Page 1
1.
Traditionally, nations pegged their currencies to _______, and so trade was
accomplished with _______ exchange rates.
A)
the pound sterling; floating
B)
gold; fixed
C)
the U.S. dollar; floating
D)
silver; fixed
2.
To maintain a functioning gold standard:
A)
nations are obliged to exchange any amount of issued paper money for gold.
B)
paper money is not allowed; all transactions must be in coins or gold.
C)
the monetary authority cannot exchange currency for gold.
D)
care must be taken to keep inflation under 10%.
3.
The gold standard dominated exchange rate systems during what period?
A)
from 1776 to 1816
B)
from 1836 to 1849
C)
from 1870 to 1913
D)
from 1945 to 1965
4.
After World War II, many currencies were:
A)
losing value because of the war’s devastation.
B)
still on the gold standard.
C)
suffering from high inflation.
D)
pegged to the U.S. dollar.
5.
The gold standard system was:
A)
a floating exchange rate system.
B)
a fixed exchange rate system, in which the country’s currency was fixed relative to
a pound of gold.
C)
a fixed exchange rate system, in which the country’s currency was fixed relative to
an ounce of gold.
D)
only used by the United States.
6.
At its peak in 1913, the gold standard system had been adopted by_______ of countries.
A)
85%
B)
35%
C)
13%
D)
70%
Page 2
7.
According to the text, what share of the world’s countries now use floating exchange
rate systems?
A)
100%
B)
70%
C)
30%
D)
15%
8.
Beginning in the early 1970s, many nations abandoned their dollar standard and moved
toward a system of:
A)
fixed exchange rates based on gold.
B)
fixed exchange rates based on the Deutsche Mark.
C)
floating exchange rates.
D)
real money systems in which currencies were backed by government bonds.
9.
The Exchange Rate Mechanism (ERM) was:
A)
an attempt to bring all countries under a fixed exchange rate system.
B)
a fixed exchange rate system in Europe, with the Deutsche Mark as the anchor
currency.
C)
a fixed exchange rate system in Europe, with the British pound as the anchor
currency.
D)
a fixed exchange rate system in use in the 1960s.
10.
What currency was the base, or center, currency in the ERM used in Europe during the
1980s and 1990s?
A)
the French franc
B)
the British pound
C)
the German mark
D)
the Italian lira
11.
In September 1992, Great Britain changed its exchange rate system. How?
A)
It abandoned the gold standard in favor of pegging to the U.S. dollar.
B)
It joined in with the new euro.
C)
It switched from an exchange rate peg to floating.
D)
It abandoned the sterling backing for the British pound.
Page 3
12.
Which of the following does NOT describe why Britain adopted the pegged system (the
Exchange Rate Mechanism [ERM]) in 1990?
A)
There were benefits to trade and other forms of cross-border exchange.
B)
Britain wanted to hold onto the pound as its currency.
C)
It was a member of the European Union and fixed rates were good for trade with
other members.
D)
It hoped to participate in the new common currency when it was launched.
13.
Europe’s ERM, which preceded the advent of the euro, was a weighted basket of
European currencies, the most important of which was:
A)
the U.S. dollar.
B)
the Deutsche Mark.
C)
the British pound.
D)
the French franc.
14.
Which of the following statements is correct?
I. The ERM used the Deutsche Mark as the base or center currency.
II. The ERM allowed the Italian central bank autonomy over its policies.
III. The ERM allowed the Bundesbank monetary autonomy.
A)
I only
B)
II only
C)
III only
D)
I, II, and III
15.
Suppose that the United Kingdom pegs the pound to the euro. If all other things remain
unchanged, what would you expect to happen to European interest rates if all countries
who use the euro decided to adopt expansionary fiscal policies?
A)
They would rise.
B)
They would fall.
C)
They would not change.
D)
That cannot be determined using the information provided.
16.
Suppose that the United Kingdom pegs the pound to the euro. If all other things remain
unchanged, what would you expect to happen to European GDP if all countries who use
the euro decided to adopt contractionary fiscal policies?
A)
It would rise.
B)
It would fall.
C)
It would not change.
D)
That cannot be determined using the information provided.
Page 4
17.
Suppose that the United Kingdom pegs the pound to the euro and the European Central
Bank decides to use monetary policy to offset the possible inflationary effects of
European expansionary fiscal policy. Would it expand, contract, or not change the
European money supply?
A)
expand
B)
contract
C)
not change
D)
The answer cannot be determined using the information provided.
18.
Suppose that the United Kingdom pegs the pound to the euro and the European Central
Bank decides to use monetary policy to offset the possible inflationary effects of
European expansionary fiscal policy. How would the European Central Bank’s monetary
policy affect European interest rates?
A)
They would rise.
B)
They would fall.
C)
The combination of the expansionary fiscal policy and the monetary policy would
cause interest rates to return to their level prior to the expansionary fiscal policy.
D)
The combination of the expansionary fiscal policy and the monetary policy would
not affect interest rates.
19.
Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an
exchange rate of $C1 = $US1. Now suppose that the increase in the price of oil in the
second half of 2007 causes the IS curve in the United States to shift to the left. If all
other things remain unchanged, what will happen to U.S. interest rates?
A)
They will rise.
B)
They will fall.
C)
They will not change.
D)
They will rise dramatically.
20.
Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an
exchange rate of $C1 = $US1. What is likely to happen to U.S. GDP following the
leftward shift of its IS curve?
A)
It will rise.
B)
It will fall.
C)
It will not change.
D)
It will rise dramatically.
Page 5
21.
Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an
exchange rate of $C1 = $US1. What might the U.S. Federal Reserve do to offset the
macroeconomic effect of the leftward shift in the U.S. IS curve?
A)
It would increase the money supply.
B)
It would decrease the money supply.
C)
It would not change its monetary policy.
D)
It would not change its fiscal policy.
22.
Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an
exchange rate of $C1 = $US1. What will happen to the Canadian IS curve as a result of
the leftward shift of the U.S. IS curve?
A)
It will shift rightward.
B)
It will shift leftward.
C)
It will not change.
D)
The IS curve will show an increase.
23.
Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an
exchange rate of $C1 = $US1. What will happen to Canadian interest rates as a result of
the leftward shift of the U.S. IS curve?
A)
They will rise.
B)
They will fall.
C)
They will not change.
D)
The IS curve will show an increase.
24.
Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an
exchange rate of $C1 = $US1. Will there be pressure for the Canadian dollar to change
in value against the U.S. dollar as a result of the leftward shift of the U.S. IS curve?
A)
Yes, the value will appreciate.
B)
Yes, the value will depreciate.
C)
No, the value will not change in value.
D)
Yes, but that pressure will be offset.
25.
Great Britain opted out of the ERM in 1992 because its government concluded that:
A)
it wanted to increase its trade with North America rather than Europe.
B)
the gains from being a member of the ERM outweighed the costs from higher
German interest rates.
