40.
Firms should not utilize the forward exchange market when they are faced
with uncertainty about the future value of currencies.
FALSE
Faced with uncertainty about the future value of currencies, firms can
utilize the forward exchange market.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-06 Explain the implications of the global monetary system for currency management and business
strategy.
Topic: Implications for Managers
Multiple Choice Questions
41.
The international monetary system refers to the institutional arrangements
that govern _____.
A.
microeconomic parameters
B.
exchange rates
C.
gross domestic produce
D.
The international monetary system refers to the institutional arrangements
that govern exchange rates.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: Introduction
42.
When the foreign exchange market determines the relative value of a
currency, we say that the country is adhering to a _____ regime.
A.
currency board exchange
B.
pegged exchange rate
C.
fixed exchange rate
D.
floating exchange rate
When the foreign exchange market determines the relative value of a
currency, we say that the country is adhering to a floating exchange rate
regime. Four of the world’s major trading currencies—the U.S. dollar, the
European Union’s euro, the Japanese yen, and the British pound—are all
free to float against each other.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: Introduction
43.
A pegged exchange rate means that the value of a currency is _____.
A.
fixed against other currencies based on an agreement
B.
not determined by free market forces
C.
fixed relative to a reference currency
D.
independent of the valuations of other currencies
A pegged exchange rate means the value of the currency is fixed relative to
a reference currency, such as the U.S. dollar, and then the exchange rate
between that currency and other currencies is determined by the reference
currency exchange rate.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: Introduction
44.
A dirty float refers to a situation in which _____.
A.
a set of currencies are fixed against each other at some mutually agreed
on exchange rate
B.
many countries join hands to form a monetary system and an exchange
rate
C.
more than one foreign currency is used as the formal reference for a
country’s currency
D.
a country tries to hold its currency against an important reference
currency without a formal pegged rate
Countries, while not adopting a formal pegged rate, try to hold the value of
their currency within some range against an important reference currency
such as the U.S. dollar, or a “basket” of currencies. This is often referred to
as a dirty float.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
45.
After World War II, world’s major industrial nations arranged their
currencies against each other at a mutually agreed on exchange rate. This
is an example of a _____ system.
A.
fixed exchange rate
B.
dirty float exchange
C.
pegged exchange rate
D.
floating exchange rate
With a fixed exchange rate system, the values of a set of currencies are
fixed against each other at some mutually agreed on exchange rate.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: Introduction
46.
Which of the following statements is true of the Gold standard?
A.
Gold standard was adopted only by the smaller nations of the world.
B.
Currencies were pegged to gold under the gold standard.
C.
Convertibility to gold was not guaranteed under the gold standard.
D.
Gold standard was not helpful in maintaining balance-of-trade
equilibrium.
Pegging currencies to gold and guaranteeing convertibility is known as the
gold standard. By 1880, most of the world’s major trading nations, including
Great Britain, Germany, Japan, and the United States, had adopted the gold
standard.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: The Gold Standard
47.
Gold par value refers to the _____.
A.
ratio of price of gold in a currency to price of gold in U.S. dollars
B.
amount of a currency needed to purchase one ounce of gold
C.
ratio of price of gold in a currency to price of gold in euros
D.
amount of gold required to equal the reference currency that a nation is
using
The amount of a currency needed to purchase one ounce of gold is referred
to as the gold par value.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: The Gold Standard
48.
A country is said to be in balance-of-trade equilibrium when _____.
A.
it has the potential to produce all goods that its residents want without
engaging in foreign trade
B.
the income its residents earn from exports is equal to the money its
residents pay for imports
C.
the country import all goods that its residents want by engaging in
foreign trade
D.
it has the potential to balance the production and procurement of the
basic amenities that it needs
A country is said to be in balance-of-trade equilibrium when the income its
residents earn from exports is equal to the money its residents pay to other
countries for imports (the current account of its balance of payments is in
balance).
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: The Gold Standard
49.
A country’s trade balance is in surplus when _____
A.
its exports are more than its imports
B.
it experiences negative inflation
C.
its exports equal the imports
D.
the prices of commodities are low in the country
A country’s trade balance is in surplus when it exports more than what it
imports.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: The Gold Standard
50.
Which of the following is an advantage of using the gold standard?
A.
The standard makes sure that goods are not priced out from markets due
to inflation.
B.
The standard does not require a commitment from nations to maintain its
currency’s value.
C.
The standard effectively prevents the devaluation of currencies across
the world.
D.
It contains a powerful mechanism for achieving balance-of-trade
equilibrium by all countries.
