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67) Exchange rates are ________ under a pure "free float" system.
A) completely balanced
B) determined by market forces
C) wildly variable and unpredictable
D) determined by the government
68) The great virtue claimed for a ________ is that it imposes monetary discipline on a country
and leads to low inflation.
A) fixed exchange rate
B) managed-float system
C) pegged exchange rate
D) floating exchange rate
69) ________ limits the ability of the government to print money and, thereby, create inflationary
pressures.
A) A dirty-float system
B) A managed-float system
C) The European Monetary System
D) A currency board system
70) Currencies of countries with currency boards will become uncompetitive and overvalued if
A) local inflation rates remain higher than the inflation rate in the country to which the currency is
pegged.
B) the country to which the currency is pegged experiences a trade deficit.
C) local inflation rates are lower than the inflation rate in the country to which the currency is
pegged.
D) the country to which the currency is pegged experiences a trade surplus.
71) The International Monetary Fund has been criticized for exacerbating moral hazard
A) with its rescue programs.
B) by increasing the probability of debt default.
C) making loans to countries that are trying to reduce national debt by "playing the market."
D) by refusing to bail out banks that made loans to overleveraged Asian companies during the
1990s.
72) A currency crisis occurs due to
A) the loss of confidence in a country's banking system.
B) heavy foreign debt obligations.
C) high levels of trade deficit.
D) a speculative attack on the exchange value.
73) Moral hazard arises when people behave recklessly because
A) of the restrictions that exist in a country's monetary policy.
B) of the restrictions the IMF has imposed on them.
C) they know they will be saved if things go wrong.
D) they face financial difficulties arising out of external factors.
74) Which of the following is a common criticism against the powerful International Monetary
Fund?
A) IMF lacks any real mechanism for accountability.
B) It is hesitant to help banks when they are in crisis.
C) IMF has not intervened to resolve the Asian crisis.
D) It did not try to resolve the Mexican currency crisis.
75) A ________ is a situation in which a country cannot service its foreign debt obligations.
A) currency crisis
B) banking crisis
C) foreign debt crisis
D) moral crisis
76) Loans issued by the IMF
A) are conditional loans.
B) are unconditional loans.
C) include a macroeconomic policy that calls for lower interest rates.
D) include a macroeconomic policy that calls for increases in public spending to improve
infrastructure in a country.
77) The Asian economic crisis and the global financial crisis of 2008–2009 were caused by
A) high inflation rates.
B) excessive debt.
C) low inflation rates.
D) a huge trade surplus.
78) Which of the following is a common underlying cause of financial crises?
A) a narrowing current account deficit
B) excessive expansion of domestic borrowing
C) low relative price inflation rates
D) asset price deflation
79) A ________ crisis refers to a loss of confidence in the banking system that leads to a run on
banks as individuals and companies withdraw their deposits.
A) currency
B) banking
C) foreign debt
D) domestic debt
80) Which of the following observations is true of the current system of the foreign exchange
market?
A) Most of the currencies can be converted to gold in the current system of foreign exchange.
B) The current system is driven by fixed exchange rates.
C) Currencies float freely against others in the current system.
D) The current system is a combination of government intervention and speculative activity.
81) Which of the following will help a company hedge against currency fluctuations?
A) finding a large supplier to supply all the raw materials
B) manufacturing raw materials in-house
C) basing business in a single country
D) dispersing production to different geographic locations
82) Contracting out manufacturing allows companies to reduce economic exposure because
A) multiple suppliers attract subsidies from government.
B) it reduces the pressure on them to maintain a trade surplus.
C) it allows companies to shift suppliers from country to country.
D) quality issues are insignificant when manufacturing is contracted to others.
83) Increasingly the ________ has been acting as macroeconomic police of the world economy,
insisting that countries seeking significant borrowings adopt certain macroeconomic policies.
A) Economic and Social Council (ECOSOC)
B) International Monetary Fund (IMF)
C) United Nations (UN)
D) World Bank
84) Countries that require substantial loans from the International Monetary Fund to survive will
________ due to IMF-mandated economic policies.
A) benefit from a sharp expansion of demand in the long term
B) endure a sharp contraction of demand in the long term
C) benefit from a sharp expansion of demand in the short term
D) endure a sharp contraction of demand in the short term
85) In the face of unpredictable movements in exchange rates, businesses should
A) pursue strategies that will reduce their economic exposure.
B) pursue strategies that will decrease their strategic flexibility.
C) pursue strategies that will reduce their foreign market exposure.
D) sell off investments in foreign subsidiaries and consolidate domestic facilities.
86) It is difficult if not impossible to get adequate insurance coverage for exchange rate changes
that
A) will occur in the next few weeks.
B) might occur in the next few months.
C) might occur several years in the future.
D) might occur in the coming days.
