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64. Which of the following statements best completes the following sentence; “Prior to World
War I, when the U.S. was on the gold standard, inflation in the U.S….”?
a. averaged 3.5 percent per year but was highly variable.
b. averaged less than one percent per year and was highly variable.
c. averaged less than one percent per year and was stable.
d. averaged 3.5 percent per year and was stable.
65. Most economists do not advocate a return to the gold standard because:
a. it forces the central bank to fix the price of something we don’t really care about while other
prices can fluctuate a lot.
b. past willingness to exit the Gold Standard casts doubt on the credibility of committing to it
again.
c. inflation will depend on the rate that gold is mined.
d. all of the answers given are correct.
66. If the U.S. were to revert to a gold standard, trade deficits would:
a. result in gold reserves in the U.S. decreasing.
b. result in lower domestic interest rates.
c. quickly disappear.
d. result in high inflation.
67. If the U.S. were to revert to a gold standard, trade deficits would:
a. result in gold reserves in the U.S. increasing.
b. result in higher domestic interest rates.
c. quickly disappear.
d. result in high inflation.
68. Which of the following best completes the sentence; “Under a gold standard a central bank …
“?
a. can have too much gold.
b. can have too little gold but never have too
much. c. wants to keep their gold reserves fixed.
d. will have gold reserves depleted when exports exceed imports.
69. Most economic historians believe that:
a. if more countries would have been on the gold standard the Great Depression would have been
averted.
b. the gold standard didn’t play a major role in the Great Depression.
c. the gold flows played a central role in spreading the Great Depression.
d. countries that held on to the gold standard recovered from the Great Depression the quickest.
70. Fixed exchange rate regimes include each of the following, except:
a. the Bretton Woods exchange rate system.
b. exchange rate pegs.
c. dollarization.
d. currency boards.
71. The Breton Woods System was an agreement that:
a. required each participating country to peg their currency to the U.S. dollar.
b. required each participating country to abolish all trade barriers.
c. required each participating country to stay on the gold standard.
d. standardized tariffs across all participating countries.
72. Under the Bretton Woods System each participating country had to:
a. be willing to exchange their own currency for gold.
b. hold ample reserves of currency of each of the participating countries.
c. stand ready to exchange its own currency for U.S. dollars at a fixed exchange rate.
d. adopt capital controls.
73. The Bretton Woods System failed in 1971 due to:
a. high rates of inflation in the U.S.
b. greater mobility of capital across international borders.
c. the desire on the part of participating countries to have an independent monetary policy.
d. all of the reasons given are correct.
74. The International Monetary Fund was created as a part of:
a. the United Nations.
b. the Bretton Woods System.
c. the European Monetary Union.
d. the Federal Reserve System.
75. The International Monetary Fund’s primary role under the Bretton Woods System was to be:
a. the issuer of gold.
b. the clearinghouse for international transactions.
c. a short-term lender for countries with an excess of imports over exports.
d. the arbiter of trade disputes.
76. China has used its current account surplus to:
a. buy stocks on the New York Stock Exchange.
b. buy German government and agency securities.
c. buy U.S. government and agency securities.
d. make loans to foreigners.
77. Only two exchange rate regimes can be considered hard pegs. These are:
a. currency boards and
dollarizati
on.
b. dollarization and managed floating.
c. flexible exchange rates and currency boards.
d. the gold standard and inflation targeting.
78. In Hong Kong, the monetary authority can only increase the monetary base if they
accumulate more U.S. dollars because:
a. the currency of Hong Kong is the U.S. dollar.
b. the monetary authority in Hong Kong operates a currency board where its sole objective is to
fix the exchange rate between its currency and the U.S. dollar.
c. the IMF required Hong Kong to peg its currency to the U.S. dollar in order to obtain a loan.
d. Hong Kong has received substantial funding from the U.S. Treasury and the loans were
conditional on maintaining the value of the Hong Kong currency.
79. When a country operates with a currency board, the central bank’s sole objective is to:
a. focus on domestic monetary policy.
b. maintain the domestic interest rate.
c. maintain the exchange rate.
d. maintain the target inflation rate.
80. In April 1991, Argentina adopted a currency board primarily to address the problem of:
a. slow growth.
b. high interest rates.
c. large trade surpluses.
d. triple-digit inflation.
81. The failure of the Argentinean currency board can be attributed to many factors, including
the:
a. failure right from the start to lower inflation.
b. pegging of the Argentine peso to the euro.
c. pegging of the Argentine peso to the U.S. dollar, even though the countries’ economies were
not that highly integrated.
d. prices of goods Argentine exported dropped significantly in the late 1990s hurting their
economy.
82. A lesson that policymakers should learn from the Argentinean experience with currency
boards is:
a. poor fiscal policies can undermine any monetary policy regime.
b. a flexible exchange rate is always preferred to a pegged exchange rate.
c. the only fixed exchange rate that works is the gold standard.
d. they never work.
83. A problem with currency boards is that the central bank loses:
a. control over the government budget.
b. a flexible exchange rate is always preferred to a pegged exchange rate.
c. influence over interest rates.
d. the ability to supervise banks.
84. Which of the following best defines dollarization?
a. A country uses the U.S. dollar as well as its currency for all transactions.
b. A country adopts a foreign currency for all transactions basically eliminating its own monetary
policy.
c. A country eliminates its own currency for international transactions and requires that all
international transactions be conducted in U.S. dollars.
d. The central bank of a country agrees to exchange its own currency for U.S. dollars at a fixed
exchange rate.
