Fundamentals of Multinational Finance, 5e (Moffett et al.)
Chapter 2 The International Monetary System
Multiple Choice and True/False Questions
2.1 History of the International Monetary System
1) Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of
gold cost $20.67 in U.S. dollars and £4.2474 in British pounds. Therefore, the exchange rate of
pounds per dollar under this fixed exchange regime was
A) £4.8665/$.
B) £0.2055/$.
C) always changing because the price of gold was always changing.
D) unknown because there is not enough information to answer this question.
2) World War I caused the suspension of the gold standard for fixed international exchange rates
because the war
A) cost too much money.
B) interrupted the free movement of gold.
C) lasted too long.
D) used gold as the main ingredient in armament plating.
3) The post WWII international monetary agreement that was developed in 1944 is known as the
A) United Nations.
B) League of Nations.
C) Yalta Agreement.
D) Bretton Woods Agreement.
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4) Another name for the International Bank for Reconstruction and Development is
A) the Recon Bank.
B) the European Monetary System.
C) the Marshall Plan.
D) the World Bank.
5) The International Monetary Fund (IMF)
A) in recent years has provided large loans to Russia, South Korea, and Brazil.
B) was created as a result of the Bretton Woods Agreement.
C) aids countries with balance of payment and exchange rate problems.
D) is all of the above.
6) A special Drawing Right is a unit of account established by
A) the Federal Reserve Bank.
B) the World Bank.
C) the International Monetary Fund.
D) the European Central Bank.
7) Special Drawing Right or SDR is
A) global reserve asset created by IMF to replace the national currencies.
B) international reserve asset created by IMF to supplement existing foreign exchange reserves.
C) weighted average of four major currencies plus the currencies of the BRICs countries.
D) none of the above
8) Under the terms of Bretton Woods countries tried to maintain the value of their currencies to
within 1% of a hybrid security made up of the U.S. dollar, British pound, and Japanese yen.
9) Members of the International Monetary Fund may settle transactions among themselves by
transferring Special Drawing Rights (SDRs).
10) Today, the United States has been ejected from the International Monetary Fund for refusal
to pay annual dues.
11) Which of the following led to the eventual demise of the fixed currency exchange rate
regime worked out at Bretton Woods?
A) widely divergent national monetary and fiscal policies among member nations
B) differential rates of inflation across member nations
C) several unexpected economic shocks to member nations
D) all of the above
12) If exchange rates were fixed, investors and traders would be relatively certain about the
current and near future exchange value of each currency.
13) An international gold standard for currency exchanges has the implicit effect of
A) making currencies float relative to the price of gold.
B) limiting the growth of a country’s money supply subject to the ability of the official
authorities to obtain more gold.
C) melting the polar ice caps.
D) encouraging the United Kingdom to abandon the Pound Sterling in favor of the Euro.
14) In 1934 the United States ________ the USD from ________.
A) devalued; $20.67/oz to $35.00/oz of gold
B) devalued; $35.00/oz to $20.67/oz of gold
C) revalued; $20.67/oz to $35.00/oz of gold
D) revalued; $35.00/oz to $20.67/oz of gold
15) Which of the following is NOT a characteristic of the Bretton Woods Agreement?
A) Member nations would enjoy a fixed exchange rate with an “adjustable peg.”
B) The International Monetary Fund would be formed.
C) The World Bank would be formed.
D) All of the above are characteristics of the Bretton Woods Agreement.
16) Jordan is planning to take a vacation trip to Mexico following her graduation from college.
Her parents are giving her a $500 graduation present. If the current exchange rate is Ps11.637/$
how many pesos will Jordan have to enjoy her vacation?
A) $500
B) Ps4,296.64
C) Ps5,818.50
D) $429.66
17) American college students on the USA-Canadian border have discovered they can buy
Canadian beer for less money than what they pay in the states. Recently Jerry paid C$5.50 for a
six-pack of beer while he was in Canada while his roommate, Ben, paid $5.75 for a six-pack of
the same beer in the states. If the current exchange rate is $1.0335/C$, who paid less and why?
