foreign currency.
1) An unsterilized intervention in which domestic currency is sold to purchase foreign assets
leads to a gain in international reserves.
2) The difference between merchandise exports and imports is called the current account
balance.
3) The current account balance plus the capital account balance equals the net change in
government international reserves.
4) A central bank’s international reserves are its holdings of assets denominated in foreign
currencies.
5) In contrast to other countries’ currencies, the Japanese yen and yen-denominated assets are the
major component of international reserves held by countries.
6) An anchor currency provides the base for a floating exchange rate system.
7) In a fixed exchange rate system, a country whose currency is undervalued will lose
international reserves.
8) The Bretton Woods system was a fixed exchange rate regime in which central banks bought
and sold their own currencies to keep their exchange rates fixed.
9) If a country’s central bank eventually runs out of international reserves, it cannot keep its
currency from depreciating and a devaluation must occur.
10) When it acts as a lender of last resort, the IMF may increase the likelihood that financial
institutions take excessive risks and thus increase moral hazard.
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11) An unsterilized intervention in which domestic currency is purchased by selling foreign
assets leads to a rise in international reserves, a decrease in the money supply, and an
appreciation of the domestic currency.
12) A sterilized intervention leaves the money supply changed and has a direct way of affecting
interest rates or the expected future exchange rate.
13) A managed float regime is when countries intervene in foreign exchange markets in an
attempt to influence their exchange rates by buying and selling foreign assets.
14) By the end of 2012, China had accumulated more than $3 trillion of international reserves.
16.3 Essay
1) How does a sterilized foreign exchange intervention differ from an unsterilized one in terms
of its effects on the exchange rate, international reserves, and the monetary base?
Topic: Chapter 16.1 Intervention if the Foreign Exchange Market
Question Status: Previous Edition
2) How does a fixed exchange rate regime differ from a system of floating exchange rates?
Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System
Question Status: Previous Edition
3) Briefly explain what it means to be a “reserve-currency” country. What are the advantages?
Can you think of any disadvantages?
Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System
Question Status: Previous Edition
4) What was the European Monetary System? How did its exchange rate mechanism work?
Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System
Question Status: Previous Edition
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5) Explain graphically how a country must intervene in the foreign exchange market under a
fixed exchange rate regime if its currency is undervalued.
Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System
Question Status: Previous Edition
6) Explain graphically the speculative attacks that occurred against the British pound in 1992, the
Mexican peso in 1994, the Thai baht in 1997, the Brazilian real in 1999, and the Argentine peso
in 2002.
Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System
Question Status: Previous Edition
7) What are the arguments for and against the IMF acting as an international lender of last
resort?
Topic: Chapter 16.5 The Role of the IMF
Question Status: Previous Edition
8) Describe the pros and cons for controls on capital inflows and outflows.
Topic: Chapter 16.4 Capital Controls
Question Status: Previous Edition
9) By the end of 2012, China had accumulated more than $3 trillion of international reserves.
How did China accomplish this? Is the policy sustainable?
Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System
Question Status: New Question
10) What is the policy trilemma as it relates to capital mobility, fixed/floating exchange rates,
and monetary policy?
Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System
Question Status: New Question
11) What features of the European Monetary Union caused problems during the global financial
crisis?
Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System
Question Status: New Question