5) The United States was taken off the gold standard by
A) President Lyndon Johnson.
B) President Richard Nixon.
C) President Ronald Reagan.
D) President Jimmy Carter.
6) With the Bretton Woods system of international exchange rates
A) the value of a country’s currency was determined strictly by the laws of supply and demand.
B) the value of a country’s currency was determined by its stock of gold.
C) there were fixed exchange rates, and most countries were obligated to intervene to maintain
the values of their currencies within 1 percent of par value.
D) a nation’s balance of payments was eliminated.
7) The International Monetary Fund was created
A) in 1945 by the Bretton Woods Agreement.
B) to collect money from member countries that were running balance of payments deficits.
C) in 1971 when President Richard Nixon signed the Bretton Woods Agreement.
D) in the aftermath of World War II to help nations move off of the gold standard.
8) The gold standard is a type of
A) fixed exchange rate system.
B) flexible exchange rate system.
C) floating exchange rate system.
D) barter currency system.
9) Under the gold standard, when a nation had a deficit in its balance of payments
A) interest rates would rise which would reduce foreign investment.
B) interest rates would fall which would increase foreign investment.
C) gold would flow to foreign residents and the domestic money supply would decrease.
D) gold would flow into the country leading to an increase in the domestic money supply.
10) Under a pure gold standard
A) the dollar is tied to gold and all other currencies are fixed relative to the dollar.
B) all foreign exchanges involve gold for goods and services.
C) all currencies are defined in terms of gold and these rates are fixed.
D) all trade involves government agencies.
11) A problem with the operation of the gold standard in the world economy was that
A) it involved too much government intervention in the economy.
B) the world economy was subject to too much inflation.
C) a country did not have control of its domestic monetary policy.
D) it caused the Great Depression.
12) The international financial market moved towards equilibrium under the gold standard due to
A) shifts in exchange rates caused by changes in supply and demand for foreign exchange.
B) changes in interest rates.
C) negotiations among central banks.
D) flows of gold among countries.
13) Based on the U.S. historical experience with the gold standard, we can conclude that
A) the gold standard guarantees price stability but not economic stability.
B) the standard guarantees economic stability but not price stability.
C) the gold standard guarantees both economic and price stability.
D) the gold standard guarantees neither economic nor price stability.
14) The International Monetary System was established
A) by the United Nations.
B) by the Bretton Woods Agreement.
C) by the United States, in cooperation with Great Britain.
D) during the Great Depression by the League of Nations.
15) Under the Bretton Woods system, a country could alter its exchange rate
A) by changing its value relative to gold.
B) whenever it determined that there was a fundamental disequilibrium.
C) only when the IMF permitted due to a fundamental disequilibrium.
D) under no circumstances.
16) The legally established value of a country’s monetary unit in terms of another under the
Bretton Woods system was called the
A) exchange rate.
B) dirty float.
C) special draw.
D) par value.
17) Under the Bretton Woods agreement, the officially determined value of a country’s currency
is referred to as its
A) GDP.
B) par value.
C) exchange rate.
D) value-to-weight ratio.
18) At the Bretton Woods conference, all currencies were given
A) a fixed value.
B) a zero value.
C) a par value.
D) a floating value.
19) A key objective of the gold standard was to
A) create a flexible exchange rate system between countries.
B) create a fixed exchange rate system between countries.
C) allow nations to maintain their gold reserves.
D) allow nations to tax its citizens in gold.
20) When all currencies are tied directly to gold, then
A) currency exchange rates throughout the world are flexible.
B) currency exchange rates throughout the world are fixed.
C) the world’s stock of gold cannot change.
D) the price of each nation’s currency in terms of gold is flexible.
21) The U.S. government suspended the convertibility of the dollar into gold in
A) the 1930s.
B) the 1950s.
C) the 1970s.
D) 1991, when the first Gulf War broke out.
22) The United States dollar has NOT been officially convertible to gold by international traders
since
A) 1930.
B) 1944.
C) 1971.
D) 1995.
23) Which agreement was signed in 1944 with the purpose of creating a new international
payment system?
A) Philadelphia Accord
B) Bretton Woods
C) Camp David
D) Lake Geneva
24) Under the Bretton Woods Agreement, the goal of the IMF was to
A) finance international transactions in gold.