The great strength claimed for the gold standard was that it contained a
powerful mechanism for achieving balance–of-trade equilibrium by all
countries.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: The Gold Standard
51.
The agreement reached at Bretton Woods established _____.
A.
International Monetary Fund
B.
World Economic Forum
C.
United Nations
D.
International Atomic Energy Agency
The agreement reached at Bretton Woods established two multinational
institutions— the International Monetary Fund (IMF) and the World Bank.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the international monetary system.
Topic: The Bretton Woods System
52.
Which of the following observations is true of the Bretton Woods
agreement?
A.
All countries agreed to fix the value of their currency in terms of gold
under the agreement.
B.
The system accepted Pound as the official reference currency against
gold.
C.
The agreement established a floating system of monetary exchange.
D.
Two multinational institutions, World Economic Forum and WTO, were
formed under the agreement.
The Bretton Woods agreement called for a system of fixed exchange rates
that would be policed by the IMF. Under the agreement, all countries were
to fix the value of their currency in terms of gold but were not required to
exchange their currencies for gold.
AACSB: Analytic
Blooms: Remember
53.
The World Bank was established at the at Bretton Woods conference to
_____.
A.
establish an international monetary system
B.
promote general economic development
C.
establish gold standard across the world
D.
fund the initiatives of the United Nations
The agreement reached at Bretton Woods established the World Bank. The
task of the World Bank was to promote general economic development.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the international monetary system.
Topic: The Bretton Woods System
54.
Identify the currency that was convertible to gold under the Bretton Woods
system.
A.
Pound
B.
Yen
C.
Euro
D.
Dollar
Under the Bretton Woods agreement, all countries were to fix the value of
their currency in terms of gold but were not required to exchange their
currencies for gold. Only the dollar remained convertible into gold.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the international monetary system.
Topic: The Bretton Woods System
55.
What will happen if a country increases its money supply rapidly under fixed
exchange rate regime?
A.
Imports will become less attractive in that country.
B.
The country will face negative inflation.
C.
Trade deficit would widen in that country.
D.
The country’s products will become more attractive in world markets.
A fixed exchange rate regime imposes monetary discipline on countries and
curtails price inflation. For example, if a country increases its money supply
by printing more currency, the increase in money supply would lead to price
inflation. Given fixed exchange rates, inflation would make the country’s
goods uncompetitive in world markets, while the prices of imports would
become more attractive in that country. The result would be a widening
trade deficit in the country, with the country importing more than it exports.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the international monetary system.
Topic: The Bretton Woods System
56.
Which of the following is a disadvantage of using a rigid policy of fixed
exchange rates?
A.
It is likely to create high unemployment in some cases.
B.
It will lead to inflationary economies across the world.
C.
It is likely to bring about trade wars between nations.
D.
It will instigate competitive devaluations and intense competition.
A rigid policy of fixed exchange rates would be too inflexible. In some cases,
a country’s attempts to reduce its money supply growth and correct a
persistent balance-of-payments deficit could force the country into
recession and create high unemployment.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the international monetary system.
Topic: The Bretton Woods System
57.
Which of the following is a function of World Bank?
A.
Implementing a rigid fixed exchange rate regime
B.
Promoting gold standard across the world
C.
Lending money to governments for development
D.
Implementing a flexible fixed exchange rate regime
The World Bank was established to reconstruct world economies. The bank
lends money to entities such as governments.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the international monetary system.
Topic: The Bretton Woods System
58.
Which of the following is a factor that initiated the collapse of the fixed
exchange rate system?
A.
Worsening of Great Britain’s balance of trade
B.
Recession in third world countries
C.
Price inflation in Europe
D.
Worsening of U.S. foreign trade position
U.S. dollar had a special role in the fixed exchange rate system as the only
currency that could be converted into gold. This meant that any pressure on
the dollar would devalue the system. The increase in inflation and the
worsening of the U.S. foreign trade position gave rise to speculation in the
foreign exchange market that the dollar would be devalued. This initiated
the demise of the fixed exchange rate system.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: The Collapse of the Fixed Exchange Rate System
59.
Which of the following changes were made to IMF’s Articles of Agreement
in the Jamaica agreement?
A.
IMF members were permitted to use Dollar as the convertible currency.
B.
Gold was declared as a formal reserve asset for IMF members.
C.
IMF members were permitted to sell their gold reserves at the market
price.
D.
IMF members were restricted from entering the foreign exchange market.
IMF members met in Jamaica in January 1976 and agreed to the rules for
the international monetary system that are in place today. In the meeting,
gold was abandoned as a reserve asset. IMF members were permitted to
sell their own gold reserves at the market price.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: The Floating Exchange Rate Regime