53) Gold was officially abandoned as an international reserve asset
A) in the January 1976 Jamaica Agreement.
B) in the 1971 Smithsonian Agreement.
C) in the 1944 Bretton Woods Agreement.
D) none of the options
54) Following the demise of the Bretton Woods system, the IMF
A) created a new role for itself, providing loans to countries facing balance-of-payments and
exchange rate difficulties.
B) ceased to exists, since the era of fixed exchange rates had ended.
C) became the sole agent responsible for maintaining fixed exchange rates.
D) became the central bank of the United Nations.
55) Under a flexible exchange rate regime, governments can retain monetary policy independence
because the external balance will be achieved by
A) the exchange rate adjustments.
B) the price-specie flow mechanism.
C) the Triffin paradox.
D) none of the options
56) The choice between the alternative exchange rate regimes (fixed or floating) is likely to
involve a trade-off between
A) national monetary policy autonomy and international economic integration.
B) exchange rate uncertainty and national policy autonomy.
C) balance of payments autonomy and inflation.
D) unemployment and inflation.
57) Under a purely flexible exchange rate system
A) supply and demand set the exchange rates.
B) governments can set the exchange rate by buying or selling reserves.
C) governments can set exchange rates with fiscal policy.
D) governments can set the exchange rate by buying or selling reserves and with fiscal policy.
58) A currency board arrangement is
A) when the currency of another country circulates as the sole legal tender.
B) when the country belongs to a monetary or currency union in which the same legal tender is
shared by the members of the union.
C) a monetary regime based on an explicit legislative commitment to exchange domestic currency
for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing
authority to ensure the fulfillment of its legal obligation.
D) where the country pegs its currency at a fixed rate to a major currency where the exchange rate
fluctuates within a narrow margin of less than one percent.
59) Ecuador does not have its own national currency, circulating the U.S. dollar instead. About
how many countries do not have their own national currency?
A) 10
B) 20
C) 30
D) 40
60) With regard to the current exchange rate arrangement between the U.S. and the U.K., it is best
characterized as
A) independent floating (market determined).
B) managed float.
C) currency board.
D) pegged exchange rate within a horizontal band.
61) With regard to the current exchange rate arrangement between Italy and Germany, it is best
characterized as
A) independent floating (market determined).
B) managed float.
C) an exchange arrangement with no separate legal tender.
D) pegged exchange rate within a horizontal band.
62) On January 1, 1999, an epochal event took place in the arena of international finance when
A) all EU countries adopted a common currency called the euro.
B) eight of 15 EU countries adopted a common currency called the euro.
C) nine of 15 EU countries adopted a common currency called the euro.
D) eleven of 15 EU countries adopted a common currency called the euro.
63) The advent of the euro marks the first time that sovereign countries have voluntarily given up
their
A) national borders to foster economic integration.
B) monetary independence to foster economic integration.
C) fiscal policy independence to foster economic integration.
D) national debt to foster economic integration.
64) To pave the way for the European Monetary Union, the member countries of the European
Monetary System agreed to achieve a convergence of their economies. Which of the following is
not a condition of convergence:
A) keep the ratio of government budget deficits to GDP below 3 percent.
B) keep gross public debts below 60 percent of GDP.
C) achieve a high degree of price stability.
D) maintain its currency at a fixed exchange rate to the ERM.
65) The European Monetary System (EMS) has the chief objective(s)
A) to establish a “zone of monetary stability” in Europe.
B) to coordinate exchange rate policies vis-à-vis the non-EMS currencies.
C) to pave the way for the eventual European monetary union.
D) all of the options
66) The Exchange Rate Mechanism (ERM) is
A) the procedure by which ERM member countries collectively manage their exchange rates.
B) based on a “parity-grid” system, which is a system of par values among ERM countries.
C) the procedure by which ERM member countries collectively manage their exchange rates and is
based on a “parity-grid” system, which is a system of par values among ERM countries.
D) none of the options
67) The Maastricht Treaty
A) irrevocably fixed exchange rates among the member currencies.
B) commits the members of the European Union to political union as well as monetary union.
C) was signed and subsequently ratified by the 12 member states.
D) all of the options
68) The single European currency, the euro, was adopted by 11 member nations on January 1 of
what year?
A) 1984
B) 1991
C) 1999
D) 2001
69) Benefits from adopting a common European currency include
A) reduced transaction costs.
