2) The current account balance plus the financial account balance
A) equals the trade balance.
B) equals the net outflow of currency from the domestic economy.
C) will be negative during economic expansions and positive during economic contractions.
D) equals zero.
3) The trade balance is
A) by definition, identical to the current account balance.
B) is a major portion, but not the only component, of the current account balance.
C) almost invariably larger than the financial account balance.
D) the largest component of the financial account.
4) Which of the following is NOT considered a receipt in the balance of payments?
A) exports of goods
B) capital inflows
C) import of services
D) unilateral transfers to U.S. citizens
5) Which of the following is NOT considered a payment in the balance of payments?
A) capital outflows
B) U.S. foreign aid to other countries
C) imports of goods
D) exports of services
6) What was the approximate value of the U.S. current account balance in 2009?
A) +$10 billion
B) +$79 billion
C) -$380 billion
D) -$600 billion
7) In 2009, the net financial account balance was approximately
A) $780 billion.
B) -$790 billion.
C) $215 billion.
D) -$215 billion.
8) If the U.S. current account balance is positive,
A) U.S. citizens must have purchased more merchandise abroad than they sold abroad.
B) the foreign-exchange value of the dollar must be rising.
C) the foreign-exchange value of the dollar must be falling.
D) U.S. citizens have funds to lend to foreigners.
9) What accounted for much of policymakers’ concern over U.S. current account deficits in the
1980s, 1990s, and 2000s?
A) The current account deficits were thought to be largely responsible for the federal budget
deficit.
B) Current account deficits lower U.S. interest rates, thereby leading to reduced domestic saving.
C) Current account deficits require the United States to borrow funds from foreign savers.
D) The United States had signed international agreements in which it had pledged not to run a
current account deficit for more than three years in a row.
10) When someone in a country buys an asset abroad, the transaction is recorded
A) in the current account.
B) in the official settlements balance.
C) in the financial account as a capital inflow.
D) in the financial account as a capital outflow.
11) Historically, the leading official reserve asset was
A) gold.
B) the U.S. dollar.
C) the British pound.
D) the German mark.
12) The official settlement balance
A) is an amount that the IMF requires each member country to pay annually.
B) must by definition always be zero.
C) equals the current account balance divided by the capital account balance.
D) equals the net increase in a country’s official reserve assets.
13) In the balance-of-payments accounts, the statistical discrepancy
A) equals the capital account balance minus the current account balance.
B) equals the current account balance minus the capital account balance.
C) probably reflects hidden capital flows.
D) must equal zero.
14) When a nation is said to be running a balance of payments surplus, this means its
A) official settlements balance is positive.
B) trade balance is positive.
C) net financial account balance is positive.
D) current account is positive.
15) How did the global savings glut in the 2000s affect the U.S. current account balance?
A) it caused it to decline by increasing the value of the dollar
B) it caused it to decline by reducing the value of the dollar
C) it caused it to increase by increasing the value of the dollar
D) it caused it to increase by reducing the value of the dollar
16) Why do some economists think a global savings glut contributed to the U.S. running a
current account deficit in the 2000s?
16.4 Exchange Rate Regimes and the International Financial System
1) Under the gold standard, if the demand for U.S. goods increased, which of the following
would happen?
A) Gold would flow into the United States.
B) The U.S. monetary base would decline.
C) Prices in the United States would fall.
D) The United States would experience a balance of trade deficit.
2) Which of the following was NOT considered to have been a drawback of the pre-1914 gold
standard?
A) It sometimes led to inflation, which several times in the late nineteenth century caused
recessions in the United States.
B) Countries had little control over their domestic monetary policies.
C) Countries with trade deficits experienced deflation.
D) Changes in the world money supply were strongly influenced by gold discoveries.
3) The gold standard probably made the Great Depression more severe in the United States
because
A) the value of gold declined sharply during those years.
B) the existence of the gold standard kept prices from falling.
