Economics of Money, Banking, and Financial Markets, 11e (Mishkin)
Chapter 18 The International Financial System
18.1 Intervention in the Foreign Exchange Market
1) A central bank ________ of domestic currency and corresponding ________ of foreign assets
in the foreign exchange market leads to an equal decline in its international reserves and the
monetary base, everything else held constant.
A) sale; purchase
B) sale; sale
C) purchase; sale
D) purchase; purchase
2) A central bank ________ of domestic currency and corresponding ________ of foreign assets
in the foreign exchange market leads to an equal increase in its international reserves and the
monetary base, everything else held constant.
A) sale; purchase
B) sale; sale
C) purchase; sale
D) purchase; purchase
3) Suppose that the Bank of Japan buys U.S. dollar assets with yen-denominated assets.
Everything else held constant, this transaction will cause ________ in the foreign assets held by
the Federal Reserve and ________ in the U.S. monetary base.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
4) Suppose that the Bank of Japan buys yen-denominated assets with U.S. dollar assets.
Everything else held constant, this transaction will cause ________ in the foreign assets held by
the Federal Reserve and ________ in the U.S. monetary base.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
5) When the central bank allows the purchase or sale of domestic currency to have an effect on
the monetary base, it is called
A) an unsterilized foreign exchange intervention.
B) a sterilized foreign exchange intervention.
C) an exchange rate feedback rule.
D) a money neutral foreign exchange intervention.
6) A foreign exchange intervention with an offsetting open market operation that leaves the
monetary base unchanged is called
A) an unsterilized foreign exchange intervention.
B) a sterilized foreign exchange intervention.
C) an exchange rate feedback rule.
D) a money neutral foreign exchange intervention.
7) Everything else held constant, if a central bank makes an unsterilized purchase of foreign
assets, then the domestic money supply will ________ and the domestic currency will ________.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
8) Everything else held constant, if a central bank makes an unsterilized ________ of foreign
assets, then the domestic money supply will increase and the domestic currency will ________.
A) purchase; appreciate
B) purchase; depreciate
C) sale; appreciate
D) sale; depreciate
9) Everything else held constant, if a central bank makes an unsterilized ________ of foreign
assets, then the domestic money supply will ________ and the domestic currency will
appreciate.
A) purchase; increase
B) purchase; decrease
C) sale; increase
D) sale; decrease
10) Everything else held constant, if a central bank makes an unsterilized sale of foreign assets,
then the domestic money supply will ________ and the domestic currency will ________.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
11) Everything else held constant, if a central bank makes an unsterilized ________ of foreign
assets, then the domestic money supply will decrease and the domestic currency will ________.
A) purchase; appreciate
B) purchase; depreciate
C) sale; appreciate
D) sale; depreciate
12) Everything else held constant, if a central bank makes an unsterilized ________ of foreign
assets, then the domestic money supply will ________ and the domestic currency will
depreciate.
A) purchase; increase
B) purchase; decrease
C) sale; increase
D) sale; decrease
13) Everything else held constant, if a central bank makes a sterilized purchase of foreign assets,
then the domestic currency will
A) appreciate.
B) depreciate.
C) either appreciate, depreciate, or remain constant.
D) not be affected.
14) Because sterilized interventions mean offsetting open market operations, there is no impact
on the monetary base and the money supply, and therefore a sterilized intervention
A) causes the exchange rate to overshoot in the short run.
B) causes the exchange rate to undershoot in the short run.
C) causes the exchange rate to depreciate in the short run, but has no effect on the exchange rate
in the long run.
D) has no effect on the exchange rate.
15) Everything else held constant, if a central bank makes a sterilized sale of foreign assets, then
the domestic currency will
A) appreciate.
B) depreciate.
C) either appreciate, depreciate, or remain constant.
D) not be affected.
16) If the United States has a current account deficit with England of $1 million, and the Bank of
England sells $1 million worth of pounds in the foreign exchange market, then England
________ $1 million of international reserves and its monetary base ________ by $1 million.
A) gains; rises
B) gains; falls
C) loses; rises
D) loses; falls
18.2 Balance of Payments
1) The difference between merchandise exports and imports is called the ________ balance.
A) current account
B) capital account
C) official reserve transactions
D) trade
2) The account that shows international transactions involving currently produced goods and
services is called the
A) trade balance.
B) current account.
C) balance of payments.
D) capital account.
3) The account that shows international transactions involving financial transactions (stocks,
bonds, bank loans, etc.) is called the
A) trade balance.
B) current account.
C) balance of payments.
D) capital account.
4) Which of the following does NOT appear in the current account part of the balance of
payments?
A) a loan of $1 million from Bank of America to Brazil
B) foreign aid to El Salvador
C) an Air France ticket bought by an American
D) income earned by General Motors from its plants abroad
5) Of the following, the one that appears in the current account of the balance of payments is
A) an Italian investor’s purchase of IBM stock.
