Global Business Today, 11e (Hill)
Chapter 11 The International Monetary System
1) The U.S. dollar, EU euro, Japanese yen, and British pound are all free to float against each other,
which means their exchange rates never fluctuate.
2) When the foreign exchange market determines the relative value of a currency, we say that the
country is adhering to a pegged exchange rate regime.
3) A pegged exchange rate means the value of the currency is fixed relative to a reference
currency, and then the exchange rate between that currency and other currencies is determined by
the reference currency exchange rate.
4) The process of dollarization occurs when a country abandons its own currency and adopts
another currency—typically the U.S. dollar.
5) Under the gold standard, a country in balance-of-trade equilibrium earns income from exports
that is equal to the money its residents pay for imports.
6) During the Bretton Woods negotiations, there was a consensus among the countries represented
that fixed exchange rates were preferred.
7) The architects of the Bretton Woods agreement wanted to avoid high unemployment, so they
built the fixed exchange rate system to be highly inflexible.
8) When the Bretton Woods participants established the International Monetary Fund, nations who
chose to borrow from the IMF could borrow a limited amount without adhering to any specific
agreements.
9) As the only currency that could be converted into gold, the British pound occupied a central
place in the fixed exchange rate system up until 1973.
10) The U.S. balance-of-payments position flourished throughout the 1970s under the guidance of
President Nixon.
11) The Bretton Woods system could work only as long as the U.S. inflation rate remained low and
the United States did not run a balance-of-payments deficit.
12) Under the 1976 Jamaica Agreement, gold was abandoned as a reserve asset.
13) Since 1973, exchange rates have become less volatile and more predictable.
14) Under a floating exchange rate system, a country’s ability to expand or contract its money
supply as it sees fit is limited by the need to maintain exchange rate parity.
15) Critics argue that a floating exchange rate system can be affected by uncertainty and the
bandwagon effect.
16) Pegged exchange rates are most popular in larger nations.
17) It has been shown that countries with pegged exchange rates have a lower annual inflation rate
than countries with floating regimes.
18) A country that introduces a currency board commits itself to converting its domestic currency
on demand into another currency at a fixed exchange rate.
19) Under a currency board system, the government has the absolute authority to set interest rates.
20) The activities of the International Monetary Fund have declined after the collapse of the
Bretton Woods system in 1973.
21) A banking crisis occurs when there is a speculative attack on the exchange value of currency.
22) Some IMF economists argue that higher inflation rates might be good if the consequence is
greater growth in aggregate demand.
23) The forward exchange market is an accurate predictor of future exchange rates.
24) One way a company can build strategic flexibility is by contracting out manufacturing
processes around the globe.
25) The institutional arrangements that govern exchange rates are called the
A) generally accepted accounting principles.
B) general agreement on tariffs and trade.
C) international monetary system.
D) general agreement on trade in services.
E) financial management information system.
26) Some countries let the foreign exchange market determine the relative value of its currency.
This is called a ________ exchange rate.
A) fixed
B) floating
C) forward
D) pegged
E) nominal
27) The currency of the United Arab Emirates is fixed relative to the U.S. dollar: this means that
the exchange rate between the United Arab Emirates dirham and other currencies is determined by
the dollar exchange rate. This is an example of a ________ exchange rate.
A) flexible
B) pegged
C) real
D) dirty-float
E) floating
28) Many of the world’s developing nations peg their currencies, primarily to the
A) U.S. dollar.
B) Saudi riyal.
C) Japanese yen.
D) Chinese yuan.
E) German deutsche mark.
29) In a floating exchange rate, the relative value of a currency
A) is more predictable and less volatile.
B) is determined by market forces.
C) changes infrequently only under a specific set of circumstances.
D) is set against other currencies at some mutually agreed on exchange rate.
E) does not depend on the free play of market forces.