B) elimination of exchange rate risk.
C) increased price transparency, which promotes Europe-wide competition.
D) all of the options
70) Monetary policy for the countries using the euro as a currency is now conducted by
A) the Federal Reserve.
B) the Bundesbank.
C) European Central Bank.
D) none of the options
71) Following the introduction of the euro, the national central banks of the euro-12 nations
A) disbanded.
B) formed the ESCB, which is analogous to the Federal Reserve System in the U.S.
C) continue to perform important functions in their jurisdictions.
D) formed the ESCB, which is analogous to the Federal Reserve System in the U.S., and continue
to perform important functions in their jurisdictions.
72) The main cost of European monetary union is
A) the loss of national monetary and exchange rate policy independence.
B) increased exchange rate uncertainty.
C) lessened political integration.
D) none of the options
73) The euro zone is remarkably comparable to the United States in terms of
A) population size.
B) GDP.
C) international trade share.
D) all of the options
74) Which country is not using the euro?
A) Greece
B) Italy
C) Sweden
D) Portugal
75) Once the changeover to the euro was completed by July 1, 2002, the legal-tender status of
national currencies in the euro zone
A) was canceled, leaving the euro as the sole legal tender in the euro zone countries.
B) was affirmed at the fixed exchange rate.
C) was tied to gold.
D) none of the options
76) According to the theory of optimum currency areas,
A) the relevant criterion for identifying and designing a common currency zone is the degree of
factor (i.e., capital and labor) mobility within the zone.
B) exchange rates should reflect the degree to which workers are willing to move to get a better
job.
C) exchange rates are determined by portfolio managers seeking the highest return.
D) none of the options
77) Willem Duisenberg, the first president of the European Central Bank, defined “price stability”
as an annual inflation rate of
A) “no more than five percent.”
B) “less than but close to 2 percent.”
C) “absolutely no more than zero percent.”
D) “no more than three percent.”
78) Robert A. Mundell won the Nobel Memorial Prize in Economic Science. He was
A) one of the intellectual fathers of both the new European common currency and Reagan-era
supply-side economics.
B) one of the intellectual fathers of both the new European common currency and Reagan-era
Keynesian economics.
C) one of the intellectual fathers of both the Bretton Woods currency agreement and Keynesian
economics.
D) none of the options
79) In the EU, there is a
A) low degree of fiscal integration among EU countries.
B) high degree of fiscal integration among EU countries.
80) When money can move freely across borders, policy makers must choose between
A) exchange-rate stability and an economic growth.
B) exchange-rate stability and inflation.
C) exchange-rate stability and an independent monetary policy.
D) exchange-rate stability and capital controls.
81) The Mexican Peso Crisis was touched off by
A) an unsurprising announcement by the Mexican government to devalue the peso against the
dollar by 14 percent.
B) an unexpected announcement by the Mexican government to devalue the peso against the dollar
by 14 percent.
C) an announcement by the Mexican government to enact a currency board arrangement with the
U.S. dollar.
D) contagion from other Latin American and Asian financial markets.
82) Prior to the peso crisis, Mexico depended on foreign portfolio capital to finance its economic
development. This foreign capital influx
A) caused higher domestic inflation.
B) led to an overvalued peso.
C) helped Mexico’s trade balances.
D) caused higher domestic inflation and led to an overvalued peso.
83) The Mexican peso crisis is significant in that
A) it is perhaps the first serious international financial crisis touched off by cross-border flight of
portfolio capital.
B) selling by international portfolio managers had a highly destabilizing, contagious effect on the
world financial system.
C) it provides a cautionary tale that as the world’s financial markets are becoming more integrated,
this type of contagious financial crisis is likely to occur more often.
D) all of the options
84) The Asian Currency Crisis
A) happened just prior to the Mexican peso crisis.
B) turned out to be far more serious than the Mexican peso crisis in terms of the extent of
contagion.
C) was limited to Asian currencies.
D) was almost over before anyone outside the Pacific Rim noticed.
85) Generally speaking, liberalization of financial markets when combined with a weak,
underdeveloped domestic financial system tends to
A) strengthen the domestic financial system in the short run.
B) create an environment susceptible to currency and financial crises.
C) raise interest rates and lead to domestic recession.