C)
the costs associated with higher German interest rates outweighed the gains from
being a member of the ERM.
D)
it was unable to agree with the French on an exchange rate between the pound and
the French franc.
Page 6
26.
In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates,
assuming Britain maintains its exchange rate peg, the likely impact on the British
economy would be a(n):
A)
recession.
B)
inflationary economy.
C)
stronger pound.
D)
decrease in taxes.
27.
In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates,
what will Britain have to do in order to maintain its exchange rate peg?
A)
The British would be forced to increase their interest rates.
B)
The British would increase their money supply.
C)
The British would have to lower their interest rates.
D)
The British government would have to use expansionary fiscal policy.
28.
In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates,
assuming Britain does not maintain its exchange rate peg:
A)
the only option available to Britain would be to increase its interest rate.
B)
the British pound would depreciate.
C)
the British pound would appreciate.
D)
the British economy would slow down.
29.
If the Deutsche Mark and the British pound exchange rates are fixed, and the German
Bundesbank conducts a tight monetary policy to counteract an expansion in German
GDP, interest rates in Germany will ____, which will force Britain to ______.
A)
fall; default
B)
rise; raise its rates to maintain interest parity and the fixed exchange rate
C)
fall; sell gold
D)
rise; lower its rates to maintain interest parity and the fixed exchange rate
30.
When exchange rates are fixed and the foreign nation’s interest rate increases, what
happens next?
A)
The home nation’s IS curve shifts out because of a depreciation and an increase in
the trade balance.
B)
The home nation’s LM curve shifts right, and its interest rate falls.
C)
Fixed exchange rates force the home nation to raise its interest rates.
D)
The home nation and the foreign nation are always in equilibrium, so no changes
occur.
Page 7
31.
In the example of the peg between Britain and Germany, what would have been the case
if Britain had allowed the pound to float and depreciate after Germany’s GDP rise?
A)
Britain would have suffered depreciation and a recession.
B)
Britain would have had to raise interest rates.
C)
Britain would no longer be eligible to join the new euro currency.
D)
Britain could have lowered interest rates and enjoyed an added boost to GDP.
32.
In the example of the peg between Britain and Germany, what would have been the case
if Britain had adhered to the pegged exchange rate?
A)
It would not have had the option of raising its own rate.
B)
It would have been able to inflate its currency to keep output stable.
C)
It would not have been able to inflate its currency to keep output stable.
D)
It would have had to raise taxes and balance its budget.
33.
Britain’s 1992 recession is probably the result of:
A)
the struggle to reconcile monetary and fiscal policy.
B)
the adherence to the ERM, which required Britain to raise interest rates to maintain
exchange parity.
C)
high unemployment rates, which are a product of the generous welfare system.
D)
poor planning for the conversion to the euro.
34.
If Britain had not joined the ERM, the policy options it would have had available to
avoid recession would have been:
A)
severely limited.
B)
more numerous and varied.
C)
subject to veto by the European Parliament.
D)
a conflict with its desire to maintain a stable economy.
35.
The text compares the macroeconomic performance of Great Britain and France
immediately following Great Britain’s departure from the ERM in 1992. What does it
conclude?
A)
The rate of growth of real GDP was higher in France than in Great Britain.
B)
The rate of growth of real GDP was lower in France than in Great Britain.
C)
The rates of growth of real GDP were equal in France and in Great Britain.
D)
GDP growth of both Great Britain and France increased dramatically after Great
Britain withdrew from the ERM.
Page 8
36.
Britain’s decision to exit the ERM in September 1992 had what effect?
A)
Lower interest rates and a depreciated exchange rate caused the British economy to
expand.
B)
It subjected Britain to a ruling by the European Courts of Justice.
C)
It caused the system to collapse.
D)
It had no effect on Britain’s economy.
37.
Compared with France, who stayed in the ERM, what was the result of Britain’s exit?
A)
France’s economy performed a bit better.
B)
Britain had an economic recession while France enjoyed an expansion.
C)
There was no significant difference.
D)
France had an economic recession while Britain enjoyed an expansion.
38.
Since Britain withdrew from the ERM in 1992, what has it done with regard to fixing its
exchange rates?
A)
Britain has joined with the euro, forgoing its long-standing independence.
B)
Britain has put the pound back on solid footing by backing it with gold.
C)
Britain has retained its independent pound currency and not joined the currency
union of Europe.
D)
Britain has abandoned its own monetary authority for the certainty of fixed
exchange rates with its largest trading partners.
39.
Reunification of East and West Germany created which sequence of events?
I. an increase in German rates of interest
II. a boom in German output and a shift to the right of the German IS curve
III. large reunification costs financed by increased government spending
IV. an increase in rates of interest in ERM nations
A)
IV, I, III, I
B)
III, II, I, IV
C)
I, II, III, IV
D)
IV, III, II, I
40.
What was the response to Germany’s expansionary fiscal policy from the German
central bank, the Bundesbank?
A)
It expanded the money supply to ease rates of interest.
B)
It made no policy changes.
C)
It contracted the money supply and raised interest rates.
D)
It began the process of reverting to a gold standard.
Page 9
41.
If Britain allows the pound–DM (Deutsche Mark) exchange rate to float, and there is an
increase in the foreign interest rate, it:
A)
has no effect on home rates.
B)
will cause a monetary contraction and a higher interest rate in Britain.
C)
will eventually decrease if trade is affected.
D)
always shifts out the home IS curve (Britain), all else equal.
42.
Because of the ERM, if Britain desires to maintain fixed exchange rates, then what
would Britain be forced to do after German reunification?
A)
It would increase its interest rate and follow the central country’s lead.
B)
It would ignore the increase in the German interest rate and hope for the best.
C)
It would change over to an exchange rate regime based on gold.
D)
It would decrease its interest rate to stimulate its economy.
43.
During Britain’s brief alignment with the ERM from 1990–1992, the trilemma tells us
that monetary policy authority no longer existed in Britain. Why?
A)
Britain could print more pounds, but could not increase its gold stock.
B)
Britain kept monetary growth rates at zero.
C)
The British interest rate equaled the German rate to attain uncovered interest parity.
D)
The British could lower unemployment using other means such as fiscal policy.
44.
When a nation chooses to fix or float, it should consider:
A)
only its domestic banks, importers, and exporters.
B)
only whether it has a great deal of economic integration.
C)
only whether it has similar circumstances in terms of demand or supply shocks
with its trading partners.
D)
both the level of economic integration and the similarity of demand or supply
shocks.
45.
When a nation is economically integrated with trading partners, fixed exchange rates:
A)
would be very harmful to the dynamic nature of trade.
B)
could promote integration and economic efficiency by keeping transaction costs
low.
C)
would be the best choice if that nation became the dominant nation in the
transactions.
D)
would be adequate but have the disadvantage of discouraging trade because of
uncertainty.
Page 10
46.
The fiscal shock in Germany due to reunification caused the Bundesbank to pursue a
monetary policy that:
A)
was appropriate for Britain, since it had experienced a similar shock.