B) income earned by U.S. subsidiaries of Barclay’s Bank of London.
C) a loan by a Swiss bank to an American corporation.
D) a purchase of a British Treasury bond by the Fed.
6) Capital ________ are American purchases of foreign assets, and capital ________ are foreign
purchases of American assets.
A) inflows; outflows
B) inflows; inflows
C) outflows; outflows
D) outflows; inflows
7) Which of the following appears in the capital account part of the balance of payments?
A) a gift to an American from his English aunt
B) a purchase by the Honda corporation of a U.S. Treasury bill
C) a purchase by the Bank of England of a U.S. Treasury bill
D) income earned by the Honda corporation on its automobile plant in Ohio
8) The net amount of international reserves that move between governments to finance
international transactions is called the ________ balance.
A) capital account
B) current account
C) trade
D) official reserve transactions
9) If the current account balance shows a surplus, and the capital account also shows a surplus,
then the official reserve transactions balance
A) must be positive.
B) must be negative.
C) must be zero.
D) can either be positive, negative, or zero.
10) A current account surplus indicates that America is ________ its claims on foreign wealth,
while a deficit indicates that this country is ________ its claims on foreign wealth.
A) reducing; reducing
B) reducing; increasing
C) increasing; reducing
D) increasing; increasing
11) Because it provides some indication of what is happening to U.S. claims on foreign wealth
and the demand for imports and exports, the ________ is closely followed by economists
wanting information on the future movement of exchange rates.
A) trade balance
B) capital account
C) current account balance
D) statistical discrepancy
12) Economists closely follow the current account balance because they believe it can provide
information on the future movement of
A) interest rates.
B) gold flows.
C) exchange rates.
D) special drawing rights.
18.3 Exchange Rate Regimes in the International Financial System
1) Under a gold standard in which one dollar could be turned in to the U.S. Treasury and
exchanged for 1/20th of an ounce of gold and one German mark could be exchanged for 1/100th
of an ounce of gold, an exchange rate of ________ marks to the dollar would stimulate a flow of
gold from the United States to Germany.
A) 7
B) 6
C) 5
D) 4
2) When gold production was low in the 1870s and 1880s, the money supply grew ________
causing ________.
A) rapidly; inflation
B) rapidly; disinflation
C) slowly; deflation
D) slowly; disinflation
3) The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been
known as the
A) General Agreement on Tariffs and Trade.
B) Bretton Woods system.
C) International Settlement Fund.
D) Balance of Payments Compliance Accord.
4) Under the Bretton Woods system, the organization assigned the task of making loans to
countries that were experiencing balance of payments difficulties is known as the
A) World Bank.
B) International Development Association.
C) International Monetary Fund.
D) Federal Reserve System.
5) The Bretton Woods agreement created the ________, which was given the task of promoting
the growth of world trade by setting rules for the maintenance of fixed exchange rates and by
making loans to countries that were experiencing balance of payments difficulties.
A) IMF
B) World Bank
C) Central Settlements Bank
D) Bank of International Settlements
6) The World Bank is an international organization that
A) promotes the growth of trade by setting rules for how tariffs and quotas are set by countries.
B) makes loans to countries to finance projects such as dams and roads.
C) makes loans to countries with balance of payment difficulties.
D) helps developing countries that have been having difficulties in repaying their loans to come
to terms with lenders in the West.
7) Under the Bretton Woods system, the United States was designated as the
A) reserve-currency country.
B) fixed-rate country.
C) par-standard country.
D) dollar-standard country.
8) Under a fixed exchange rate regime, if the domestic currency is initially ________, that is,
________ par, the central bank must intervene to sell the domestic currency by purchasing
foreign assets.
A) overvalued; below
B) overvalued; above
C) undervalued; below
D) undervalued; above
9) Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is,
above par, the central bank must intervene to sell the ________ currency by purchasing
________ assets.
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
10) Under a fixed exchange rate regime, if the domestic currency is initially ________, that is,
________ par, the central bank must intervene to purchase the domestic currency by selling
foreign assets.
A) overvalued; below
B) overvalued; above
C) undervalued; below
D) undervalued; above
11) Under a fixed exchange rate regime, if the domestic currency is initially overvalued, that is,
below par, the central bank must intervene to purchase the ________ currency by selling
________ assets.
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
12) Under a fixed exchange rate regime, if a central bank must intervene to purchase the
________ currency by selling ________ assets, then, like an open market sale, this action
reduces the monetary base and the money supply, causing the interest rate on domestic assets to
rise.
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
13) Under a fixed exchange rate regime, if a central bank must intervene to purchase the
domestic currency by selling foreign assets, then, like an open market sale, this action ________
the monetary base and the money supply, causing the interest rate on domestic assets to
________.
A) increases; rise
B) increases; fall
C) reduces; rise
D) reduces; fall
14) When the domestic currency is initially overvalued in a fixed exchange rate regime, the
central bank must intervene in the foreign exchange market to ________ the domestic currency,
thereby allowing the money supply to ________.
