after the effects of different rates of inflation are eliminated.
[QUESTION]
137. Suppose that the rate of inflation in Japan is 1 percent and the rate of inflation in the United
States is 3 percent. If the real exchange rate remains constant, the value of the U.S. dollar relative
to the yen must:
A. rise by 2 percent.
B. fall by 2 percent.
C. rise by 4 percent.
D. fall by 4 percent.
138. When a country occasionally buys or sells currencies to influence the exchange rate but
usually lets market forces determine the exchange rate, it has a:
A. partially flexible exchange rate.
B. flexible exchange rate.
C. fixed exchange rate.
D. gold standard.
139. For many years, China tightly managed its currency, through intervention and capital
controls, effectively pegging the yuan to the U.S. dollar at a rate of about 8 yuan per dollar.
Which of the exchange rate regimes discussed in the textbook did China have at that time?
A. Fixed exchange rate
B. Flexible exchange rate
C. Partially flexible exchange rate
D. Purchasing-power-parity exchange rate
140. Macroeconomic policy is:
A. not affected by the choice of an exchange rate system.
B. limited the most under fixed exchange rates.
C. limited the most under partially flexible exchange rates.
D. limited the most under flexible exchange rates.
141. In what type of exchange rate system is the level of official reserves the most important?
A. Reserves are equally important in all systems
B. A fixed exchange rate system
C. A partially flexible exchange rate system
D. A flexible exchange rate system
142. Partially flexible exchange rates are:
A. superior to both fixed and flexible exchange rates.
B. superior to fixed but not flexible exchange rates.
C. superior to flexible but not fixed exchange rates.
D. not necessarily superior to either fixed or flexible exchange rates.
143. In theory, partially flexible exchange rates:
A. require a very high level of official reserves.
B. allow speculative pressures to affect exchange rates.
C. impose no limitations on a country’s monetary and fiscal policy.
D. permit sizable exchange rate fluctuations if they foster movement toward the long-run
equilibrium exchange rate.
144. Countries are unlikely to maintain fixed exchange rates for long periods of time because:
A. they lack the tools to do so.
B. fixed exchange rates eventually produce very high levels of inflation.
C. fixed exchange rates impede a nation’s ability to use monetary and fiscal policy to pursue
domestic macroeconomic goals.
D. fixed exchange rates promote domestic macroeconomic goals at the expense of international
macroeconomic goals.
145. Fixed exchange rates:
A. do not restrict exchange rate movements.
B. limit foreign exchange market intervention.
C. give governments great flexibility in their use of monetary policy.
D. are difficult to maintain without sufficient official reserves.
146. Flexible exchange rates:
A. give governments a greater degree of flexibility in monetary policy than fixed exchange rates
do.
B. make it simpler to engage in international trade than fixed exchange rates do.
C. produce smaller exchange rate fluctuations than fixed exchange rates do.
D. impose a greater degree of discipline on the behavior of central banks than fixed exchange
rates do.
147. Partially flexible exchange rates:
A. provide governments with a more independent monetary policy than flexible exchange rates.
B. produce fewer exchange rate changes in general than fixed exchange rates.
C. mix market forces with government intervention in a way that allows exchange rates to
respond to speculative pressures.
D. mix market forces with government intervention in a way that permits the exchange rate to
respond to long-term balance of payments problems.
148. The best exchange rate system:
A. is a fixed exchange rate system.
B. is a flexible exchange rate system.
C. is a partially fixed exchange rate system.
D. has not yet been determined.
149. In 2002, the euro replaced the currencies of most of the members of the European Union.
The euro has:
A. reduced monetary policy flexibility for the individual EU countries.
B. increased monetary policy flexibility for the individual EU countries.
C. increased transaction costs among EU countries.
D. increased macroeconomic independency among EU countries.
150. Which of the following is a disadvantage of the European Monetary Union to member
countries?
A. A reduced likelihood of conflict between members
B. Less monetary independence for each member
C. Lower cost of exchanging currencies
D. Greater price transparency
151. Which of the following is a disadvantage of the European Monetary Union to member
countries?
