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A) External agencies should not interfere in the monetary policies of a country.
B) Trade deficits can be corrected through changes in exchange rates.
C) Changes in exchange rates will not impact the trade balance in a country.
D) Governments should act in ways to minimize the uncertainty in monetary markets.
55) Which of the following is an exchange rate policy where the exchange rate is determined
completely by market forces?
A) managed float
B) fixed peg
C) free float
D) currency board
56) Which of the following is the exchange rate policy where the government intervenes in
the exchange rate system only in a limited way?
A) managed-float
B) fixed peg
C) free-float
D) currency board
57) Under a _____ exchange rate regime, a country will attach the value of its currency to
that of a major currency.
A) managed-float
B) pegged
C) free-float
D) currency board
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58) Which of the following statements is true of pegged exchange rates?
A) A pegged exchange rate allows a country’s currency to be determined by market
forces.
B) A pegged exchange rate weakens the monetary discipline of a country.
C) Pegged exchange rates are popular among many of the world’s smaller nations.
D) Adopting a pegged exchange rate regime increases inflationary pressures in a
country.
59) A country that introduces a currency board commits itself to converting its domestic
currency on demand into
A) another currency at a fixed exchange rate.
B) gold or silver at a fixed exchange rate.
C) gold or silver at a floating exchange rate.
D) another currency at a floating exchange rate.
60) Under a currency board system
A) inflation rates are maintained at a high level.
B) countries issue domestic notes at will.
C) interest rates remain constant.
D) the government lacks the ability to set interest rates.
61) Exchange rates are _____ under a pure “free float” system.
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A) completely balanced
B) determined by market forces
C) wildly variable and unpredictable
D) determined by the government
62) The great virtue claimed for a _____ is that it imposes monetary discipline on a country
and leads to low inflation.
A) fixed exchange rate
B) managed-float system
C) pegged exchange rate
D) floating exchange rate
63) _____ limits the ability of the government to print money and, thereby, create
inflationary pressures.
A) A dirty-float system
B) A managed-float system
C) The European Monetary System
D) A currency board system
64) Currencies of countries with currency boards will become uncompetitive and overvalued
if
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A) local inflation rates remain higher than the inflation rate in the country to which the
currency is pegged.
B) the country to which the currency is pegged experiences a trade deficit.
C) local inflation rates are lower than the inflation rate in the country to which the
currency is pegged.
D) the country to which the currency is pegged experiences a trade surplus.
65) The International Monetary Fund has been criticized for exacerbating moral hazard
A) with its rescue programs.
B) by increasing the probability of debt default.
C) making loans to countries that are trying to reduce national debt by “playing the
market.”
D) by refusing to bail out banks that made loans to overleveraged Asian companies
during the 1990s.
66) A currency crisis occurs due to
A) the loss of confidence in a country’s banking system.
B) heavy foreign debt obligations.
C) high levels of trade deficit.
D) a speculative attack on the exchange value.
67) Moral hazard arises when people behave recklessly because
A) of the restrictions that exist in a country’s monetary policy.
B) of the restrictions the IMF has imposed on them.
C) they know they will be saved if things go wrong.
D) they face financial difficulties arising out of external factors.
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68) Which of the following is a common criticism against the powerful International
Monetary Fund?
A) IMF lacks any real mechanism for accountability.
B) It is hesitant to help banks when they are in crisis.
C) IMF has not intervened to resolve the Asian crisis.
D) It did not try to resolve the Mexican currency crisis.
69) A _____ is a situation in which a country cannot service its foreign debt obligations.
A) currency crisis
B) banking crisis
C) foreign debt crisis
D) moral crisis
70) Loans issued by the IMF
A) are conditional loans.
B) are unconditional loans.
C) include a macroeconomic policy that calls for lower interest rates.
D) include a macroeconomic policy that calls for increases in public spending to
improve infrastructure in a country.
71) The Asian economic crisis and the global financial crisis of 2008–2009 were caused by
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A) high inflation rates.
B) excessive debt.
C) low inflation rates.
D) a huge trade surplus.
72) Which of the following is a common underlying cause of financial crises?
A) a narrowing current account deficit
B) excessive expansion of domestic borrowing
C) low relative price inflation rates
D) asset price deflation
73) A _____ crisis refers to a loss of confidence in the banking system that leads to a run on
banks as individuals and companies withdraw their deposits.