B)
was appropriate for all the other ERM nations but not Britain.
C)
was appropriate only for Germany, since neither Britain nor other ERM nations
experienced a similar shock.
D)
had poor timing, since the monetary action should have come before the
reunification.
47.
Economic integration refers to the growth of market linkages in:
A)
goods only.
B)
labor.
C)
capital and labor only.
D)
goods, capital, and labor.
48.
A fixed exchange rate causes:
A)
transaction costs to increase.
B)
efficiency to increase only if the economies are integrated.
C)
efficiency to increase under all circumstances.
D)
volume of trade to decline.
49.
When a fixed exchange rate system is adopted, it results in all of the following except:
A)
reduced uncertainty about exchange rate.
B)
decreased volatility in prices.
C)
increased volume of trade.
D)
decreased volume of trade.
50.
In a fixed exchange rate system, the center country, to whose currency the other
countries peg their exchange rate, will:
A)
find it difficult to conduct autonomous monetary policy.
B)
find it difficult to conduct autonomous fiscal policy.
C)
easily implement monetary and fiscal policy to suit its economy.
D)
defer to advice from other countries in conducting its domestic policy.
51.
When exchange rates are volatile:
A)
firms are assured that they will be able to earn profits from currency swings.
B)
firms engage in more trade.
C)
trade and cross-border financial and labor flows are reduced as uncertainty and
transaction costs take their toll.
D)
international economic activity is increased.
Page 11
52.
If there is a greater degree of economic integration between markets in the home
country and the base country:
A)
the home country will benefit to a greater degree by fixing its exchange rate with
the base country.
B)
efficiency will be reduced with fixed exchange rates.
C)
flexible exchange rates will result in GDP stability.
D)
the volume of transactions will be too low to justify an elaborate exchange rate
policy.
53.
The greater the degree of economic integration between markets in the home country
and the base country:
A)
the greater the volume of transactions and the greater the benefit to the home
country of fixed exchange rates.
B)
the smaller the volume of transactions and the lesser the benefit to the home
country of fixed exchange rates.
C)
the greater the volume of transactions and the greater the benefit to the home
country of flexible exchange rates.
D)
the less important the volume of transactions and the greater the importance of
ethnic similarities.
54.
Suppose that country A pegs its currency to the currency of country B. Which of the
following will NOT be a benefit of this arrangement to country A?
A)
lower transactions costs for A to conduct international trade with country B
B)
increased capital flows between the two countries because of increased certainty of
future exchange rates
C)
decreased migration between the two countries because of increased certainty of
future exchange rates
D)
lower costs of economic transactions costs between the two countries, leading to
welfare gains for country A
55.
Which of the following events is least likely to take place under a fixed exchange rate
system?
A)
an increased volume of trade because of a decline in exchange rate volatility
B)
increased cross-border capital flows
C)
increase in cost of trade because of higher transaction costs
D)
increased cross-border labor flows in integrated economies
Page 12
56.
The difference between asymmetric and symmetric shocks is that:
A)
the former results in no conflicts in policy goals between countries.
B)
the latter results in policy conflicts between countries.
C)
the latter results in identical policies being implemented.
D)
the former is favored over the latter.
57.
Asymmetric shocks pose a problem for nations linked by fixed exchange rates to a base
currency. In general:
A)
the home nation always has a better outcome than its foreign trading partner.
B)
both nations share a common currency and so will experience equal results.
C)
when the base currency nation takes any action to counteract the shock, it forces its
exchange rate partner to do the same to maintain its peg.
D)
both nations only get half the benefit of any economic policy.
58.
Symmetric shocks pose fewer problems for nations linked by fixed exchange rates to a
base currency. In general:
A)
because there are common problems, the economic policy taken by the base
currency nation is beneficial for both nations.
B)
it gives the nation maintaining the peg more autonomy to deal with financial crises.
C)
the base currency nation can just do nothing, and the issue will resolve itself.
D)
when there are symmetric shocks, the home nation unlinks its exchange rate from
the base currency nation.
59.
Why do symmetric shocks not disturb fixed exchange rate systems?
A)
Symmetric shocks happen only once and cause a one-time shift in interest rates.
B)
Symmetric shocks imply differences in rates of interest, which is irrelevant to fixed
exchange rate systems.
C)
A demand shock can easily be dealt with using domestic policies that do not
involve other nations.
D)
Symmetric shocks require the same medicine in both economies, so monetary
policy will be in a direction to help both situations.
60.
If there is a greater degree of economic similarity between the home nation and the base
currency nation, the economic stabilization benefit of pegged exchange rates:
A)
gets smaller.
B)
becomes more equal.
C)
gets larger.
D)
disappears.
Page 13
61.
As economic similarity rises, the stability costs of a common currency decrease because
there are:
A)
more asymmetric shocks.
B)
fewer asymmetric shocks.
C)
no asymmetric shocks.
D)
no symmetric shocks.
62.
Suppose that Canada pegs its dollar to the U.S. dollar at a rate of $C1 = $US1 and that
Canada is a major exporter of crude oil to the United States. The increase in the price of
oil that occurred in the second half of 2007 is likely to:
A)
cause asymmetric shocks to the U.S. and Canadian economies that will make it
difficult for Canada to maintain the $C1 = $US1 exchange rate.
B)
cause symmetric shocks to the U.S. and Canadian economies that will make it
difficult for Canada to maintain the $C1 = $US1 exchange rate.
C)
cause asymmetric shocks to the U.S. and Canadian economies and make it easier
for Canada to maintain the $C1 = $US1 exchange rate.
D)
cause symmetric shocks to the U.S. and Canadian economies and make it difficult
for Canada to maintain the $C1 = $US1 exchange rate.
63.
Suppose that Canada pegs its currency to the U.S. dollar at a rate of $C1 = $US1 and
that Canada is a major exporter of crude oil to the United States. The increase in the
price of oil that occurred in the second half of 2007 is likely to:
A)
cause Canada to adopt a contractionary monetary policy and the United States to
adopt an expansionary monetary policy.
B)
cause Canada to adopt an expansionary monetary policy and the United States to
adopt a contractionary monetary policy.
C)
cause both Canada and the United States to adopt contractionary monetary policies.
D)
cause both Canada and the United States to adopt expansionary monetary policies.
64.
A cost-benefit analysis can be done to assess whether a nation should fix its exchange
rate. Which of the following is NOT correct?
A)
If market integration or symmetry increase, then the net benefits of a fixed
exchange rate increase.
B)
If the net benefits are negative, economically speaking the nation should float.
C)
If the net benefits are positive, economically speaking the nation should float.
D)
If the net benefits turn negative, the nation should fix.
Page 14
65.
Based on economic criteria, a nation should choose a fixed exchange rate if:
A)
the monetary authorities are capable of handling shocks.
B)
the net benefits of fixing versus floating are positive.