85. The benefits to a country from dollarization include each of the following, except:
a. a lower risk premium since inflationary finance is no longer a possibility.
b. greater and faster integration into world markets, increasing trade and investment.
c. no risk of an exchange rate crisis.
d. increased revenue from seignorage.
86. Dollarization is associated with each of the following, except:
a. slower integration into world markets.
b. adopting the monetary policy of the country whose currency is being used.
c. the central bank no longer has the ability to be the lender of last resort.
d. the loss of revenue from printing currency.
87. Monetary union, in comparison to dollarization, means that:
a. countries forgo revenues from seignorage.
b. countries share in monetary policy decisions.
c. the central bank no longer has the ability to be the lender of last resort.
d. all of the answers given are correct.
Short Answer Questions
88. While it is true that central banks of many countries intervene in the foreign exchange
market, why wouldn’t it be correct to say that central banks of these countries fix the exchange
rates?
89. Imagine the exchange rate between the British pound (£) and the U.S. dollar ($) is fixed at
$1.40/£ and capital flows freely between Great Britain and the U.S. Explain what the price of
shares of stock in XYZ Inc. would be selling for in London if they are $80 per share in the U.S.
and why.
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90. Consider the current peso/dollar exchange rate is 100 pesos per dollar and the current
inflation rate in Mexico and the U.S. is 3 percent in each country. Assuming purchasing power
parity, what will the exchange rate be if the inflation rate increases to 5 percent in Mexico and
falls to 2 percent in the U.S.?
91. Assuming the free flow of capital, explain why the central bank of a country that has
fixed its exchange rate would not find discussions of inflation on the agenda of its policy
meetings.
92. Capital flows freely between two countries and the countries have fixed exchange rates. The
treasury bonds of each country have similar maturities but different expected returns. What can
you deduce from this information?
93. If the exchange rate between the Canadian dollar and the American dollar was fixed at 1.30
Canadian dollars per U.S. dollar and investors perceived Canadian bonds to be equal in value
and risk to U.S. bonds, if the U.S. bonds are selling for $1,000 and have a 5 percent interest
rate, assuming capital flows freely between the two countries what will be the price and the
interest rate of the Canadian bonds?
94. Could a country be open to international capital flows, control its domestic interest rate and
fix its exchange rate? Explain.
95. What are the cost and benefits to a country instituting capital controls?
96. Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would
be the impact on the money supply in the U.S. if the euro started to decline in value and why?
97. Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would
be the impact on the interest rate in the U.S. if the euro started to appreciate in value and why?
98. Using demand and supply analysis, explain why the euro/dollar exchange rate rises (the
dollar appreciates) if the Fed intervenes in the foreign exchange market and sells euros.
99. Are foreign exchange market interventions the only tool available to a central bank to
change the exchange rate? Explain.
100. How would the impact on the exchange rate differ if the Fed were to sell U.S. Treasury
securities instead of selling an equal amount (in $ terms) of euros?
101. What should be the impact on the U.S. interest rates if the Fed undertakes a sterilized
foreign exchange intervention? Be sure to explain your answer.
102. What separates a sterilized foreign exchange market intervention from an unsterilized
intervention?
103. A sterilized intervention is actually a combination of two transactions. What are they and
what is the effect on the monetary base?
104. You are an American resident but have invested in a German bond (paying face value) that
matures in two years, pays a 5 percent interest rate and is denominated in euros. What
coul
d
ca
us
e
your rate of return to fall below 5 percent even though the bond pays off at maturity?
105. What are the risks to a country of fixing its exchange rate to that of another country?
106. Describe the automatic stabilizers that are lost to a country that fixes its exchange rate to
another currency.
107. What makes countries with fixed exchange rates prone to speculative attacks? Why don’t
the central banks of these countries stop these attacks?
108. How can irresponsible fiscal policy contribute to a speculative attack on a country‘s
currency that is fixed in value to another currency?
109. What are the general conditions under which a fixed exchange rate makes sense for a
country?
110. How did the gold standard contribute to the spreading of the Great Depression of the
1930s?
111. What were the reasons for selecting the U.S. dollar as the currency to which the other 43
countries agreed to peg their currencies as part of the Bretton Woods System?
112. What are the pros and cons of a currency board?
113. What are the main costs to a country that adopts dollarization?
114. Is the European Monetary Union a form of dollarization? Explain.
115. What is the relationship between a nation’s monetary and fiscal policy and its exchange
rate?
Essay Questions
116. If a country has a flexible exchange rate, will high rates of inflation, though generally
harmful, price this country‘s goods off world markets? Explain.
117. You live in a small country that suffers constantly from high and variable rates of inflation.
You are quite sure it has something to do with the fact that the head of the central bank is the
President’s brother. A rival presidential candidate is advocating fixing the exchange rate between
your country‘s currency and the dollar. What are the advantages to this proposal and how do you
think the current head of the central bank will respond?
118. Completely flexible exchange rates are fairly self-explanatory, and hard pegs include
dollarization and currency boards. These seem to be the extremes. Assuming free flow of
capital, why do you think soft pegs are never used?
119. What were the contributing factors that led to Argentina‘s initial adoption of a currency
board and then its subsequent failure?
120. Compare the monetary policy of the 50 states that make up the United States to the
exchange rate regime of dollarization.