A) currency
B) banking
C) foreign debt
D) domestic debt
74) Which of the following observations is true of the current system of the foreign exchange
market?
A) Most of the currencies can be converted to gold in the current system of foreign
exchange.
B) The current system is driven by fixed exchange rates.
C) Currencies float freely against others in the current system.
D) The current system is a combination of government intervention and speculative
activity.
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75) Which of the following will help a company hedge against currency fluctuations?
A) finding a large supplier to supply all the raw materials
B) manufacturing raw materials in-house
C) basing business in a single country
D) dispersing production to different geographic locations
76) Contracting out manufacturing allows companies to reduce economic exposure because
A) multiple suppliers attract subsidies from government.
B) it reduces the pressure on them to maintain a trade surplus.
C) it allows companies to shift suppliers from country to country.
D) quality issues are insignificant when manufacturing is contracted to others.
77) Increasingly the _____ has been acting as macroeconomic police of the world economy,
insisting that countries seeking significant borrowings adopt certain macroeconomic policies.
A) Economic and Social Council (ECOSOC)
B) International Monetary Fund (IMF)
C) United Nations (UN)
D) World Bank
78) Countries that require substantial loans from the International Monetary Fund to survive
will probably _____ due to IMF-mandated economic policies.
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A) benefit from a sharp expansion of demand in the long term
B) endure a sharp contraction of demand in the long term
C) benefit from a sharp expansion of demand in the short term
D) endure a sharp contraction of demand in the short term
79) In the face of unpredictable movements in exchange rates, businesses should
A) pursue strategies that will reduce their economic exposure.
B) pursue strategies that will decrease their strategic flexibility.
C) pursue strategies that will reduce their foreign market exposure.
D) sell off investments in foreign subsidiaries and consolidate domestic facilities.
80) It is difficult if not impossible to get adequate insurance coverage for exchange rate
changes that
A) will occur in the next few weeks.
B) might occur in the next few months.
C) might occur several years in the future.
D) might occur in the coming days.
81) One aspect of the international monetary system is the institutional arrangements that can
govern or set exchange rates.
⊚ true
⊚ false
82) The gold standard called for fixed exchange rates against the U.S. dollar.
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⊚ true
⊚ false
83) The fixed exchange rate system established at Bretton Woods failed due to speculative
pressures on the U.S. dollar.
⊚ true
⊚ false
84) Gold was declared as the formal reserve asset in the Jamaica agreement of 1976.
⊚ true
⊚ false
85) Market forces have produced a stable dollar exchange rate under a floating exchange rate
regime.
⊚ true
⊚ false
86) The agreement reached at Bretton Woods established the International Monetary Fund
(IMF) and the World Bank.
⊚ true
⊚ false
87) After the agreement reached at Bretton Wood, the dollar was the only currency that could
be convertible into gold.
⊚ true
⊚ false
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88) Implementing a fixed exchange rate regime increases the price inflation in countries.
⊚ true
⊚ false
89) The World Bank offers low-interest loans to risky customers whose credit rating is often
poor.
⊚ true
⊚ false
90) Fixed exchange rates lead to speculation and uncertainty in the value of currencies.
⊚ true
⊚ false
91) Adopting a pegged exchange rate regime increases the inflationary pressures in a country.
⊚ true
⊚ false
92) A country that introduces a currency board commits itself to converting its domestic
currency on demand into another currency at a fixed exchange rate.
⊚ true
⊚ false
93) Interest rates adjust automatically under a strict currency board system.
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⊚ true
⊚ false
94) The International Monetary Fund’s original function was to provide a pool of money
from which members could borrow in the short term.
⊚ true
⊚ false
95) The IMF does not expect governments to meet any obligations except to pay back the
money it borrows.
⊚ true
⊚ false
96) In 2002, the IMF stepped in to help stabilize the value of the Brazilian currency on
foreign exchange markets by lending it foreign currency. This constitutes a foreign debt crisis.
⊚ true
⊚ false
97) The definition of moral hazard is when people behave recklessly without regard for the
consequences.
⊚ true
⊚ false
98) The current system of foreign exchange is a mixed system of government intervention
and speculative activity.
⊚ true
⊚ false
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99) Firms cannot utilize the forward exchange market when they are faced with uncertainty
about the future value of currencies.
⊚ true
⊚ false
100) An effective business strategy to reduce economic exposure is to contract out high-value-
added manufacturing.
⊚ true
⊚ false
Answer Key
Test name: chapter 11