C)
the net benefits of fixing versus floating are negative.
D)
there is a liberal political agenda that restricts government authority over capital
flows.
66.
The symmetry-integration diagram shows a set of situations under which a nation
should fix or float. There is a set of combinations of integration and symmetry beyond
which the benefits of fixing outweigh the costs. This is shown as:
A)
a positively sloped line from the origin, equidistant from both axes.
B)
a negatively sloped line, above which a nation should fix and below which a nation
should float.
C)
a curved line that follows a random path through the space, coming close but never
touching either axis.
D)
a curved line, the slope of which is at first negative, then increases at an increasing
rate as the benefits of fixing increase exponentially.
67.
Seventeen European countries use the euro as their common currency. This arrangement
is best described as a:
A)
currency union.
B)
free trade area.
C)
common market.
D)
monetary union.
68.
Suppose that Mexico and Canada both peg their currencies to the U.S. dollar. The
relationship between the Mexican peso and the Canadian dollar is best described as a(n):
A)
indirect peg.
B)
fixed exchange rate system.
C)
currency union.
D)
free trade area.
69.
The authors of your textbook cite one study that estimated that currency unions
________ trade among member countries by approximately ______.
A)
increase; 100%
B)
increase; 40%
C)
decrease; 100%
D)
decrease; 40%
Page 15
70.
All other things being equal, we expect fixed exchange rates to promote trade by
lowering transactions costs. If that is true, then differences in prices measured in a
common currency should be ________among countries with ______exchange rates than
among countries with ______ rates.
A)
lower; fixed; floating
B)
lower; floating; fixed
C)
higher; fixed; floating
D)
the same; fixed; floating
71.
Studies cited in the text indicate that prices in countries with _______ exchange rate
systems tend to __________more rapidly than prices in countries with ________
exchange rate systems.
A)
fixed; diverge; floating
B)
floating; converge; fixed
C)
fixed; converge; floating
D)
fixed; rise; floating
72.
Economists studying the impact of currency unions on trade found currency unions:
A)
increased levels of trade by 221%.
B)
increased levels of trade by 104%.
C)
increased levels of trade by 38%.
D)
had no effect on trade levels.
73.
A recent study found that currency unions _____ bilateral trade by _____ compared
with floating regimes.
A)
increased; 90%
B)
increased; 38%
C)
decreased; 10%
D)
decreased; 50%
74.
Economists studying the impact of direct pegs on trade found that direct pegs:
A)
increased levels of trade by 21%.
B)
increased levels of trade by 44%.
C)
increased levels of trade by 58%.
D)
had no effect on trade levels.
Page 16
75.
Adopting a fixed exchange rate promotes trade if the regime is:
A)
semi-floating.
B)
indirectly pegged.
C)
directly floating.
D)
directly pegged.
76.
Lower transaction costs are a benefit of fixed exchange rates. Therefore, relative prices
in two trading nations linked by fixed exchange rates should:
A)
experience more price divergence.
B)
experience more price convergence.
C)
have less arbitrage and more speculation.
D)
have lower costs of production.
77.
Research shows that when exchange rates are more volatile, the price differentials are
____ and the convergence is _____.
A)
smaller; faster
B)
smaller; slower
C)
larger; slower
D)
larger; faster
78.
In fact, several studies focused on Europe concluded that higher exchange rate
volatility:
A)
is associated with smaller price differentials.
B)
is associated with larger price differentials.
C)
often precedes a return to stability.
D)
promotes trade and cooperation among nations.
79.
Prices in the European ERM countries on fixed exchange rates have converged ___ than
for nations outside the ERM.
A)
more slowly
B)
more rapidly
C)
more completely
D)
less completely
80.
The effect of an exchange rate system on the price level between countries is that:
A)
exchange rate volatility causes the prices to converge between countries.
B)
a fixed exchange rate results in price convergence.
C)
a fixed exchange rate results in price divergence.
D)
all member nations of the ERM saw a divergence in prices.
Page 17
81.
In comparison with a floating exchange rate, the effect on the volume of trade in a fixed
exchange rate is:
A)
highest under an indirect peg.
B)
lowest for currency unions.
C)
highest for currency unions.
D)
higher for an indirect peg than a direct peg.
82.
What is the most powerful argument against a fixed exchange rate?
A)
The nation must administer the rates at all currency exchange venues, and it is
expensive to do.
B)
The nation usually gets opposition from other trading partners who are excluded.
C)
The nation has to have a large store of gold on hand to exchange at fixed rates.
D)
The nation gives up its ability to control its money supply and affect its own
interest rates.
83.
To maintain a pegged rate, a nation faces a trilemma and must also:
A)
generate extra export revenues.
B)
watch carefully to ensure imports and exports are equal.
C)
adjust its interest rates and money supply to ensure the home interest rate is equal
to the foreign interest rate to prevent pressure on the exchange rate.
D)
restrict foreign capital inflows and domestic capital outflows.
84.
An open peg might be an option for some nations that desire to:
A)
close off capital inflows and outflows and fix currency rates.
B)
allow the free flow of capital and fix currency rates.
C)
allow the free flow of capital with flexible currency rates.
D)
close off capital inflows and outflows with flexible currency rates.
85.
Comparing various exchange systems, which system offers a nation the least control
over monetary policy?
A)
flexible exchange rates and a closed economy
B)
a closed economy
C)
an open nonpeg
D)
an open peg
Page 18
86.
All else equal, an increase in the base country’s interest rate should cause a(n) ____ in
the interest rate of a country that fixes its exchange rate to the base country.
A)
decline
B)
negligible impact
C)
increase
D)
change in the exchange rate regime
87.
Which of the following fixed exchange rate regimes has very little monetary policy
autonomy?
A)
dirty float
B)
open peg
C)
open nonpeg
D)
closed
88.
One might expect the interest rate correlation between nonpegs and closed economies
with the base currency to be ____, but because of other circumstances, there may be a
____ correlation.
A)
negative; positive
B)
positive; negative
C)
zero; positive
D)
negative; zero
89.
When a nation prints money (rather than taxing directly) to finance its government
spending, it results in inflation, and purchasing power of the private sector falls. This is
known as:
A)
benchmarking.
B)
indirect taxation.
C)
seigniorage.
D)
creeping inflation.
90.
In economics, another term for seigniorage is:
A)
inflation tax.
B)
royalty.
C)
high inflation.
D)
government borrowing.
Page 19
91.
With a flexible exchange rate system, to gain credibility with investors or savers, a
nation will often:
A)
adopt a nominal anchor to keep currency growth in line with a measurable
indicator, such as exchange rates or inflation rates.
B)
limit the power of the central bank by having elected officials set monetary targets.
C)
give more power to the prime minister to stop inflation and lower unemployment.
D)
temporarily adopt a gold standard.
92.
An advantage to a developing nation of fixed exchange rates is that it’s:
A)
easier for the central bank to print money to finance its deficit.