A) Jerry paid less because his purchase cost 5.68 in USD.
B) Jerry paid less because his purchase cost 5.32 in USD.
C) Ben paid less because his purchase cost C$5.26.
D) Ben and Jerry actually paid the same amount for their beer. Markets are efficient!
2.2 IMF Classification of Currency Regimes
1) The IMFs exchange rate regime classification identifies ________ as the most rigidly fixed,
and ________ as the least fixed.
A) exchange arrangements with no separate legal tender; independent floating
B) crawling pegs; managed float
C) currency board arrangements; independent floating
D) pegged exchange rates within horizontal bands; exchange rates within crawling pegs
2) Which of the following correctly identifies exchange rate regimes from less fixed to more
fixed?
A) independent floating, currency board arrangement, crawling pegs
B) independent floating, currency board arrangement, managed float
C) independent floating, crawling pegs, exchange arrangements with no separate legal tender
D) exchange arrangements with no separate legal tender, currency board arrangement, crawling
pegs
3) A small economy country whose GDP is heavily dependent on trade with the United States
could use a (an) ________ exchange rate regime to minimize the risk to their economy that could
arise due to unfavorable changes in the exchange rate.
A) pegged exchange rate with the United States
B) pegged exchange rate with the Euro
C) independent floating
D) managed float
4) Under a fixed exchange rate regime, the government of the country is officially responsible
for
A) intervention in the foreign exchange markets using gold and reserves.
B) setting the fixed/parity exchange rate.
C) maintaining the fixed/parity exchange rate.
D) all of the above.
5) The United States currently uses a ________ exchange rate regime.
A) crawling peg
B) pegged
C) floating
D) fixed
6) Based on the premise that, other things equal, countries would prefer a fixed exchange rate:
Variable rates provide stability in international prices for the conduct of trade.
7) Based on the premise that, other things equal, countries would prefer a fixed exchange rate,
which of the following statements is NOT true?
A) Fixed rates provide stability in international prices for the conduct of trade.
B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of
international reserves for use in the occasional defense of the fixed rate.
C) Fixed rates are inherently inflationary in that they require the country to follow loose
monetary and fiscal policies.
D) Stable prices aid in the growth of international trade and lessen exchange rate risks for
businesses.
8) Which of the following is NOT an attribute of the “ideal” currency?
A) monetary independence
B) full financial integration
C) exchange rate stability
D) All are attributes of an ideal currency.
9) If exchange rates were fixed, investors and traders would be relatively certain about the
current and near future exchange value of each currency.
10) In London an investor can buy a U.S. dollar for £0.6102. In New York the £/$ exchange rate
is the same as found in London. Given this information, what is the $/£ exchange rate in New
York?
A) $1.6388/£
B) £0.6102/$
C) £1.6388/$
D) $0.6102/£
11) What was the annualized forward premium on the pound if the spot rate on May 6, 2011 was
£0.6102/$ and the 180 day forward rate was £0.5836/$?
A) 8.72%
B) 9.12%
C) 4.56%
D) 18.23%
12) The euro is a somewhat unique currency in that it is a floating currency within the member
nations but it is rigidly fixed relative to other international currencies.
2.3 Fixed versus Flexible Exchange Rates
1) The global recession of 2009/2010 saw the major global economic players (USA, China, and
Europe) each choose the same international currency goals from the “impossible trinity”.
Meaning each felt an independent monetary policy was the most important goal followed by free
movement of capital, and third, a policy of free floating currencies.
2) Based on the premise that, other things equal, countries would prefer a fixed exchange rate,
which of the following statements is NOT true?
A) Fixed rates provide stability in international prices for the conduct of trade.
B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of
international reserves for use in the occasional defense of the fixed rate.
C) Fixed rates are inherently inflationary in that they require the country to follow loose
monetary and fiscal policies.
D) Stable prices aid in the growth of international trade and lessen exchange rate risks for
businesses.
3) Almost every nation today (over 90%) has a floating or perhaps a managed floating currency
for the purposes of international currency exchange.