C) the money supply in the United States increased rapidly as gold flowed into the country.
D) the Fed attempted to reduce gold outflows by raising the discount rate.
4) In the early 1930s
A) countries that abandoned the gold standard suffered severe inflation.
B) countries that tried to defend the gold standard suffered more depression than countries that
abandoned the gold standard.
C) the gold standard was abandoned by every major industrial country except England.
D) the United States was the first major industrial country to abandon the gold standard.
5) The Bretton Woods system lasted from
A) 1801 to 1861.
B) 1863 to 1914.
C) 1945 to 1971.
D) 1981 to 1993.
6) Under the Bretton Woods system the international reserve currency was the
A) U.S. dollar.
B) British pound.
C) German mark.
D) Japanese yen.
7) The promise that was to hold the Bretton Woods system together was the agreement that
A) no industrial country would allow high rates of inflation.
B) foreign central banks would be able to convert U.S. dollars into gold at a fixed price.
C) no country would raise tariffs on the products of other countries.
D) all countries would be willing to redeem their paper currencies for gold.
8) Under the Bretton Woods system, exchange rates were supposed to be adjusted
A) only when a country experienced fundamental disequilibrium.
B) daily.
C) weekly.
D) following each annual meeting of the board of governors of the International Monetary Fund.
9) The Bretton Woods system was expected to be more stable than the gold standard because
A) the world supply of gold had increased greatly by the time the Bretton Woods system was
established.
B) large trade deficits and surpluses would be unlikely to occur under the Bretton Woods system.
C) fewer countries were involved in the Bretton Woods system than had been involved in the
gold standard.
D) the IMF was set up to be a lender of last resort.
10) The fixed exchange rates of the Bretton Woods system were maintained
A) by central bank interventions in the foreign-exchange market.
B) by the requirement that short-term interest rates be equalized in all participating countries.
C) by the requirement that long-term interest rates be equalized in all participating countries.
D) through the automatic workings of the foreign-exchange market.
11) Under the Bretton Woods system, an asymmetry in the ability of central banks to defend
their exchange rates existed because
A) a country experiencing a balance of payments surplus was limited in its ability to defend its
exchange rate by its stock of international reserves.
B) a country experiencing a balance of payments deficit was limited in its ability to defend its
exchange rate by its stock of international reserves.
C) central banks were allowed by the IMF to adjust their exchange rates upward whenever they
chose, but were rarely allowed to adjust their exchange rates downward.
D) central banks were allowed by the IMF to adjust their exchange rates downward whenever
they chose, but were rarely allowed to adjust their exchange rates upward.
12) Which of the following statements is correct?
A) A devaluation of the British pound would result in more dollars to the pound.
B) A revaluation of the British pound would raise the prices of U.S. goods in Britain.
C) A devaluation of the British pound would lower the prices of British goods in the United
States.
D) Revaluations and devaluations of a country’s currency were not allowed under the Bretton
Woods system.
13) Why has the IMF come in for widespread criticism for its handling of the Asian financial
crisis?
A) It refused to make loans to any of the countries whose currencies were under speculative
attack.
B) Its policies did not sufficiently punish speculators with losses, giving rise to moral hazard.
C) Its policies led to unsustainably low interest rates in a number of Asian countries.
D) Its policies failed to lead to sufficient hardship for citizens in a number of Asian countries,
giving rise to moral hazard.
14) The speculative attack on the British pound in 1967 succeeded because
A) the pound was seriously undervalued relative to the dollar.
B) Britain decided to drop out of the Bretton Woods system.
C) British exports greatly exceeded British imports, causing a large inflow of gold.
D) the Bank of England lacked the international reserves to defend the existing exchange rate
indefinitely.
15) The speculative attack on the German mark in 1971 resulted in
A) a large increase in the German monetary base.
B) a decline in the value of the mark relative to the dollar.
C) a decision to end the floating of the mark against the dollar.
D) a large decrease in the German monetary base.
