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Module 08 The International Monetary System and Financial Forces
Answer Key
True / False Questions
1.
Sir Isaac Newton established the price of gold in 1717 and de facto put England on the
gold standard.
2.
The complexity of the gold standard was a part of its appeal.
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3.
The Bretton Woods meeting in 1944 established a floating rate exchange system among
Allied governments that was imposed on the Axis governments.
4.
The Bretton Woods system led to minimal growth in international trade but helped to
reduce inflation levels.
5.
As a result of Bretton Woods and the resulting dollar's use as a proxy for gold, the U.S. ran
up a balance of payments deficit of around $56 billion, which led to the U.S. going off the
gold exchange standard in 1971.
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6.
De Gaulle pushed Nixon to close the gold window at Treasury, and this one action moved
the International Monetary Fund (IMF) immediately to establish a floating exchange rate
system.
7.
One possible current currency arrangement is a fixed peg, where the exchange rate of a
currency is allowed to move (within a narrow band) with another currency. One example is
the Canadian dollar to the U.S. dollar.
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8.
Global foreign currency exchanges transactions total over $3.2 trillion daily.
9.
The Bank for International Settlements (BIS) operates as the banker for central banks.
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10.
The controlling mechanism for a gold-based exchange system and a floating rate system
are the same.
11.
A central reserve asset is any holding that has value that is held by private banks in case
of a liquidity crisis.
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12.
If freely floating currencies are allowed to fluctuate against one another, at times the
fluctuations might be quite large.
13.
The exchange rate for today for delivery within two days is known as the current rate.
14.
Currency exchange rate movements are well understood by economists and can be
accurately forecast, which eliminates risk for the international seller operating with
exposure outside the home currency.
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15.
The law of one price states that in an efficient market, like products will never have like
prices.
16.
The Fisher effect describes interest rate parity; it's the law of one price applied to interest
rates. Interest rates vary to take anticipated differences in inflation levels into account.
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17.
The international Fisher effect states that the interest rate differentials for any two
currencies reflect the expected change in their exchange rates.
18.
The Big Mac Index is an example of purchasing power parity (PPP), an international
measure of junk food consumption.
19.
Exchange rate forecasting is an advanced science; with the correct data, we can predict
with accuracy exchange rate movements.
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20.
Countries put limitations on the convertibility of their currencies when they are concerned
that their foreign reserves could be depleted.
21.
The value-added tax (VAT) can be rebated to exporters, according to World Trade
Organization (WTO) rules.
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22.
Developed economies tend to be lower corporate tax locations.
23.
Inflated currencies tend to weaken.
24.
As global financial markets become more integrated, we can expect countries' inflation
rates to vary over a small range.
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25.
The balance of payments (BOPs) is a record of a country's transactions with only its major
trading partners.
26.
When a country imports more than it exports, the currency might be expected to weaken.
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27.
BOP accounts are recorded in a double-entry bookkeeping method, with each transaction
having a debit and credit side.
28.
In BOP accounting, a deficit in the current account is always accompanied by a surplus in
the capital account.
29.
The U.S. in recent years has had a significant deficit in its current account. This means
that the U.S. citizens are exporting more than they are importing.
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30.
When a business pays in dollars for an import from Turkey, the dollars that leave the U.S.
will eventually show up as a credit on the U.S. capital account.
Multiple Choice Questions
31.
Historically, gold has been used as a way for people to store value because of its
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32.
Sir Isaac Newton put England on the gold standard when he
33.
Bretton Woods led to an exchange rate agreement known as the Bretton Woods System
or
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34.
The present floating exchange rate system was
35.
Financial forces such as inflation and taxation are considered uncontrollable because
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36.
The present floating exchange rate system is not a totally free float because
37.
The forward currency market
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38.
If the Japanese yen is strengthening against the U.S. dollar, and the Japanese government
wanted to boost exports, the Central Bank of Japan (CBJ) might well
39.
Market forces that set the relative prices of currencies are
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40.
Arbitrage functions to
41.
When the law of one price is applied to interest rates, it suggests that
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42.
The international Fisher effect says that the interest rate differentials in any two
currencies reflect
43.
Purchasing power parity is a way to compare
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44.
Exchange rate forecasting is
45.
The three main approaches to exchange rate forecasting are