4) The authors discuss the concept of the “Impossible Trinity” or the inability to achieve
simultaneously the goals of exchange rate stability, full financial integration, and monetary
independence. If a country chooses to have a pure float exchange rate regime, which two of the
three goals is a country most able to achieve?
A) monetary independence and exchange rate stability
B) exchange rate stability and full financial integration
C) full financial integration and monetary independence
D) A country cannot attain any of the exchange rate goals with a pure float exchange rate regime.
2.4 A Single Currency for Europe: The Euro
1) The Euro currency is fixed against other currencies on the international currency exchange
markets, but allows member country currencies to float against each other.
2) The use of EURO is obligatory to member countries of the European Union.
3) European Central Bank (ECB) is
A) an independent central bank controlling the deficit levels of EU member countries.
B) an institution in charge of financial market intervention and issuance of the EURO.
C) does not have a mandate to promote price stability in the European Union.
D) part of the US Federal Reserve System.
4) Which of the following is NOT a required convergence criteria to become a full member of
the European Economic and Monetary Union (EMU)?
A) National birthrates must be at 2.0 or lower per person.
B) The fiscal deficit should be no more than 3% of GDP.
C) Nominal inflation should be no more than 1.5% above the average inflation rate for the three
members with the lowest inflation rates in the previous year.
D) Government debt should be no more than 60% of GDP.
5) Which of the following groups of countries have replaced their individual currencies with the
Euro?
A) France, Germany, and the United Kingdom
B) Sweden, Denmark, and Greece
C) The United Kingdom, The Netherlands, and Austria
D) Germany, The Netherlands, and Italy
6) According to the authors, what is the single most important mandate of the European Central
Bank?
A) Promote international trade for countries within the European Union.
B) Price, in euros, all products for sale in the European Union.
C) Promote price stability within the European Union.
D) Establish an EMU trade surplus with the United States.
7) Which of the following is a way in which the euro affects markets?
A) Countries within the Euro zone enjoy cheaper transaction costs.
B) Currency risks and costs related to exchange rate uncertainty are reduced.
C) Consumers and business enjoy price transparency and increased price-based competition.
D) All of the above.
8) The 1991 treaty that established a timetable to replace individual European currencies with the
euro is referred to as the ________ Treaty.
A) Zurich
B) Yalta
C) Maastricht
D) Paris
9) Because there is now a European Central Bank (ECB), the members of the European
Monetary Union have done away with their individual central banks.
10) Since the launch of the euro in January of 1999, one nation has joined the original 11
members and three nations have dropped the euro as their official currency.
11) The euro was launched in January 1999 with an official initial value against the dollar of
$1.16/€. As of January 2011 the currency exchange rate was $1.40/€. Thus, over this time period
the euro has ________ against the dollar by a total of ________.
A) appreciated; 82.86%
B) appreciated; 20.69%
C) depreciated; 82.86%
D) depreciated; 20.69%
12) Since adopting the euro, all member nations have realized a significant reduction in
unemployment rates.
2.5 Emerging Markets and Regime Choices
1) Beginning in 1991 Argentina conducted its monetary policy through a currency board. In
January 2002, Argentina abandoned the currency board and allowed its currency to float against
other currencies. The country took this step because
A) the Argentine peso had grown too strong against major trading powers thus the currency
board policies were hurting the domestic economy.
B) the United States required the action as a prerequisite to finalizing a free trade zone with all of
North, South, and Central America.
C) the Argentine government lost the ability to maintain the pegged relationship as in fact
investors and traders perceived a lack of equality between the Argentine peso and the U.S. dollar.
D) all of the above.
2) In January 2002, the Argentine peso was officially valued at a rate of Peso 1.40/USD. More
recently the exchange rate is Peso 3.10/USD, thus, the Argentine peso ________ against the U.S.
dollar.
A) strengthened
B) weakened
C) remained neutral
D) all of the above
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3) On September 9, 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre,
with the U.S. dollar. This practice is known as
A) bi-currencyism.
