60.
_____ exchange rates were declared as acceptable in the Jamaica
agreement of IMF.
A.
Pegged
B.
Fixed
C.
Floating
D.
Gold standard
Floating rates were declared acceptable in the Jamaica agreement. IMF
members were also permitted to enter the foreign exchange market to even
out “unwarranted” speculative fluctuations.
61.
United States had large and growing trade deficit between 1980 and 1985.
Despite this, the value of U.S. dollar rose during this period. Which of the
following is a factor that caused this occurrence?
A.
United States attracted heavy inflows of capital from foreign investors
during this period.
B.
Banks in the United States offered low interest rates to investors during
this period.
C.
Markets across the world witnessed strong economies during this period.
D.
Developed countries in Europe maintained trade equilibrium and
supplied goods to underdeveloped countries.
A number of favorable factors overcame the unfavorable effect of a trade
deficit. Strong economic growth in the United States was one such factor. It
attracted heavy inflows of capital from foreign investors seeking high
returns on capital assets.
62.
Which of the following is the reason why the current foreign-exchange
system is sometimes thought of as a managed-float system?
A.
The exchange rates of a currency are determined by market forces.
B.
Governments intervene frequently in the foreign exchange market.
C.
Major currencies are allowed to freely float against each other.
D.
Countries use a reference currency to estimate the value of their
currencies.
High frequency of government intervention in the foreign exchange market
explains why the current system is sometimes thought of as a managed–
float system or a dirty-float system.
63.
Which of the following arguments is in favor of floating exchange rates?
A.
A country’s ability to expand or contract its money supply should be
limited by the need to maintain exchange rate parity.
B.
Maintaining balance of trade equilibrium is not in the best interest of a
country.
C.
Countries can isolate themselves from uncertainties when they trade
using a mutually agreed on exchange rate.
D.
Governments can restore monetary control by removing the obligation to
maintain exchange rate parity.
Advocates of a floating exchange rate regime argue that removal of the
obligation to maintain exchange rate parity would restore monetary control
to a government. If a government faced with unemployment wanted to
increase its money supply to stimulate domestic demand and reduce
unemployment, it could do so unencumbered by the need to maintain its
exchange rate.
64.
The monetary autonomy argument holds that _____.
A.
each country should be allowed to choose its own inflation rate
B.
inflation is beneficial to a country’s economy and growth
C.
inflation is detrimental to a country’s economy and growth
D.
countries should restrict inflation based on the global standards
Advocates of floating rates argue that each country should be allowed to
choose its own inflation rate. This is called the monetary autonomy
argument.
65.
Which of the following arguments is against the use of fixed exchange
rates?
A.
Monetary discipline is the most important determinant of a strong
economy.
B.
Each country has the freedom to choose its own inflation rate.
C.
Market speculation can cause fluctuations in exchange rates.
D.
Governments are likely to expand the monetary supply far too rapidly due
to political pressures.
Advocates of floating rates argue that each country should be allowed to
choose its own inflation rate. This is called the monetary autonomy
argument.
66.
Which of the following arguments strengthen the idea of floating exchange
rates?
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.
The supporters of floating exchange rates argue that floating rates can
correct trade deficit by making its exports cheaper and its imports more
expensive. They argue that exchange rate depreciation should correct the
trade deficit.
67.
Those in favor of floating exchange rate claim that _____.
A.
uncertainty in monetary markets dampens the growth of international
trade
B.
inflation is beneficial to a country if it is controlled closely
C.
trade imbalances can be adjusted by using floating exchange rates
D.
governments can have rigid control over monetary markets by using
floating rates
Those in favor of floating exchange rates argue that floating rates help
adjust trade imbalances.
68.
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
Governments around the world pursue a number of different exchange rate
policies. One such policy is a pure “free float” where the exchange rate is
determined by market forces.
69.
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
In a managed float system governments intervene in only a limited way.
About 26 percent of IMF’s members use this system.
70.
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
Under a pegged exchange rate regime, a country will attach the value of its
currency to that of a major currency so that, for example, as the U.S. dollar
rises in value, its own currency rises too.
71.
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.
Under a pegged exchange rate regime, a country will peg the value of its
currency to that of a major currency. Pegged exchange rates are popular
among many of the world’s smaller nations.
72.
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
A country that introduces a currency board commits itself to converting its
domestic currency on demand into another currency at a fixed exchange
rate. To make this commitment credible, the currency board holds reserves
of foreign currency equal at the fixed exchange rate to at least 100 percent
of the domestic currency issued.
73.
Under a currency board system, _____.
A.
inflation rates are maintained at high level
B.
countries issue domestic notes at will
C.
interest rates remain constant
D.
government lacks the ability to set interest rates
Under a currency board system, government lacks the ability to set interest
rates. Interest rates in Hong Kong, for example, are effectively set by the
U.S. Federal Reserve.
74.
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
A currency crisis occurs when a speculative attack on the exchange value of
a currency results in a sharp depreciation in the value of the currency or
forces authorities to expend large volumes of international currency
reserves and sharply increase interest rates to defend the prevailing
exchange rate.
75.
Moral hazard arises when people behave recklessly because _____.
A.
of the restrictions that exist in a country’s monetary policy
B.
of the restrictions that 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
Moral hazard arises when people behave recklessly because they know they
will be saved if things go wrong.
76.
Which of the following is a common criticism against IMF?
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.
One criticism of the IMF is that it has become too powerful for an institution
77.
Which of the following observations is true of the current system of 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.
The current system of foreign exchange is a mixed system in which a
combination of government intervention and speculative activity can drive
the foreign exchange market.
78.
Which of the following will help a company hedge against currency
fluctuations?
A.
Finding a large supplier to supply all the raw materials
B.
In-house manufacturing of raw materials
C.
Basing business in a single country
D.
Dispersing production to different geographic locations
Maintaining strategic flexibility can take the form of dispersing production
to different locations around the globe as a real hedge against currency
fluctuations.
79.
Contracting out manufacturing allows companies to reduce economic
exposure because _____.
A.
having multiple suppliers attracts 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
One way of building strategic flexibility and reducing economic exposure
involves contracting out manufacturing. This allows a company to shift
suppliers from country to country in response to changes in relative costs
brought about by exchange rate movements.