A. Greater clout for European consumers
B. Loss of some national identity
C. Greater price transparency
D. The expected creation of new reserve currency, the euro
152. Because of the European Monetary Union, each EU member is now:
A. better able to manage its own economy.
B. less able to manage its own economy.
C. less susceptible to external shocks.
D. less susceptible to internal shocks.
153. Which of the following is an advantage of the European Monetary Union?
A. A higher likelihood of conflict between members
B. Increased monetary independence for each member
C. Increased cost of exchanging currencies
D. Increased price transparency
154. Which of the following is an advantage of the European Monetary Union?
A. Increased economies of scale
B. Greater national identity
C. Higher transaction costs
D. Greater monetary independence for each member
155. The formation of the European Monetary Union:
A. reduced exchange rate instability and made it easier for members to manage their own
economies.
B. reduced exchange rate instability but made it harder for members to manage their own
economies.
C. increased exchange rate instability but made it easier for members to manage their own
economies.
D. increased exchange rate instability and made it harder for members to manage their own
economies.
156. If the euro becomes an international reserve currency, the:
A. demand for it will decrease, causing it to depreciate.
B. demand for it will increase, causing it to appreciate.
C. supply of it will increase, causing it to appreciate.
D. supply of it will decrease, causing it to depreciate.
157. If the euro becomes an international reserve currency, the EU may enjoy:
A. interest-free loans that finance trade deficits.
B. interest-free loans that promote trade surpluses.
C. high-interest loans that finance trade deficits.
D. high-interest loans that promote trade surpluses.
158. Suppose Greece was not part of the Eurozone, and it was facing a possible financial crisis.
Which of the following would not have been used to fix the crisis?
A. Using monetary policy to grow the economy
B. Allowing its currency to weaken in order to remain competitive
C. Allowing its currency to appreciate in order to remain competitive
D. Eliminating the fixed exchange rate
159. Which of the following is not a characteristic of a gold standard?
A. Currency convertibility into gold
B. Exchange rate stability
C. Unlimited international gold flows
D. Discretionary or activist monetary policy
160. Under the gold standard, a nation with a balance of payments deficit would experience a
gold:
A. inflow and a reduction in its money supply.
B. outflow and a reduction in its money supply.
C. inflow and an increase in its money supply.
D. outflow and an increase in its money supply.
161. Under the gold standard, if a country had a deficit in its balance of payments, it would have
to:
A. sell gold in order to keep the value of its currency from rising.
B. sell gold in order to keep the value of its currency from falling.
C. buy gold in order to keep the value of its currency from rising.
D. buy gold in order to keep the value of its currency from falling.
162. Under the gold standard, a nation with a private balance of payments surplus would
experience:
A. higher interest rates, lower inflation, and lower output.
B. lower interest rates, lower inflation, and lower output.
C. higher interest rates, higher inflation, and higher output.
D. lower interest rates, higher inflation, and higher output.
163. The Bretton Woods agreement:
A. also established the International Monetary Fund.
B. was established immediately after World War I.
C. tied the value of foreign currencies to British sterling.
D. continued the existing international monetary system.
164. The Bretton Woods system:
A. established the rules of the game of the gold standard.
B. committed the participating countries to a system of floating exchange rates.
C. committed the participating countries to a system of fixed exchange rates.
D. was set up as a result of the U.S. balance of payments crisis in the early 1970s.
165. Under the Bretton Woods system, whenever a country ran a short-term balance of
payments deficit it was:
A. obliged to contract its money supply.
B. obliged to expand its money supply.
C. likely to increase the value of its currency.
D. possible for it to borrow from the IMF.
166. The Bretton Woods system is best described as a:
A. pure floating exchange rate system.
B. partially flexible exchange rate system or “dirty float.”
C. pure gold standard system.
D. fixed exchange rate system.
167. Under the existing system of partially flexible exchange rates, a country experiencing what
it believes is a long-term balance of payments deficit might be expected to:
A. sell its own currency in the foreign exchange market.
B. buy its own currency in the foreign exchange market.
C. let its currency lose value.
D. let its currency gain value.