B) lend to countries experiencing balance of payment deficits.
C) help less developed countries advertise their goods in the developed countries.
D) provide oversight to the functioning of central banks in the member countries.
25) One problem associated with the gold standard was that
A) nations gave up control of their money supply.
B) there was an incentive for individuals to hold gold at all interest rates.
C) there was no fluctuation in exchange rates.
D) nations could not determine their current account balances.
26) Suppose a central bank tries to keep exchange rates fixed. When there is an increase in the
demand for foreign goods, the central bank will most likely
A) buy foreign currency in exchange for the domestic currency.
B) do nothing.
C) sell the domestic currency in exchange for foreign reserves.
D) use foreign reserves to buy the domestic currency.
27) Suppose a currency’s value in the foreign exchange market is determined solely by market
supply and demand without any intervention by the government authority, the currency has
A) a fixed exchange rate.
B) a gold standard.
C) a price control in its exchange rate.
D) a floating exchange rate.
28) To prevent the dollar from depreciating, the U.S. central bank can try to fix the currency
value of the dollar when they
A) buy U.S. dollars in the foreign exchange market.
B) sell U.S. dollars in the foreign exchange market.
C) abandon the U.S. dollar and use another country’s currency as its legal currency.
D) buy foreign currencies in the foreign exchange market.
29) In a fixed exchange rate system
A) market forces and the country’s stock of gold determine its exchange rate.
B) a central bank affects the value of a currency by changing its foreign exchange reserves.
C) market forces play a role in determining the fixed value of a currency.
D) the International Monetary Fund determines exchange rates.
30) The use of foreign exchange reserves to keep exchange rates constant over time is called
A) a fixed exchange rate system.
B) the Bretton Woods system.
C) barter exchange system.
D) a floating exchange rate system.
31) Today, the most common exchange rate arrangement in the world is
A) the fixed exchange rate system.
B) the gold standard system.
C) the managed floating system.
D) the freely floating exchange rate system.
32) According to the text, over 40 percent of member nations of the International Monetary Fund
have
A) a fixed exchange rate.
B) no separate legal currency.
C) an independently floating exchange rate.
D) a managed floating exchange rate.
33) A nation’s foreign exchange reserves consist mainly of
A) excess reserves held by its banks.
B) government securities of that nation.
C) the legal currency of that nation.
D) currencies of other nations.
34) Suppose the Canadian central bank wants to keep the exchange rate of the Canadian dollar
with the U.S. dollar constant over time. An increase in the demand for Canadian goods by
American residents will lead the Canadian central bank to
A) sell American goods in exchange for Canadian dollars.
B) buy more Canadian goods with Canadian dollars.
C) increase the demand for Canadian dollars in the foreign exchange market.
D) increase the supply of Canadian dollars in the foreign exchange market.
35) Suppose the currency price of the U.S. dollar in terms of the Japanese yen starts to fall. To
prevent that from occurring, the U.S. central bank should
A) use U.S. dollars to buy Japanese goods.
B) use yen reserves to buy U.S. dollars in the foreign exchange market.
C) sell U.S. dollars in the foreign exchange market in exchange for yen.
D) buy both U.S. dollars and yen in the foreign exchange market.
36) Suppose the Chinese central bank wants to keep the exchange rate of its currency value
constant over time. An increase in the demand for Chinese goods by American residents will
lead the Chinese central bank to
A) coordinate with the U.S. central bank in order to increase the supply of the U.S. dollar in the
foreign exchange market.
B) increase the demand for the Chinese currency in the foreign exchange market.
C) use its dollar reserves to buy the Chinese currency in the foreign exchange market.
D) sell the Chinese currency in exchange for U.S. dollars in the foreign exchange market.
37) If a country wants to keep the value of its currency fixed, then its central bank should
A) sell domestic goods when there is an increase in the supply of its domestic currency.
B) buy domestic goods when there is an increase in the supply of its domestic currency.
C) sell its domestic currency when there is an increase in the supply of that currency.
D) buy its domestic currency when there is an increase in the supply of that currency.
38) If a central bank wants to keep the value of its home currency fixed in the foreign exchange
market, then an increase in the demand for its home currency will lead the central bank to
A) do nothing.