B)
harder for the central bank to print money to finance its deficit.
C)
easier to conduct fiscal policy.
D)
harder for the government to raise taxes.
93.
Research in the performance of developing nations with exchange rate pegs has shown
that:
A)
fixed exchange rates are 100% effective in curbing inflation and preventing
hyperinflation.
B)
fixed exchange rates are 100% ineffective in curbing inflation and preventing
hyperinflation.
C)
floating exchange rates are more effective in curbing inflation and preventing
hyperinflation.
D)
fixed exchange rates are neither necessary nor sufficient to curb inflation and
prevent hyperinflation.
94.
Research has shown that the inflation in a country is:
A)
always high if there is a fixed exchange rate.
B)
always low if there is a flexible exchange rate.
C)
not dependent on the choice of exchange rate regime.
D)
higher in developing countries coming out of hyperinflation.
95.
If the money supply is 1000, the price level is 5, and the inflation rate is 10%, what is
the amount of seigniorage?
A)
200
B)
100
C)
20
D)
5
Page 20
96.
If the money supply is 2000, the price level is 20, and the inflation rate is 50%, what is
the amount of seigniorage?
A)
100
B)
50
C)
10
D)
5
97.
If the amount of seigniorage is 50, the monetary supply is 1000, and the price level is
20, what is the inflation rate?
A)
10%
B)
50%
C)
100%
D)
200%
98.
Whenever a nation has substantial external debts and assets denominated in foreign
currency:
A)
it is easier to manage, since changes in value are often offsetting.
B)
there can be large and destabilizing wealth effects.
C)
its interest payments on the debt will be matched by interest earnings on the assets.
D)
the risk of default becomes very large.
99.
A nation’s total external wealth is calculated as:
A)
the sum of total assets minus total liabilities expressed in local currency.
B)
total assets expressed in foreign currency minus total liabilities expressed in
foreign currency.
C)
the sum of total assets minus total liabilities expressed in foreign currency.
D)
the sum of physical assets within the nation, domestic stock market capitalization,
and government assets minus total liabilities.
100.
Suppose that Argentina’s dollar-denominated external assets and liabilities are $10
billion and $100 billion, respectively, and its Argentine peso-denominated external
assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes
its exchange rate at P1 = $US1. What is the peso value of Argentina’s total external
wealth?
A)
–60 billion pesos
B)
–150 billion pesos
C)
–0 billion pesos
D)
–90 billion pesos
Page 21
101.
Suppose that Argentina’s dollar-denominated external assets and liabilities are $10
billion and $100 billion, respectively, and its Argentine peso-denominated external
assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes
its exchange rate at P1 = $US1. What is the dollar value of Argentina’s total external
wealth?
A)
–$60 billion
B)
–$150 billion
C)
–$90 billion
D)
–$210 billion
102.
Suppose that Argentina’s dollar-denominated external assets and liabilities are $10
billion and $100 billion, respectively, and its Argentine peso-denominated external
assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes
its exchange rate at P1 = $US1. Suppose that Argentina changes its exchange rate to P3
= $US1. Now what is the peso value of Argentina’s total external wealth?
A)
–270 billion pesos
B)
–150 billion pesos
C)
0
D)
–210 billion pesos
103.
Suppose that Argentina’s dollar-denominated external assets and liabilities are $10
billion and $100 billion, respectively, and its Argentine peso-denominated external
assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes
its exchange rate at P1 = $US1. How was Argentina’s net external wealth affected as a
result of the devaluation of the peso (from P1 = $US1 to P3 = $US1)?
A)
Net external wealth rose.
B)
Net external wealth fell.
C)
Net external wealth was not affected.
D)
One cannot determine how net external wealth was affected with the information
provided.
104.
Suppose that Argentina’s dollar-denominated external assets and liabilities are $10
billion and $100 billion, respectively, and its Argentine peso-denominated external
assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes
its exchange rate at P1 = $US1. What is the likely effect of the change in Argentina’s
external wealth on Argentine aggregate demand as a result of the devaluation of the
peso (from P1 = $US1 to P3 = $US1)?
A)
It will increase Argentine aggregate demand.
B)
It will decrease Argentine aggregate demand.
C)
It will neither increase nor decrease Argentine aggregate demand.
D)
It will first increase, then decrease Argentine aggregate demand.
Page 22
105.
If Mexico has foreign assets worth $100 billion and no liabilities, a 15% depreciation of
the peso will result in a(n):
A)
increase in liabilities at home by 100 billion pesos.
B)
decrease in assets at home by 150 billion pesos.
C)
decrease in overall wealth by 15%.
D)
increase in overall wealth.
106.
A currency depreciation affects total spending in the short run through expenditure
switching, but the net external wealth effect also can influence:
A)
other types of expenditure such as consumption or investment.
B)
the ability of the nation to keep up technologically, since new capital will be more
expensive.
C)
the production function of the home country.
D)
the ability of the government to conduct monetary policy.
107.
If China has domestic assets of $50 billion, domestic liabilities of $100 billion, and $50
billion in foreign assets, a 10% appreciation of the Chinese yuan will:
A)
cause the Chinese domestic assets to increase in value.
B)
cause the Chinese domestic liabilities to decrease in value.
C)
cause the overall wealth to decrease by 5%.
D)
cause the overall wealth to increase by 5%.
108.
When there are currency depreciations or appreciations, how is the external wealth of a
nation affected?
A)
It rises (along with its GDP) when there is a depreciation and falls with an
appreciation.
B)
It usually does not change because external wealth is related to gold and capital.
C)
The change in wealth depends on the exchange rates with the currencies in which
the assets or liabilities are denominated.
D)
If all assets are domestic and all liabilities are foreign, wealth always rises when
there is any kind of exchange rate shift.
109.
After a depreciation of the home currency, what is the situation with a nation’s external
wealth?
A)
It will rise if external liabilities exceed external assets.
B)
It will fall if external liabilities exceed external assets.
C)
It will rise if domestic liabilities exceed domestic assets.
D)
It will fall if domestic liabilities exceed domestic assets.
Page 23
110.
What would happen to a low-income nation if its liability currency appreciated against
its own currency?
A)
Its external wealth would rise because low-income nations have more assets than
liabilities.
B)
Its external wealth would not be affected because currency values are fixed.
C)
Its external wealth would fall because low-income nations tend to have more
external liabilities denominated in other currencies.
D)
Its external wealth would rise because of the ability of its monetary authority to
print more money.
111.
If net external wealth increases for firms, it could ____ their ability to borrow and
expand.
A)
cut off completely
B)
increase
C)
decrease
D)
have no effect
112.
Many large developing countries with large dollar-denominated external liabilities
experienced large depreciations of their currencies between 1990 and 2003. What
effects, if any, did these depreciations have on these countries’ external wealth and their
GDPs?
A)
Both their external wealth and their GDPs fell.
B)
Their external wealth fell and their GDPs rose.
C)
Their external wealth rose and their GDPs fell.