30) The government of an Asian country allows its currency to nominally float freely against other
currencies, but the government has the right to intervene, buying and selling currency, if it believes
that the currency has deviated too far from its fair value. What this country is doing is called a
________ float.
A) fixed
B) clean
C) pegged
D) dirty
E) capital
31) Two nations that are part of a recently formed common market have an exchange rate system
where the values of their currencies are set against each other at a mutually agreed on exchange
rate. This type of exchange rate system is called
A) clean float.
B) floating.
C) fixed.
D) dirty-float.
E) pegged.
32) The gold standard was adopted in response to the
A) expansion in the volume of international trade due to the Industrial Revolution.
B) inability of governments to convert gold into paper currency on demand at a fixed rate.
C) widening gap between the developed and the developing nations.
D) failure of the Bretton Woods fixed exchange rate system.
E) failure of the U.S. dollar to act as a reference currency.
33) In terms of the gold standard, the amount of currency needed to purchase one ounce of gold
was referred to as the
A) gold to bond ratio.
B) gold reserve ratio.
C) gold mix ratio.
D) gold par value.
E) gold net value.
34) One unit of a peso in a Latin American country was defined as equivalent to 12 grains of “fine”
(pure) gold, while one unit of its neighboring countries currency, a dollar, was defined as
equivalent to 18 grains of “fine” (pure) gold. Using the gold par value concept (with 480 grains in
an ounce), the exchange rate for converting the peso to the dollar is
A) 1.5 peso = 1 dollar.
B) 1 peso = 1 dollar.
C) 3 peso = 2 dollar.
D) 1 peso = 1.5 dollar.
E) 2 peso = 1 dollar.
35) A ________ exists in a country when the income its residents earn from exports is equal to the
money its residents pay to other countries for imports.
A) currency crisis
B) balance-of-trade equilibrium
C) balance-of-payments deficit
D) balance-of-trade surplus
E) fiscal deficit
36) Under the gold standard, gold flows reduce the money supply in one nation when another
nation experiences a trade surplus. The nation with a trade surplus has a swell in the money supply,
which leads to price increases. At the same time, the nation with a reduction in the money supply
will cause prices to fall. The lower prices create more demand for product from the nation with a
reduction in the money supply, which leads to a
A) balance-of-trade.
B) facilitating payment.
C) tragedy of the commons.
D) floating exchange rate.
E) planned economy.
37) The country of Ambos Republic defined its currency, ambos, as being equivalent to 16 grains
of “fine” (pure) gold. Assuming that there are 480 grains in an ounce, the gold par value of the
ambos is
A) 30.
B) 28.
C) 20.
D) 22.
E) 14.
38) In the 1930s, countries were devaluing their currencies at will in order to boost exports, thus
shattering confidence in the
A) floating exchange rate system.
B) gold standard system.
C) fixed exchange system.
D) Bretton Woods system.
E) managed-float system.
39) Cissen and Napor are two neighboring countries that actively trade goods and services with
each other. Under the gold standard, there will be a net flow of gold from Napor to Cissen when
A) Cissen is in trade deficit with Napor.
B) Napor is in balance-of-trade equilibrium with Cissen.
C) Cissen is in trade surplus with Napor.
D) Cissen imports more than it exports to Napor.
E) Napor balance of payment to Cissen is favorable.
40) The United States returned to the gold standard in 1934 when more dollars were needed to buy
an ounce of gold than before. This implied that the dollar
A) was no longer used for pegged rates.
B) was worth less.
C) could control the spot exchange rate.
D) had maintained a steady value.
E) was worth more.
41) One reason for the collapse of the gold standard in 1939 was the
A) difficulty and complexity in using the gold standard to determine the exchange rate.
B) agreement by governments to convert paper currency into gold on demand at a fixed rate.
C) cycle of competitive currency devaluations by various countries.
D) expansion in the volume of international trade after the Industrial Revolution.
E) inability of the gold standard to act as a mechanism for achieving balance-of-trade equilibrium
by all countries.
42) The 1944 Bretton Woods conference created two major international institutions that play a
role in the international monetary system—the International Monetary Fund (IMF) and the
A) United Nations.
B) European Union.
C) World Trade Organization.
D) World Bank.
E) G20.