16) On August 15, 1971, the United States
A) returned to the gold standard.
B) suspended the convertibility of dollars into gold.
C) provided unlimited dollar reserves to the German central bank to help end a speculative attack
on the mark.
D) provided unlimited dollar reserves to the Bank of England to help end a speculative attack on
the pound.
17) At the 1976 IMF conference in Jamaica,
A) the United States reaffirmed its commitment to buy and sell gold at a fixed price.
B) currencies were formally allowed to float.
C) the major countries of the world agreed to continue a system of fixed exchange rates.
D) the gold standard was reestablished.
18) Special Drawing Rights
A) are granted by the Fed to banks which want to trade in the foreign exchange markets.
B) were eliminated when the Bretton Woods system broke down.
C) are created by the IMF in its role as lender of last resort.
D) were created by the Nixon administration on August 15, 1971.
19) Currently, the price of gold is
A) fixed by the United States.
B) adjusted periodically by the IMF.
C) adjusted periodically by the World Bank.
D) determined in the market by demand and supply.
20) The exchange rate system followed by the United States is known as
A) the gold standard.
B) a fixed exchange rate system.
C) a flexible exchange rate system.
D) a barter system.
21) Currently, the dominant reserve currency is the
A) U.S. dollar.
B) Japanese yen.
C) euro.
D) British pound.
22) If the U.S. dollar were to cease to be the leading international reserve currency,
A) U.S. households and businesses would be unaffected.
B) U.S. households and businesses would be subject to increased exchange rate risk.
C) interest rates in the U.S. would be lower.
D) the U.S. monetary base would contract.
23) Fixed exchange rate regimes
A) existed prior to the nineteenth century but were then superseded by the gold standard.
B) lower the transactions costs of buying and selling goods and assets.
C) result in higher world interest rates.
D) were first established by the GATT in 1971.
24) The euro is
A) the currency of all nations in Europe.
B) the rate at which the French central bank makes discount loans.
C) a common currency of many European countries.
D) the name of the European central bank.
25) Members of the European Exchange Rate Mechanism (ERM)
A) agreed to buy and sell gold at a fixed rate.
B) promised to maintain the values of their currencies within a fixed range.
C) attempted to maintain a fixed exchange rate against the dollar.
D) all agreed to charge the same interest rate on central bank loans.
26) At the time monetary union in Europe began in 1999, which of the following countries
declined to participate?
A) France
B) United Kingdom
C) Italy
D) Germany
27) All of the following are advantages of currency pegging EXCEPT
A) it reduces exchange rate risk.
B) it is a check against inflation.
C) it provides protection for firms that have taken out loans in foreign currencies.
D) it keeps the exchange rate closer to its equilibrium rate.
28) All of the following accurately describes China’s currency peg EXCEPT
A) pegging against the dollar ensured that Chinese exporters faced stable prices on exports to the
U.S.
B) some U.S. firms complained that the peg gave Chinese firms an unfair advantage over U.S.
firms.
C) the Chinese currency was allowed to depreciate moderately in the years preceding the
financial crisis.
D) many economists argued that the Chinese currency was undervalued.
29) How did maintaining the gold standard deepen the severity of the Great Depression?
30) How did the the use of the euro limit the use of monetary policy by European nations
severely affected by the Financial Crisis of 2007-2009?
31) Briefly describe how the Bretton Woods system worked. What advantages did it have over
the gold standard? What problems did the Bretton Woods system eventually encounter?
32) In what sense does the IMF act as a lender of last resort? How might the IMF’s actions
during the Mexican crisis of the mid-1990s have contributed to the Asian currency crisis a few
years later?
33) Suppose that Ruritania has a fixed exchange rate versus the U.S. dollar. If foreign investors
become convinced that the Ruritanian currency is overvalued, what actions might they take to
profit from this conviction? Would these actions make it easier or harder for Ruritania to
maintain the value of its currency versus the dollar? Why?