D)
The depreciations reduced their external wealth but had no effect on their GDPs.
113.
Monetary policy to stabilize the nation is less desirable whenever:
A)
the nation is a net external debtor with liabilities denominated in foreign currency.
B)
the nation is a net external creditor with assets denominated in foreign currency.
C)
the central bank of the nation must also finance government deficits.
D)
the government is unable to raise taxes sufficiently to lower its deficit.
Page 24
114.
When developing countries borrow in international credit markets, many find that they
must borrow in currencies other than their own (such as dollars, yen, or euros). Why are
international creditors willing to make loans in dollars, yen, or euros but not in the
developing countries’ currencies?
A)
Lenders are not well-informed about developing countries’ economic situations.
B)
Lenders believe that the currencies of developing countries will always appreciate.
C)
Lenders receive higher interest rates on loans in dollars, yen, or euros than on loans
made in the currencies of developing countries.
D)
Lenders believe that developing countries have a history of weak macroeconomic
management and imprudent monetary and fiscal policies.
115.
The recognition that _____ plays a profound role in many developing nations has led to
more attention to this factor when choosing an exchange rate regime.
A)
poverty
B)
illiteracy
C)
currency mismatch due to liability dollarization
D)
government corruption
116.
An important factor in the choice of an exchange rate regime in low-income nations is:
A)
the credentials of the finance minister.
B)
the extent of liability dollarization, which can cause contractions when the home
currency depreciates.
C)
how dependent the nation is on imports, which must be financed by external
borrowing.
D)
the price level and how it affects the interest rate level in the nation.
117.
Borrowing in one’s own currency has many advantages for low-income nations (such as
Chile). Which of the following is NOT an advantage?
A)
Service payments are usually retained in the nation.
B)
Defaults are typically not an issue.
C)
The nation is never obliged to repay—it can roll over the debt in perpetuity.
D)
More national debt actually helps credit markets deepen and mature.
118.
Developing countries have been able to reduce the effect of depreciation on the value of
their debt by:
A)
issuing debt in U.S. dollars.
B)
issuing debt in domestic currency.
C)
appreciating their currency.
D)
using expansionary fiscal policy.
Page 25
119.
The problem of currency mismatch of net external wealth can be mitigated by:
A)
ensuring the creditor countries always denominate loans in U.S. dollars.
B)
promoting internal financial markets where foreign securities can be traded.
C)
restricting borrowing yet encouraging lending.
D)
piling up large stocks of foreign currency assets in central bank reserves and
sovereign wealth funds.
120.
More borrowing by firms in the domestic currency is one way to reduce currency
mismatch. What would be the major issue if government insured repayment of the loans
at a low cost?
A)
There would be lots of new borrowing, and the production sector might not be able
to keep pace.
B)
It would be too expensive.
C)
There could be a moral hazard problem with excessive risk taking.
D)
It is likely that no new borrowing would take place—firms need the incentive of
tax breaks.
121.
In nations that cannot borrow in their own currencies, which exchange rate system is
more destabilizing and less useful in terms of stabilizing GDP?
A)
floating exchange rates
B)
fixed exchange rates
C)
banded exchange rates
D)
open pegs
122.
Limiting net external wealth effects could be accomplished by limiting movements in
the exchange rate. What measure might address this situation?
A)
devaluing the currency
B)
keeping nominal interest rates exactly 1% higher than one’s trading partners
C)
borrowing only in U.S. dollars
D)
pegging the exchange rate to the currency of the largest creditor nation
123.
Fear of floating is:
A)
when the benefits of floating exchange rates outweigh the costs.
B)
when the attractions of fixed exchange rates are large relative to those of floating.
C)
when countries adopt the gold standard.
D)
when countries say they are floating, but fix their exchange rates in practice.
Page 26
124.
A cooperative outcome in a situation where one nation pegs to another would be that
the:
A)
center country abandons its own stabilization policy in favor of the home country.
B)
home country absorbs the losses resulting from the stabilization policy in the center
country.
C)
center country makes concessions, recognizing the impact on the home country,
thereby sharing the pain.
D)
peg is temporarily abandoned.
125.
A noncooperative outcome after the center nation has undertaken a stabilization policy
in response to an asymmetric shock would be that the:
A)
center country abandons its own stabilization policy in favor of the home country.
B)
home country absorbs the losses resulting from the stabilization policy in the center
country.
C)
center country makes concessions, recognizing the impact on the home country and
thereby sharing the pain.
D)
peg is temporarily abandoned.
126.
Why are cooperative arrangements difficult to negotiate and maintain?
A)
They require a long-term policy commitment, but politics is often focused on the
short run.
B)
No one understands the benefits and consequences.
C)
Trading nations do not trust one another.
D)
They have to be approved by the IMF, which takes years to accomplish.
127.
When analyzing cooperative fixed exchange rate agreements, there are two forms of
cooperation:
A)
decentralized and center-oriented.
B)
agreement over interest rates and agreement over exchange rates.
C)
compromise and democratic methodology.
D)
idiosyncratic and rules-based.
128.
Political tensions may arise from nations pegging to a center base country’s currency if:
A)
asymmetric shocks cause the home nation to lose the power to stabilize.
B)
it is determined that the center nation has been misrepresenting the value of its
currency.
C)
financing of military spending becomes more difficult.
D)
interest rates are affected.
Page 27
129.
If there is a center country to which other nations peg under a noncooperative
arrangement, which nation(s) have monetary policy authority?
A)
none
B)
all
C)
industrialized nations only
D)
the center nation only
130.
If the center nation operates under a cooperative peg agreement, how does the
cooperation work?
A)
The home nation will try to resist any changes coming from the center.
B)
The home nation will accept all changes coming from the center without
discussion.
C)
The center nation will make policy concessions to other nations in its cooperative
currency agreement.
D)
Cooperation usually does not work well.
131.
When a country has monetary autonomy, it can:
A)
conduct monetary policy independently of all other countries.
B)
conduct monetary policy only in coordination with all other countries.
C)
conduct monetary policy only in cooperation with its reserve currency country (the
country to which it fixes its currency).
D)
print money without affecting inflation.
132.
A pegged rate system that includes policy cooperation is usually:
A)
difficult to maintain.
B)
a good compromise for nations who want exchange rate stability, stable output, and
some flexibility.
C)
not a good bet for nations who are large trading partners.
D)
administered by large private banks.
133.
In practice, cooperative agreements are:
A)
the largest single exchange rate format.
B)
easy to maintain because they have little impact on the nations.
C)
often contentious because nations favor their own situations over those of their
trading partners.
D)
impossible to maintain because nations have widely differing systems and values.
Page 28
134.
In a reserve currency system (such as the Bretton Woods system or the European ERM),
currencies peg to a reserve currency. As a result:
A)
only the reserve currency country has monetary autonomy.
B)
all countries, other than the reserve currency country, have monetary autonomy.
C)
all countries have monetary autonomy.
