1. The international monetary system refers to a system to regulate fixed exchange rates
before the introduction of the euro.
2. When the foreign exchange market determines the relative value of a currency, we say
that the country is adhering to a pegged exchange rate regime.
3. A pegged exchange rate means the value of the currency is fixed relative to a reference
currency, and then the exchange rate between that currency and other currencies is determined
by the reference currency exchange rate.
4. In a fixed exchange rate system, the central bank of a country will intervene in the foreign
exchange market to try to maintain the value of its currency if it depreciates too rapidly against
an important reference currency.
5. As the volume of international trade expanded in the wake of the Industrial Revolution,
shipping large quantities of gold around the world to finance international trade became
impractical.
6. Given a common gold standard, the value of any currency in units of any other currency
(the exchange rate) was easy to determine.
7. A country is said to be in balance-of-trade equilibrium when the income its residents earn
from exports is greater than the money its residents pay to other countries for imports.
8. Under the gold standard, a country in balance–of-trade equilibrium will experience a net
flow of gold from other countries.
9. If more dollars are needed to buy an ounce of gold than before, the implication is that the
dollar is worth more.
10. The major problem with the gold standard was that no multinational institution could stop
countries from engaging in competitive devaluations.
11. According to the Bretton Woods agreement, if a currency became too weak to defend, a
devaluation of up to 10 percent would be allowed without any formal approval by the
International Monetary Fund.
12. The architects of the Bretton Woods agreement wanted to avoid high unemployment, so
they built the fixed exchange rate system to be highly inflexible.
13. When the Bretton Woods participants established the World Bank, the need to lend
money to third world nations was foremost in their minds.
14. Under the International Bank for Reconstruction and Development scheme, the World
Bank offers low-interest loans to risky customers whose credit rating is often poor.
15. As the only currency that could be converted into gold, the British pound occupied a
central place in the fixed exchange rate system.
16. Under the fixed exchange rate system, the dollar could be devalued only if all countries
agreed to simultaneously revalue against the dollar.
17. The Bretton Woods system could work only as long as the U.S. inflation rate remained
low and the United States did not run a balance–of-payments deficit.
18. Since March 1973, currency exchange rates have become less volatile and more
predictable than they were between 1945 and 1973.
19. Under a floating exchange rate regime, market forces have produced a volatile dollar
exchange rate.
20. Under a floating exchange rate system, a country’s ability to expand or contract its money
supply as it sees fit is limited by the need to maintain exchange rate parity.
21. Under the Bretton Woods system, if a country developed a permanent deficit in its
balance of trade, it would require the International Monetary Fund to agree to a currency
devaluation.
22. Under a pegged exchange rate regime, a country will peg the value of its currency to that
of a major currency, so that if the reference currency rises in value, its own currency rises too.
23. The disadvantage of a pegged exchange rate regime is that it aggravates inflationary
pressures in a country.
24. It can be very difficult for a small country to maintain a peg against another currency if
capital is flowing out of the country and foreign exchange traders are speculating against the
currency.
25. A country that introduces a currency board commits itself to converting its domestic
currency on demand into another currency at a fixed exchange rate.
26. Under a currency board system, the government has the absolute authority to set interest
rates.
27. The activities of the International Monetary Fund have declined after the collapse of the
Bretton Woods system in 1973.
28. At times, elements of currency, banking, and debt crises may be present simultaneously
in a region.
29. All International Monetary Fund loan packages come with conditions attached.
30. A benefit of the International Monetary Fund is that it does not have a mechanism for
accountability.
31. The International Monetary Fund can force countries to adopt the policies required to
correct economic mismanagement.
32. Some economists argue that higher inflation rates might be good if the consequence is
greater growth in aggregate demand.
33. The forward exchange market is an accurate predictor of future exchange rates.
34. In the face of unpredictable exchange rate movements, a firm should pursue strategies
that reduce its economic exposure.
35. Contracting out manufacturing may be more appropriate for high-value-added
manufacturing.
36. Which of the following refers to the institutional arrangements that govern exchange
rates?
37. _____ refers to a system under which the exchange rate for converting one currency into
another is continuously adjusted depending on the laws of supply and demand.