A) purchase; decline
B) sell; decline
C) purchase; increase
D) sell; increase
15) When the domestic currency is initially undervalued in a fixed exchange rate regime, the
central bank must intervene in the foreign exchange market to ________ the domestic currency,
thereby allowing the money supply to ________.
A) purchase; decline
B) sell; decline
C) purchase; increase
D) sell; increase
16) Under a fixed exchange rate regime, if a country has an overvalued exchange rate, then its
central bank’s attempt to keep its currency from ________ will result in a ________ of
international reserves.
A) depreciating; gain
B) depreciating; loss
C) appreciating; gain
D) appreciating; loss
17) Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its
central bank’s attempt to keep its currency from depreciating will result in a ________ of
international reserves.
A) undervalued; gain
B) undervalued; loss
C) overvalued; gain
D) overvalued; loss
18) Under a fixed exchange rate regime, if a country has an undervalued exchange rate, then its
central bank’s attempt to keep its currency from ________ will result in a ________ of
international reserves.
A) depreciating; gain
B) depreciating; loss
C) appreciating; gain
D) appreciating; loss
19) Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its
central bank’s attempt to keep its currency from appreciating will result in a ________ of
international reserves.
A) undervalued; gain
B) undervalued; loss
C) overvalued; gain
D) overvalued; loss
20) Under a fixed exchange rate regime, if a country’s central bank runs out of international
reserves, it cannot keep its currency from
A) depreciating.
B) appreciating.
C) deflating.
D) inflating.
21) Under a fixed exchange rate regime, a country that depletes its international reserves in an
attempt to keep its currency from ________ will be forced to ________ its currency.
A) depreciating; revalue
B) depreciating; devalue
C) appreciating; revalue
D) appreciating; devalue
22) Under a fixed exchange rate regime, a central bank that does not want to acquire
international reserves to keep its currency from ________ will decide to ________ its currency.
A) depreciating; revalue
B) depreciating; devalue
C) appreciating; revalue
D) appreciating; devalue
23) A balance of payments deficit is associated with a ________ of international reserves, while
a balance of payments surplus is associated with a ________.
A) loss; loss
B) loss; gain
C) gain; loss
D) gain; gain
24) Because central banks have not been willing to give up their option of intervening in the
foreign exchange market, the current international financial system can best be described as a
A) variable-pegged exchange rate system.
B) moving-pegged exchange rate system.
C) hybrid of a fixed exchange rate and flexible exchange rate system.
D) flexible-exchange, dollar-pegged exchange rate system.
25) The current international financial system is a managed float exchange rate system because
A) exchange rates fluctuate in response to, but are not determined solely by, market forces.
B) some countries keep their currencies pegged to the dollar, which is not allowed to fluctuate.
C) all countries allow their exchange rates to fluctuate in response to market forces.
D) all countries peg their currencies to the dollar which is allowed to fluctuate in response to
market forces.
26) Policymakers in a country with a balance of payments surplus may not want to see their
country’s currency appreciate because this would
A) hurt consumers in their country by making foreign goods more expensive.
B) hurt domestic businesses by making foreign goods cheaper in their country.
C) increase inflation in their country.
D) decrease the wealth of the country.
27) Under the current managed float exchange rate regime, countries with balance of payments
deficits frequently do not want to see their currencies depreciate because it makes ________
goods more expensive for ________ consumers and can stimulate inflation.
A) foreign; foreign
B) foreign; domestic
C) domestic; foreign
D) domestic; domestic
28) Countries with surpluses in their balance of payments frequently do not want to see their
currencies ________ because it makes their goods ________ expensive abroad.
A) appreciate; less
B) appreciate; more
C) depreciate; less
D) depreciate; more
29) Countries with balance of payments deficits do not want to see their currencies ________
because it makes foreign goods ________ expensive for domestic consumers.
A) appreciate; less
B) appreciate; more
C) depreciate; less
D) depreciate; more
30) Under the current managed float exchange rate regime, countries with ________ in their
balance of payments frequently do not want to see their currencies ________ because it makes
their goods more expensive abroad and foreign goods cheaper in their countries.
A) surpluses; depreciate
B) deficits; depreciate
C) surpluses; appreciate
D) deficits; appreciate
31) Under the current managed float exchange rate regime; countries with surpluses in their
balance of payments frequently do not want to see their currencies appreciate because it makes
their goods ________ expensive abroad and foreign goods ________ in their countries.
A) more; cheaper
B) more; costlier
C) less; cheaper
D) less; costlier
32) Under the current managed float exchange rate regime, countries with balance of payments
________ frequently do not want to see their currencies ________ because it makes foreign
goods more expensive for domestic consumers and can stimulate inflation.
A) surpluses; depreciate
B) deficits; depreciate
C) surpluses; appreciate
D) deficits; appreciate