B) sucrerization.
C) a Yankee bailout.
D) dollarization.
4) You have been hired as a consultant to the central bank for a country that has for many years
suffered from repeated currency crises and depends heavily on the U.S. financial and product
markets. Which of the following policies would have the greatest effectiveness for reducing
currency volatility of the client country with the United States?
A) dollarization
B) an exchange rate pegged to the U.S. dollar
C) an exchange rate with a fixed price per ounce of gold
D) an internationally floating exchange rate
5) A bank holiday
A) occurs every day after 3:00 p.m.
B) is a term used when a country’s central government freezes (temporarily) all deposits in
commercial banks.
C) is observed in Europe every fourth Friday.
D) occurs the last three working days of the year to prepare financial statements for tax purposes.
6) Which of the following is NOT an argument against dollarization?
A) The dollarized country’s central bank can no longer act as a lender of last resort.
B) The dollarized country can no longer profit from seignorage (the ability to profit from the
creation of money within its economy).
C) The dollarized country losses sovereignty over its own monetary policy.
D) All of the above are arguments against dollarization from the viewpoint of the affected
country.
7) Emerging Market Country must
A) implement fixed currency regime to substitute the ineffectiveness of its institutions to control
the money supply.
B) implement free-floating currency regime to qualify for IMF’s loan.
C) develop institutions and regulations enabling predicable and sustainable monetary policy
regardless of the currency regime.
D) maintain political influence over its monetary institutions to preserve its national interest.
2.6 Globalizing the Chinese Renminbi
1) Which argument is true about Chinese Renminbi?
A) is preferred currency for international trade accounting for over 50% of all foreign trade
settlements
B) is traded under fixed regime on China Onshore Market, but floating on its Hong Kong
Offshore Market
C) is traded at the moment under managed float within +/- 1% against the US dollar parity rate
set by People’s Bank of China
D) has been constantly depreciating against the US dollar over the last 20 years
2) According to the authors, one of the concerns for Peoples Republic of China driving
restrictions on its capital flows is that
A) RMB can appreciate to an extent of eroding PRC’s export competitiveness.
B) PRC can face rapid capital flight of Chinese Savings in search of high yielding returns.
C) growing unease over the ability of the US dollar and the Euro to maintain value over time.
D) All of the above
2.7 Exchange Rate Regimes: What Lies Ahead?
1) All exchange rate regimes must deal with the trade-off between rules and discretion.
2) All exchange rate regimes must deal with the trade-off between cooperation and
independence.
3) The authors state that the current international monetary system is characterized by strict rules
and high degrees of cooperation.
Essay Questions
2.1 History of the International Monetary System
1) Most Western nations were on the gold standard for currency exchange rates from 1876 until
1914. Today we have several different exchange rate regimes in use, but most larger economy
nations have freely floating exchange rates today and are not obligated to convert their currency
into a predetermined amount of gold on demand. Occasionally several parties still call for the
“good old days” and a return to the gold standard. Develop an argument as to why this is a good
idea.
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2.2 IMF Classification of Currency Regimes
1) List and explain the three attributes of the “ideal”currency. Why are these referred to as “the
impossible trinity”?
2.3 Fixed versus Flexible Exchange Rates
1) There are no questions in this section.
2.4 A Single Currency for Europe: The Euro
1) On January 4, 1999 the member nations of the EMU introduced a new unified currency, the
euro, to replace the individual national currencies of many member nations. Identify and explain
several of the arguments made both for and against the euro. Do you think the euro has proven to
be a “good” idea? Why/Why not?
2.5 Emerging Markets and Regime Choices
1) The mobility of international capital flows is causing emerging market nations to choose
between a free-floating currency exchange regime and a currency board (or taken to the limit,
dollarization). Describe how each of the regimes would work and identify at least two likely
economic results for each regime.
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2.6 Globalizing the Chinese Renminbi
1) There are no questions in this section.
2.7 Exchange Rate Regimes: What Lies Ahead?
1) There are no questions in this section.