International Economics, 9e (Husted/Melvin)
Chapter 13 International Monetary Systems
13.1 Multiple-Choice Questions
1) In practice, the Bretton Woods system is best described as
A) an adjustable peg.
B) a purely fixed exchange rate
C) a gold exchange standard
D) Both A and C
2) Most of the major currencies have had a floating exchange rate system since
A) 1973.
B) 1944.
C) 1956.
D) 1971.
3) ________ keeps the exchange rate fixed in the short run but then adjusts its value at regular
intervals to account for supply and demand pressures.
A) The European Monetary System
B) A managed floating
C) A crawling peg
D) A crawling float
4) Which of the currencies below does not serve a role as an international reserve currency?
A) European euro
B) Japanese yen
C) U.S. dollar
D) Mexican peso
5) For countries with high seigniorage returns, we expect
A) PPP holding better.
B) a high and variable inflation rate.
C) a smaller role for their currencies as an international store of value.
D) All of the above.
6) The Bretton Woods agreement was signed at Bretton Woods, New Hampshire, in
A) 1944.
B) 1929.
C) 1970.
D) 1973.
7) Which currency below currently serves as a dominant reserve currency?
A) European euro
B) U.S. dollar
C) Japanese yen
D) British pound
8) Which of the following helps to determine a currency’s international role as the dominant
reserve currency?
A) amount of seigniorage
B) policy goals of national monetary authorities
C) size of the domestic economic activity relative to international trade
D) All of the above
9) The SDR (Special Drawing Rights) is issued by the
A) IMF.
B) Federal Reserve Bank.
C) European Monetary System.
D) World Bank.
10) Given the currencies below, which was not replaced by the Euro?
A) German mark
B) Irish pound
C) British pound
D) French franc
11) Which of the following is not a composite currency?
A) The SDR
B) The ECU
C) The U.S. dollar
D) All of the above
12) An exchange rate arrangement with a free market determined floating exchange rate for
capital account transactions and a fixed exchange rate for current account transactions is called
A) capital-current account exchange rate system.
B) dual exchange rate system.
C) managed exchange rate system.
D) crawling peg exchange rate system.
13) Countries with floating exchange rates have certain characteristics. Indicate the one that
does not apply to those countries.
A) closed economy
B) small economy
C) diversified trade
D) divergent inflation rates
14) Of the following exchange rate arrangements, in which does the exchange rate fluctuate
around a fixed central target rate while allowing a moderate amount of fluctuation?
A) Independently floating
B) Currency Board
C) Horizontal Bands
D) Fixed peg
15) The difference between the exchange value of a money and its cost of production is defined
as
A) seigniorage.
B) net value.
C) net exchange profit.
D) the face value.
16) Indicate below the activity that the IMF is not involved in.
A) financing countries’ BOP deficits through temporary loans
B) overseeing exchange rate policies
C) monitoring BOP imbalances
D) issuing a composite currency called ECU
17) Which of the following may not be true for “multiple exchange rates”?
A) They are a form of protectionism.
B) They try to improve a country’s BOP.
C) They use different exchange rates for different international transactions.
D) They are less costly to administer than floating exchange rates.
18) The ________ is the most popular dominant currency that countries fix their currency
against.
A) Swiss franc
B) U.S. Dollar
C) SDR
D) Euro
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19) A currency’s role as an international unit of account is due to
A) invoicing costs.
B) transaction costs.
C) information costs.
D) intervention costs.
20) The greater are foreign tradable goods price fluctuations, the more likely that authorities will
choose a ________ exchange rate system.
A) floating
B) fixed
C) crawling peg
D) dual
21) Which of the following currencies has been replaced by the euro?
A) The French franc
B) The Swiss franc
C) The British pound
D) The Swedish krona
22) Before World War I, most countries belonged to a system of fixed exchange rates in which
currencies were tied to which of the following assets?
A) The U.S. dollar
B) The British pound
C) Silver
D) Gold
23) Which of the following has a currency board?
A) Hong Kong
B) The United States
C) Mexico
D) China
13.2 True or False Questions
1) Under a gold standard system, central banks can follow an independent monetary policy.
2) A dual exchange rate is no different from a devaluation in that they both try to improve a
country’s BOP.
3) The member countries under the EMS (European Monetary System) let their currencies float
jointly among themselves, but maintained a fixed exchange rate against the rest of the world.
4) The degree that PPP may hold in the short- or in the long-run is very much related to the
choice of an exchange rate regime.
5) Evidence shows that flexible exchange rates have created a destabilizing speculation in the
foreign exchange market.
6) Countries that trade a small amount with a single foreign country tend to float their exchange
rate to the foreign country’s currency.
7) The greater domestic money supply fluctuations are, the less likely that we observe a pegged
exchange rate regime.
8) Market forces can easily determine a currency’s international role, yet government decree is
most important in determining the international reserve currency status of a currency.
9) Argentina provides a recent example of a currency board success.
10) The European central bank is located in Frankfurt, Germany.
11) Seigniorage is defined as the difference between the exchange value of a money and its cost
of production.
12) The global financial crisis that started in 2008 has reestablished the continuing relevance of
the IMF.
13) A crawling peg is an exchange rate arrangement in which the rate is adjusted in small
amounts at fixed, preannounced rates.
13.3 Essay Questions
1) Provide a short account of how the Euro came in to existence? When were the first
agreements reached? When was it established as a unit of account? When did it start circulating?
2) What is seigniorage? What are the factors that determine whether a currency should emerge
as the dominant reserve currency?
3) Countries that have flexible exchange rates are known to possess some certain economic
characteristics. What are they?
4) What was the Bretton Woods agreement about? Why did it break down? Briefly explain.
5) Explain what a dual exchange rate system is.
6) What is a currency board?