D)
no country has monetary autonomy.
135.
In a system in which there is an administered exchange rate, what is the term used when
the government sets the rate lower to buy more units of foreign currency?
A)
a revaluation
B)
an appreciation
C)
a depreciation
D)
a devaluation
136.
In a system in which there is an administered exchange rate, what is the term used when
the government sets the rate higher to buy fewer units of foreign currency?
A)
a revaluation
B)
an appreciation
C)
a depreciation
D)
a devaluation
137.
In a noncooperative pegged situation, when the home country devalues in response to an
external shock the:
A)
foreign nation will also devalue, endangering the peg.
B)
home country suffers the entire burden.
C)
resulting depreciation causes a large shift in demand from the foreign nation to the
home country, thereby exporting the recession to the foreign nation.
D)
nations agree to switch their peg to the U.S. dollar.
138.
In a noncooperative environment of pegged exchange rates, if the home nation is
experiencing high inflation due to excessive demand, it may choose to ______, which
would cause______.
A)
forgo the pegged exchange rate; extreme depreciation
B)
devalue its currency; the foreign nation to suffer deficient demand for its products
C)
cut the monetary growth rate; a rise in interest rates
D)
revalue its currency; the foreign nation to suffer excessive demand for its products
Page 29
139.
If two nations both peg to a center nation, and one devalues its exchange rate against the
other partner (cooperatively) and to the center as a result of a demand shock, what is the
effect?
A)
The center nation will require that the two line up their rates.
B)
The devaluing nation will see an increase in demand while the other partner sees a
decrease (thus sharing the impact of the demand shock).
C)
The devaluing nation will see a larger increase in demand while its partner will
suffer more (thus favoring the devaluing nation).
D)
Both nations will suffer more because the center nation will match the devaluation,
thus negating the effect.
140.
If two nations both peg to a center nation, and one devalues its exchange rate against the
other partner (noncooperatively) and to the center as a result of a demand shock, what is
the effect?
A)
The center nation will require that the two line up their rates.
B)
The devaluing nation will see an increase in demand while the other partner sees a
decrease (thus sharing the effect of the demand shock).
C)
The devaluing nation will devalue more steeply and will see a larger increase in
demand while its partner will suffer more (thus favoring the devaluing nation).
D)
Both nations will suffer more because the center nation will match the devaluation,
thus negating the effect.
141.
Suppose that country A pegs its currency to that of country B. Now suppose that there is
an adverse demand shock in country A. Country B is more likely to cooperate and
increase its money supply in response to country A’s adverse demand shock when:
A)
country B’s output is below its preferred level.
B)
country B is experiencing high rates of inflation.
C)
country B wants country A to devalue its currency.
D)
country A is experiencing high rates of inflation.
142.
A country is using a beggar-thy-neighbor policy whenever:
A)
it uses contractionary monetary policy to attract capital inflows from other
countries.
B)
it devalues its currency to improve its macroeconomic position at the expense of its
trading partners.
C)
it revalues its currency to improve its macroeconomic position and that of its
trading partners.
D)
it cooperates with other countries in establishing its monetary policy.
Page 30
143.
What best describes what makes a cooperative fixed exchange rate system work?
A)
There are too many cooks in the kitchen.
B)
Take all you can get.
C)
You scratch my back, I’ll scratch yours.
D)
Curiosity killed the cat.
144.
Under the gold standard system, if 1 ounce of gold was worth $23 in the United States
and worth 15.5 pounds in Great Britain, then:
A)
$1 = 1.48 pounds.
B)
1 pound = $1.48.
C)
$1 = 365 pounds.
D)
1 pound = $0.67.
145.
Under the gold standard system, if the par exchange rate is $1 = 2 pounds, but the
market exchange rate in the United Kingdom is $1 = 1 pound, then a person interested
in arbitrage would:
A)
buy dollars in the United Kingdom to be shipped to the United States and
exchanged for a larger quantity of gold.
B)
find that it is not possible to engage in arbitrage.
C)
convert dollars into pounds in the United States and sell it for gold in the United
Kingdom.
D)
lose money by trying to exploit any price difference.
146.
Under the gold standard system, 1 ounce of gold was worth $23 in the United States and
worth 15.5 pounds in Great Britain. If the price of gold in Great Britain decreases by
10%, then:
A)
the new exchange rate would show approximately 10% depreciation of the dollar.
B)
$1 = 1.64 pounds.
C)
1 pound = $1.64.
D)
the new exchange rate would show approximately 10% depreciation of the dollar,
and 1 pound would be equal to $1.64.
147.
Suppose that the United States and the United Kingdom return to the gold standard. The
United States sets the price of gold equal to $500 per ounce, and the United Kingdom
sets the price of gold at £200 per ounce. What is the $–£ exchange rate?
A)
$0.40 = £1
B)
$2.50 = £1
C)
$500 = 1 ounce
D)
£200 = 1 ounce
Page 31
148.
Under the gold standard:
A)
the United States set the price of gold at $35 per ounce, and other countries then
established their exchange rates against the U.S. dollar (e.g., £1 = $5).
B)
Great Britain and the United States set the price of gold at $35 per ounce and £7
per ounce, and then other countries established their exchange rates against either
the British pound or the U.S. dollar.
C)
all countries pegged the values of their currencies to gold.
D)
only gold was used to settle international transactions.
149.
Suppose that the U.S. price of gold is $35 per ounce and the German price of gold is 100
Deutsche Marks (DMs) per ounce. What is the implied exchange rate between the dollar
and the DM?
A)
$0.35 = DM1
B)
$3500 = DM1
C)
$2.8571 = DM1
D)
$0.28571 = DM1
150.
Suppose that international trade is the only kind of international transaction between the
United States and Canada. The United States currently is experiencing a balance of trade
deficit with Canada. What would happen to the United States and Canadian money
supplies if the United States and Canada both used the gold standard?
A)
The U.S. money supply would rise and the Canadian money supply would fall.
B)
Both the U.S. and Canadian money supplies would rise.
C)
The U.S. money supply would fall and the Canadian money supply would rise.
D)
Both the U.S. and the Canadian money supplies would fall.
151.
Suppose that the United States and the United Kingdom both use the gold standard.
Their prices of gold are $35 = 1 ounce and £7 = 1 ounce, which yields an implied
exchange rate of $5 = £1. Now suppose that the exchange rate temporarily rises to $5.50
= £1. What actions would you follow to take advantage of this temporary opportunity
for arbitrage?
A)
Sell gold for pounds in the United Kingdom, buy dollars with pounds in currency
markets, and buy gold with dollars in the United States.
B)
Sell gold for dollars in the United States, buy pounds with dollars in currency
markets, and buy gold with pounds in the United Kingdom.
C)
Sell gold for dollars in the United States, sell pounds for dollars in currency
markets, and buy gold with dollars in the United Kingdom.