D) none of the options
86) According to the “Trilemma” a country can attain only two of the following three conditions:
(1) A fixed exchange rate, (2) free international flows of capital, and (3) an independent monetary
policy. This difficulty is also known as
A) the incompatible trinity.
B) the Trilemma.
C) the Tobin tax.
D) none of the options
87) Another name for the incompatible trinity is the
A) Tobin Tax.
B) Triffin Paradox.
C) Trilemma.
D) none of the options
88) To avoid currency crisis in the face of fully integrated capital markets, a country can have a
A) floating exchange rate.
B) fixed exchange rate.
C) fixed exchange rate that adjusts.
D) floating and fixed exchange rates can both help to avoid currency crises.
89) During the 1990s there
A) were three major currency crises.
B) were two major currency crises.
C) was only one currency crisis.
D) were no major currency crises.
90) Which factors are related to the collapse of the Argentine currency board system and ensuing
economic crisis?
A) The lack of fiscal discipline on the part of the Argentine government
B) Labor market inflexibility
C) Contagion from the financial crises in Russia and Brazil
D) all of the options
91) Prior to the Argentine Peso Crisis
A) Argentina had a “dirty float” where the government allowed the exchange rate to float within
wide bands.
B) Argentina had a currency board arrangement with the peso pegged to the U.S. dollar at parity.
C) the Argentine government defaulted on its international debts.
D) weakening of the U.S. dollar led the Argentine government to abandon dollarization.
92) A “good” (or ideal) international monetary system should provide
A) liquidity, elasticity, and flexibility.
B) elasticity, sensitivity, and reliability.
C) liquidity, adjustments, and confidence.
D) none of the options
93) A central bank can fix an exchange rate
A) in perpetuity.
B) only for as long as the market believes that it has the political will to do so.
C) only for as long as it has reserves of gold.
D) only for as long as it has independence of monetary policy.
94) A booming economy with a fixed or stable nominal exchange rate
A) inevitably brings about an appreciation of the real exchange rate.
B) inevitably brings about a depreciation of the real exchange rate.
C) inevitably brings about a stabilization of the real exchange rate.
D) inevitably brings about increased volatility of the real exchange rate.
95) Advantages of a flexible exchange rate include which of the following?
A) National policy autonomy.
B) Easier external adjustments.
C) The government can use monetary and fiscal policies to pursue whatever economic goals it
chooses.
D) all of the options
96) Advantages of a fixed exchange rate include
A) reduction in exchange rate risk for businesses.
B) reduction in transactions costs.
C) reduction in trading frictions.
D) all of the options
97) Generally speaking, a country would be more prone to asymmetric shocks
A) the more diversified and less trade-dependent its economy is.
B) the less diversified and more trade-dependent its economy is.
C) the less diversified and less trade-dependent its economy is.
D) the more diversified and more trade-dependent its economy is.
98) Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange
rate. Why?
A) The market forces may be stronger than the exchange rate intervention that the government can
muster.
B) Portfolio managers will not invest in countries with fixed exchange rates.
C) Because of the Tobin Tax.
D) none of the options
99) Consider the supply-demand framework for the British pound relative to the U.S. dollar shown
in the following chart. The exchange rate is currently $1.80 = £1.00. Which of the following is
correct?
A) At an exchange rate of $1.80 = £1.00, demand for British pounds exceeds supply.
B) At an exchange rate of $1.80 = £1.00, supply for British pounds exceeds demand.
C) Under a flexible exchange rate regime, the U.S. dollar will depreciate to an exchange rate of
$1.90 = £1.00.
D) At an exchange rate of $1.80 = £1.00, demand for British pounds exceeds supply. Additionally,
under a flexible exchange rate regime, the U.S. dollar will depreciate to an exchange rate of $1.90
= £1.00.
100) Consider the supply-demand framework for the British pound relative to the U.S. dollar
shown in the following chart. The exchange rate is currently $1.80 = £1.00. Which of the following
is correct?
A) To “fix” the exchange rate at $1.80 = £1.00, the Federal Reserve could use contractionary
monetary policy to shift the demand curve to the left.
B) To “fix” the exchange rate at $1.80 = £1.00, the U.S. government could use contractionary
fiscal policy to shift the demand curve to the left.
C) The British Government could use fiscal or monetary policy to shift the supply curve to the
right to fix the exchange rate to $1.80 = £1.00.
D) all of the options