Multinational Business Finance, 14e (Eiteman)
Chapter 2 The International Monetary System
2.1 History of the International Monetary System
1) Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of
gold cost $20.67 in U.S. dollars and £4.2474 in British pounds. Therefore, the exchange rate of
pounds per dollar under this fixed exchange regime was:
A) £4.8665/$.
B) £0.2055/$.
C) always changing because the price of gold was always changing.
D) unknown because there is not enough information to answer this question.
2) World War I caused the suspension of the gold standard for fixed international exchange rates
because the war:
A) cost too much money.
B) interrupted the free movement of gold.
C) lasted too long.
D) used gold as the main ingredient in armament plating.
3) The post WWII international monetary agreement that was developed in 1944 is known as
the:
A) United Nations.
B) League of Nations.
C) Yalta Agreement.
D) Bretton Woods Agreement.
4) Another name for the International Bank for Reconstruction and Development is:
A) the Recon Bank.
B) the European Monetary System.
C) the Marshall Plan.
D) the World Bank.
5) The International Monetary Fund (IMF):
A) in recent years has provided large loans to Russia, South Korea, and Brazil.
B) was created as a result of the Bretton Woods Agreement.
C) aids countries with balance of payment and exchange rate problems.
D) is all of the above.
6) One of the innovations introduced by Bretton Woods was the creation of the Special Drawing
Right or SDR. The SDR is an international reserve asset created by the:
A) U.S. Department of the Treasury
B) International Bank of Reconstruction and Development (IBRD)
C) World Bank (WB)
D) International Monetary Fund (IMF)
7) Which of the following led to the eventual demise of the fixed currency exchange rate regime
worked out at Bretton Woods?
A) widely divergent national monetary and fiscal policies among member nations
B) differential rates of inflation across member nations
C) several unexpected economic shocks to member nations
D) all of the above
8) Which of the following statements is NOT true?
A) The Gold Standard Era was characterized by growing openness in trade, but limited capital
mobility.
B) The time period between world wars 1 and 2 (the inter war years) witnessed significant
reductions in trade barriers and a rapid acceleration in international trade.
C) The Bretton Woods Era (post WWII) realized the increasing benefits of open economies.
Furthermore, trade was increasingly dominated by capital.
D) Since March 1973, exchange rates have become much more volatile and less predictable than
previous periods.
9) A review of the evolution of the Global Monetary System shows that capital flows dominate
trade in which of the following eras EXCEPT:
A) Classical Gold Standard
B) Fixed Exchange Rates, 1945-1973
C) The Floating Era, 1973-1997
D) The Emerging Era, 1997-Present
10) Under the terms of Bretton Woods, countries tried to maintain the value of their currencies to
within 1% of a hybrid security made up of the U.S. dollar, British pound, and Japanese yen.
11) Members of the International Monetary Fund may settle transactions among themselves by
transferring Special Drawing Rights (SDRs).
12) Today, the United States has been ejected from the International Monetary Fund for refusal
to pay annual dues.
13) From the time of its creation through July 2012, the euro peaked versus the USD in April
2008 at around $1.60/€.
14) Since March 1973, when exchange rates become more volatile and less predictable than
during the “fixed” exchange rate period, the nominal exchange rate index of the U.S. dollar
peaked in 2011.
15) Most Western nations were on the gold standard for currency exchange rates from 1876 until
1914. Today we have several different exchange rate regimes in use, but most larger economy
nations have freely floating exchange rates today and are not obligated to convert their currency
into a predetermined amount of gold on demand. Currently several parties still call for the “good
old days” and a return to the gold standard. Develop an argument as to why this is a good idea.
2.2 IMF Classification of Currency Regimes
1) Since 2009 the IMF’s exchange rate regime classification system uses a “de facto
classification” methodology. Under this system, a country that has given up their own
sovereignty over monetary
policy is considered to have:
A) a residual agreement.
B) hard pegs.
C) soft pegs.
D) floating arrangements.
2) Since 2009 the IMF’s exchange rate regime classification system uses a “de facto
classification” methodology. Under this system, countries with “fixed exchange rates” are
considered to have:
A) a residual agreement.
B) soft pegs.
C) hard pegs.
D) floating arrangements.
3) A small economy country whose GDP is heavily dependent on trade with the United States
could use a(n) ________ exchange rate regime to minimize the risk to their economy that could
arise due to unfavorable changes in the exchange rate.
A) pegged exchange rate with the United States
B) pegged exchange rate with the Euro
C) independent floating
D) managed float
4) Since 2009 the IMF’s exchange rate regime classification system uses a “de facto
classification” methodology. Under this system, currencies that are predominantly market-driven
are considered to be:
A) soft pegs.
B) hard pegs.
C) floating arrangements.
D) a residual agreement.
5) Among IMF member countries since 2010 the dominating exchange rate regime has been:
A) hard peg.
B) soft peg.
C) floating arrangements.
D) residual agreement.
6) The euro is an example of a rigidly fixed system, acting as a single currency for its member
countries. However, the euro itself is an independently floating currency against all other
currencies.
7) Although the contemporary international monetary system is typically referred to as a
“floating regime,” it is clearly not the case for the majority of the world’s nations.
8) The IMF’s methodology for classifying exchange rate regimes today is based on the official
policy statement of the respective governments, de jure classification.
9) The mobility of international capital flows is causing emerging market nations to choose
between a free-floating currency exchange regime and a currency board (or taken to the limit,
dollarization). Describe how each of the regimes would work and identify at least two likely
economic results for each regime.
1) Based on the premise that, other things equal, countries would prefer a fixed exchange rate,
which of the following statements is NOT true?
A) Fixed rates provide stability in international prices for the conduct of trade.
B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of
international reserves for use in the occasional defense of the fixed rate.
C) Fixed rates are inherently inflationary in that they require the country to follow loose
monetary and fiscal policies.
D) Stable prices aid in the growth of international trade and lessen exchange rate risks for
businesses.
2) Which of the following is NOT an attribute of the “ideal” currency?
A) monetary independence
B) full financial integration
C) exchange rate stability
D) All are attributes of an ideal currency.
3) The authors discuss the concept of the “Impossible Trinity” or the inability to achieve
simultaneously the goals of exchange rate stability, full financial integration, and monetary
independence. If a country chooses to have a pure float exchange rate regime, which two of the
three goals is a country most able to achieve?
A) monetary independence and exchange rate stability
B) exchange rate stability and full financial integration
C) full financial integration and monetary independence
D) A country cannot attain any of the exchange rate goals with a pure float exchange rate regime.
4) China today is a clear example of a nation that has chosen the following policies EXCEPT:
A) control and manage the value of its currency
B) conduct an independent monetary policy
C) full financial integration in an attempt to stimulate its domestic economy
D) restrict the flow of capital into and out of the country
5) According to the terminology associated with changes in currency values, which of the
following choices is the case when a currency’s value relative to other currencies is changed by a
government?
A) depreciation and revaluation
B) devaluation and appreciation
C) devaluation and revaluation
D) depreciation and appreciation
6) Based on the premise that, other things equal, countries would prefer a fixed exchange rate:
Variable rates provide stability in international prices for the conduct of trade.
7) If exchange rates were fixed, investors and traders would be relatively certain about the
current and near future exchange value of each currency.
8) According to the terminology associated with changes in currency values, depreciation is a
case when a currency’s value relative to other currencies is changed by a government.
9) By and large, high capital mobility is forcing emerging market nations to choose between the
two extremes of a free floating exchange rate or a hard peg regime.