D)
Sell gold for dollars in the United Kingdom, buy pounds with dollars in currency
markets, and buy gold with pounds in the United States.
Page 32
152.
Suppose that the United States and the United Kingdom both use the gold standard.
Their prices of gold are $35 = 1 ounce and £7 = 1 ounce, which yields an implied
exchange rate of $5 = £1. Now suppose that the exchange rate temporarily rises to $5.50
= £1. What will happen to the U.S. and U.K. money supplies as a result of arbitrage?
A)
The U.S. money supply would rise and the U.K. money supply would fall.
B)
Both the U.S. and the U.K. money supplies would rise.
C)
The U.S. money supply would fall and the U.K. money supply would rise.
D)
Both the U.S. and the U.K. money supplies would fall.
153.
A gold standard pegs the currency to:
A)
another nation that also adopts a gold standard.
B)
a basket of metals: gold, silver, platinum, and palladium.
C)
the price of gold in local currency.
D)
the U.S. dollar.
154.
Under a gold standard, as trade takes place and the foreign exchange market is affected,
______ tend(s) to restore equilibrium.
A)
a change in the interest rate
B)
gold flows between nations
C)
currency flows
D)
changes in the value of gold
155.
Under a gold standard, as trade takes place, the importing nation experiences a
________ and a(n) _________ in its money supply, while the exporting nation
experiences the opposite.
A)
gold outflow; contraction
B)
gold inflow; expansion
C)
gold outflow; expansion
D)
gold inflow; contraction
156.
During the late nineteenth century, the gold standard was a subject of controversy.
Why?
A)
Businesses resented fixed exchange rates because of their inability to raise or lower
prices.
B)
Gold flows were erratic and resulted in a series of large economic swings—booms
and busts.
C)
Prices were stable and predictable, but profits fell.
D)
Governments cheated on printing money, causing inflation problems all over the
world.
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157.
As the world economy grew during the 1920s, the gold standard proved to be:
A)
a real problem because the quantity of gold could not keep pace with economic
expansion, resulting in severe deflation.
B)
a boon to importers and exporters.
C)
highly inflationary.
D)
well-suited to new methods of transferring gold stocks between nations.
158.
During which period in history were the largest number of nations using the gold
standard as their payments system?
A)
from 1870 to 1913
B)
from the end of WWI to 1929
C)
from 1929 to 1939
D)
from 1945 to 1975
159.
Trilemma refers to policy conflicts among:
A)
fixed exchange rate, monetary autonomy, and free capital mobility goals.
B)
floating exchange rate, monetary autonomy, and free capital mobility goals.
C)
fixed exchange rate, monetary autonomy, and floating exchange rate goals.
D)
floating exchange rate, fiscal autonomy, and monetary autonomy goals.
160.
What happened to the international gold standard during WWI?
A)
It flourished, since no nation trusted the other nations’ currencies.
B)
It was abandoned.
C)
It did not disappear but was weakened by a major decline in international trade.
D)
It was relegated to government control.
161.
From 1929 to 1935, countries that:
A)
abandoned the gold standard had higher rates of growth of GDP than countries that
continued on the gold standard.
B)
continued on the gold standard had higher rates of growth of GDP than countries
that abandoned the gold standard.
C)
maintained capital controls had lower rates of growth of GDP than countries that
continued on the gold standard.
D)
removed capital controls had lower rates of growth of GDP than countries that
abandoned the gold standard.
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162.
In the 1930s, some nations such as the United States and Britain abandoned their gold
pegs by adopting ________, whereas other nations such as Germany and South
American nations adopted ________.
A)
floating exchange rates and open capital markets; fixed exchange rates and capital
controls
B)
fixed exchange rates and open capital markets; floating exchange rates without
capital controls
C)
fixed exchange rates and closed capital markets; floating exchange rates and closed
capital markets
D)
floating exchange rates with closed capital markets; floating exchange rates and
open capital markets
163.
During the Great Depression era, what happened to the gold standard?
A)
It remained the same.
B)
It flourished and prospered.
C)
It broke down completely.
D)
It was replaced by a new system of centralized control.
164.
Traders in nations abiding by rules of Bretton Woods found ways to avert restrictions on
_______ by offshore banking and improper accounting reporting.
A)
imports
B)
capital controls
C)
gold movements
D)
interest rate changes
165.
Which of the following did NOT lead to the collapse of Bretton Woods?
A)
ample supplies of gold
B)
collapse of capital controls
C)
the Vietnam War
D)
unwillingness to peg to the U.S. dollar
166.
Which is the best characterization of the current international payments system?
A)
The World Bank and the IMF approve nations’ exchange rate regimes and ensure
that financial flows are not hampered by imbalances.
B)
All nations are now operating with floating exchange rates and free capital flows.
C)
The four richest industrial nations have floating exchange rates, while the rest of
the nations peg to those currencies.
D)
There is no standard and no rules, and each nation chooses the regime that works
best for its individual situation at the time.
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167.
Suppose that Venezuela pegs its bolivar to the Mexican peso. Suppose further that both
countries are in a recession. Using the IS–LM–FX model, explain what will happen in
Venezuela when Mexican firms begin to expect higher profits in the future.
168.
Suppose Ireland decides to peg its currency to the U.S. dollar. What is the likely impact
of expansionary fiscal policy by the United States on Ireland?
169.
Explain why economic similarity is such an important issue for countries deciding
whether to fix or float.
170.
How does exchange rate volatility affect economic integration?
171.
Evaluate the following claim: Fixed exchange rates help reduce inflation in developing
economies.
172.
Explain seigniorage and how it influences the choice of exchange rate regime.
173.
Low-income nations have a dilemma as to whether to fix or float. There are many
factors that affect their decisions and how effectively they can manage a financial
system. Discuss a few of these issues and the factors that play into the success of a
policy.
174.
Adding to the problems of low-income nations is the effect of currency depreciation on
external wealth. Discuss various views on this issue.
175.
“Original sin” sometimes refers to a nation’s inability to borrow in its own currency, and
therefore is forced to borrow and repay internationally in other currencies. Why is this
the case? What other problems flow from this inability?
176.
Explain the concept of liability dollarization.
177.
Home’s currency is the peso and trades at 2 pesos per dollar. Home has external assets
of $100 billion, all of which are denominated in dollars. It has external liabilities of
$250 billion, 50% of which are denominated in dollars. What happens to net wealth (in
pesos) if the peso depreciates to 3 pesos per dollar?
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178.
What are benefits of a cooperative peg versus a noncooperative peg?
179.
Noncooperative adjustments could lead to a cycle of competitive devaluations. Explain
this concept and how it might affect a fixed exchange rate system.
180.
What is a beggar-thy-neighbor policy and why would a country engage in such a policy?
181.
The gold standard was the historical anchor for nearly every traded currency. Explain
how it worked as nations traded domestically and internationally at fixed exchange
rates.
182.
The Bretton Woods system attempted to set up an international payments system that
was based on gold and had flexibility. What happened?
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