10) List and explain the three attributes (often referred as the impossible trinity) an ideal
currency would possess if existed in today’s world.
1) Which of the following is NOT a required convergence criteria to become a full member of
the European Economic and Monetary Union (EMU)?
A) National birthrates must be at 2.0 or lower per person.
B) The fiscal deficit should be no more than 3% of GDP.
C) Nominal inflation should be no more than 1.5% above the average inflation rate for the three
members with the lowest inflation rates in the previous year.
D) Government debt should be no more than 60% of GDP.
2) According to the authors, what is the single most important mandate of the European Central
Bank?
A) Promote international trade for countries within the European Union.
B) Price, in euros, all products for sale in the European Union.
C) Promote price stability within the European Union.
D) Establish an EMU trade surplus with the United States.
3) Which of the following is a way in which the euro affects markets?
A) Countries within the Euro zone enjoy cheaper transaction costs.
B) Currency risks and costs related to exchange rate uncertainty are reduced.
C) Consumers and business enjoy price transparency and increased price-based competition.
D) all of the above
4) For the three years from early 2002 to early 2005, the euro maintained a strong and steady rise
in value against the U.S. dollar (USD). After a brief respite in 2005, the euro continued its climb
against the USD into 2008. Which of the following were NOT a contributing factor in the assent
of the euro and the decline in the dollar?
A) severe U.S. balance of payments deficits
B) a general weakening of the dollar after the attacks of September 11, 2001
C) large U.S. balance of payment surpluses
D) All of the above were contributing factors.
5) The countries that use the euro as their currency have:
A) agreed to use a single currency (exchange rate stability), allow the free movement of capital
in and out of their economies (financial integration), but give up individual control of their own
money supply (monetary independence).
B) gained control over their own money supply (monetary independence), allowed the free
movement of capital in and out of their economies (financial integration), but give up exchange
rate stability.
C) agreed to use a single currency (exchange rate stability), allow individual control of their own
money supply (monetary independence), but give up the free movement of capital in and out of
their economies (financial integration).
D) none of the above
6) The Euro currency is fixed against other currencies on the international currency exchange
markets, but allows member country currencies to float against each other.
7) The European Central Bank is a strong and independent central bank that has completely
replaced the individual central banks of the countries that use the euro as their currency.
8) The members of the EU do have relative freedom to set their own fiscal policies—
government spending, taxation, and the creation of government surpluses or deficits. They are
expected to keep deficit spending within limits.
9) List and explain three benefits the euro would generate for the states participating in the
European Economic and Monetary Union.
13
Copyright © 2016 Pearson Education, Inc.
2.5 Emerging Markets and Regime Choices
1) Beginning in 1991 Argentina conducted its monetary policy through a currency board. In
January 2002, Argentina abandoned the currency board and allowed its currency to float against
other currencies. The country took this step because:
A) the Argentine Peso had grown too strong against major trading powers thus the currency
board policies were hurting the domestic economy.
B) the United States required the action as a prerequisite to finalizing a free trade zone with all of
North, South, and Central America.
C) the Argentine government lost the ability to maintain the pegged relationship as in fact
investors and traders perceived a lack of equality between the Argentine Peso and the U.S.
dollar.
D) all of the above
2) In January 2002, the Argentine Peso changed in value from Peso1.00/$ to Peso1.40/$, thus,
the Argentine Peso ________ against the U.S. dollar.
A) strengthened
B) weakened
C) remained neutral
D) all of the above
3) In January 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre, with
the U.S. dollar. This practice is known as:
A) bi-currencyism.
B) securitization
C) a Yankee bailout.
D) dollarization.
4) You have been hired as a consultant to the central bank for a country that has for many years
suffered from repeated currency crises and depends heavily on the U.S. financial and product
markets. Which of the following policies would have the greatest effectiveness for reducing
currency volatility of the client country with the United States?
A) dollarization
B) an exchange rate pegged to the U.S. dollar
C) an exchange rate with a fixed price per ounce of gold
D) an internationally floating exchange rate
5) Which of the following is NOT an argument against dollarization?
A) Dollarization causes a loss of sovereignty over domestic monetary policy.
B) Dollarization removes currency volatility against the dollar.
C) Dollarization causes the country to lose the power of seignorage.
D) The central bank of the dollarized country loses the role of lender of last resort.
6) The ability of a country to profit from its ability to print money is known as:
A) profiteering.
B) dollarization.
C) seignorage.
D) inflation.
7) Which of the following factors make it difficult for emerging market economies to choose a
specific currency regime?
A) weak fiscal, financial, and monetary institutions
B) the tendency for commerce to allow currency substitution and the denomination of liabilities
in dollars
C) the emerging market’s vulnerability to sudden stoppages of outside capital flows
D) all of the above
8) A currency board exists when a country’s central bank commits to back its money supply
entirely with foreign reserves at all times.
9) A currency board exists when a country’s central bank commits to back a fraction of its money
base with foreign reserves at all times.
10) Dollarization is a common solution for countries suffering from currency revaluation.
11) Dollarization is the use of the U.S. dollar as the official currency of the country. List and
explain the arguments for and against dollarization. Provide example/s of countries that used the
dollar as its official currency.
1) Of the following, which is NOT a trade-off that must be dealt with in any exchange rate
regime?
A) cooperation vs independence
B) rules vs discretionary action
C) dollars vs pounds
D) All of the above are rate regime trade-offs.
2) The following are examples of degrees of internationalization of an international currency
EXCEPT:
A) First degree of internationalization is when an international currency becomes readily
accessible for trade.
B) A second degree of internationalization is when an international currency is used for
international investment.
C) A third degree of internationalization is when an international currency is used for
international investment.
D) A third degree of internationalization is when an international currency takes the role of a
reserve currency.
3) All exchange rate regimes must deal with the trade-off between rules and discretion as well as
between cooperation and independence.
4) Regime structures like the gold standard required no cooperative policies among countries,
only the assurance that all would abide by the “rules of the game.”
5) Bretton Woods required less in the way of cooperation among countries than did the gold
standard.
6) The People’s Republic of China has two official currencies, the Chinese renminbi (RMB) and
the yuan (CNY).
7) Explain how all exchange rate regimes must deal with the trade-off between rules and
discretion, as well as between cooperation and independence. List and classified two
International Monetary Systems based on these four quadrants.