B) sell its home currency.
C) buy its home currency.
D) sell foreign currencies.
39) Assume the U.S. government wants to hold the value of the dollar at $1.00 U.S. equals 120
Japanese yen, but it finds that the value of yen is appreciating against the U.S. dollar. What
would be an appropriate policy to reverse this trend?
A) Buy more Japanese goods.
B) Buy U.S. dollars.
C) Sell U.S. dollars.
D) Encourage U.S. investments abroad.
40) Assume the U.S. government wants to hold the value of the dollar at $1.00 U.S. equals 6
Chinese yuan, but it finds that the value of yuan is depreciating against the U.S. dollar. What
would be an appropriate policy to reverse this trend?
A) Increase government spending within the U.S.
B) Buy U.S. dollars.
C) Sell U.S. dollars.
D) Increase the money supply in the U.S.
41) If a country wants to keep its exchange rate fixed, it must
A) allow its currency value to vary with market supply and demand in foreign exchange markets.
B) be a member of the IMF.
C) vary the amount of its national currency supplied at any given exchange rate in foreign
exchange markets when necessary.
D) eliminate its foreign exchange reserves.
42) Foreign exchange risk is
A) a financial strategy that reduces the change of suffering losses arising from foreign exchange
risk.
B) an exchange rate arrangement in which a country pegs the value of its currency to the
exchange value.
C) the possibility that changes in the value of a nation’s currency will result in variations in the
market value of assets.
D) active management of a floating exchange rate on the part of a country’s government.
43) The foreign exchange system that has the highest foreign exchange risk is
A) the Gold Standard
B) the fixed exchange rate.
C) the floating exchange rate.
D) the Bretton Woods system.
44) A hedge is
A) a financial strategy that reduces the change of suffering losses arising from foreign exchange
risk.
B) an exchange rate arrangement in which a country pegs the value of its currency to the
exchange value.
C) the possibility that changes in the value of a nation’s currency will result in variations in the
market value of assets.
D) active management of a floating exchange rate on the part of a country’s government.
45) One problem that investors in foreign countries face is the possibility of a decline in the
value of that foreign country’s currency. Which of the following would be an effective way to
offset this problem?
A) Be ready to pull out at the first sign of trouble.
B) Convert as many of your dollars into their dollars as possible.
C) Hedge through currency swaps.
D) Finance your investment outside of that country.
46) Which of the following best describes exchanges rates that are determined by the demand
and supply foreign exchange in the absence of official intervention?
A) floating exchange rates
B) the gold standard
C) fixed exchange rates
D) the Bretton Woods system
47) Which of the following is an advantage of fixing exchange rates?
A) limiting foreign exchange risk
B) making residents more mobile across countries
C) eliminating trade deficits
D) making the prices of foreign goods more flexible in the domestic market
48) A currency swap can
A) make foreign goods more expensive in the domestic market.
B) make the foreign exchange rate more volatile over time.
C) reduce foreign exchange risk.
D) make domestic goods more expensive in foreign countries.
49) If an exporter wants to limit the effect of possible changes in the exchange rate on the value
of her exports, then she can adopt a strategy known as
A) floating.
B) speculating.
C) hedging.
D) appreciating.
50) When the supply and demand of currencies in the foreign exchange market determines their
relative values, this is known as
A) flexible exchange rates.
B) depreciation.
C) fixed exchange rates.
D) appreciation.
51) The possibility that changes in the value of a nation’s currency will result in variations in the
market value of a business’s assets is referred to as
A) hedge risk.
B) foreign exchange risk.
C) conversion risk.
D) transaction risk.
52) A financial strategy that reduces the chance of suffering losses arising from foreign exchange
risk is referred to as
A) hedging.
B) foreign exchange leverage.
C) conversion depletion.
D) transaction mitigation.
53) If a country moves from fixed to flexible exchange rates, its macroeconomic policy
A) is no longer restricted.
B) is restricted, as it can only use fiscal policy to achieve its economic goals.
C) is restricted, as it can only use monetary policy to achieve its economic goals.
D) must follow policy directives from the IMF.
54) Explain how the gold standard operated.
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55) What brought about the end of the Bretton Woods Agreement?