Chapter 11 The International Monetary System
True / False Questions
1.
The international monetary system refers to the institutional arrangements
that govern exchange rates.
TRUE
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
2.
A pegged exchange rate means the value of a currency is fixed relative to a
reference currency.
TRUE
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
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: Introduction
3.
A dirty float occurs when a country uses pegged exchange rates to value its
currency.
FALSE
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.
Topic: Introduction
4.
The gold standard called for fixed exchange rates against the U.S. dollar.
FALSE
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.
Difficulty: 1 Easy
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: The Gold Standard
5.
The amount of a currency needed to purchase one ounce of gold was
referred to as the gold par value under the gold standard.
TRUE
Under the gold standard, the amount of a currency needed to purchase one
ounce of gold was 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
6.
A country is said to be in balance-of-trade equilibrium when it produces all
the goods needed for domestic consumption.
FALSE
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).
Topic: The Gold Standard
7.
The agreement reached at Bretton Woods established the International
Monetary Fund (IMF) and the World Bank.
TRUE
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
8.
Implementing a fixed exchange rate regime increases the price inflation in
countries.
FALSE
A fixed exchange rate regime imposes monetary discipline on countries,
thereby curtailing price inflation.
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
9.
World Bank offers low-interest loans to risky customers whose credit rating
is often poor.
TRUE
World Bank offers low-interest loans to risky customers whose credit rating
is often poor, such as the governments of underdeveloped nations.
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
10.
IDA loans receive direct funding from the World Bank.
FALSE
One of the funding schemes of the World Bank is overseen by the
International Development Association (IDA), an arm of the bank created in
1960. Resources to fund IDA loans are raised through subscriptions from
wealthy members such as the United States, Japan, and Germany.
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
11.
The fixed exchange rate system established at Bretton Woods failed due to
speculative pressures on the U.S. dollar.
TRUE
U.S. dollar was the only currency that could be converted into gold in the
fixed exchange rate system established at Bretton Woods. As the currency
that served as the reference point for all others, the dollar occupied a
central place in the system. The system failed when its key currency U.S.
dollar faced speculative pressure.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-01 Describe the historical development of the modern global monetary system.
Topic: The Collapse of the Fixed Exchange Rate System
12.
Gold was declared as the formal reserve asset in the Jamaica agreement of
1976.
FALSE
In the Jamaica agreement, gold was abandoned as a reserve asset. The IMF
returned its gold reserves to members at the current market price, placing
the proceeds in a trust fund to help poor nations.
13.
IMF members were permitted to sell their own gold reserves at the market
price in the Jamaica agreement.
TRUE
In the Jamaica agreement, gold was abandoned as a reserve asset. IMF also
permitted its members 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
14.
The value of U.S dollar increased between 1980 and 1985 despite running a
growing trade deficit.
TRUE
The rise in the value of the dollar between 1980 and 1985 occurred when
the United States was running a large and growing trade deficit, importing
substantially more than it exported. A number of favorable factors overcame
the unfavorable effect of a trade deficit.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
15.
The rise in the value of the dollar gave U.S goods a competitive advantage
over others between 1985 and 1988.
FALSE
Rise in dollar will make U.S. goods less competitive. The rise in the dollar
priced U.S. goods out of foreign markets and made imports relatively cheap.
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
16.
Market forces have produced a stable dollar exchange rate under a floating
exchange rate regime.
FALSE
Under a floating exchange rate regime, market forces have produced a
volatile dollar exchange rate. Governments have sometimes responded by
intervening in the market—buying and selling dollars—in an attempt to limit
the market’s volatility and to correct what they see as overvaluation or
potential undervaluation of the dollar.
AACSB: Analytic
17.
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.
TRUE
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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating exchange rate system.
Topic: Fixed versus Floating Exchange Rates
18.
The monetary autonomy argument is supported by the advocates of fixed
exchange rates.
FALSE
Advocates of floating rates argue that each country should be allowed to
choose its own inflation rate. This is called the monetary autonomy
argument. Advocates of fixed rates argue against this.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating exchange rate system.
19.
Fixed exchange rates lead to speculation and uncertainty in the value of
currencies.
FALSE
Speculation can make exchange rates volatile in the floating exchange rate
system. Speculation also adds to the uncertainty surrounding future
currency movements that characterizes floating exchange rate regimes. A
fixed exchange rate eliminates such uncertainty.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating exchange rate system.
Topic: Fixed versus Floating Exchange Rates
20.
Supporters of floating exchange rates claim that trade deficits are
determined by the balance between savings and investment in a country.
FALSE
Those in favor of floating exchange rates argue that floating rates help
adjust trade imbalances. Critics of floating rates claim that trade deficits
are determined by the balance between savings and investment in a
country, not by the external value of its currency.
AACSB: Analytic
21.
Exchange rates are determined by the government under a pure “free float”
system.
FALSE
Under a pure “free float” system, exchange rates are determined by market
forces.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-04 Identify exchange rate regimes that are used in the world today and why countries adopt
different exchange rate regimes.
Topic: Exchange Rate Regimes in Practice
22.
A country valuates its currency without attaching it to a reference currency
under the pegged exchange rate regime.
FALSE
Under a pegged exchange rate regime, a country will peg 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-04 Identify exchange rate regimes that are used in the world today and why countries adopt
different exchange rate regimes.
23.
The great virtue claimed for a pegged exchange rate is that it imposes
monetary discipline on a country and leads to low inflation.
TRUE
As with a full fixed exchange rate regime, the great virtue claimed for a
pegged exchange rate is that it imposes monetary discipline on a country
and leads to low inflation.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-04 Identify exchange rate regimes that are used in the world today and why countries adopt
different exchange rate regimes.
Topic: Exchange Rate Regimes in Practice
24.
Adopting a pegged exchange rate regime increases the inflationary
pressures in a country.
FALSE
Evidence shows that adopting a pegged exchange rate regime moderates
inflationary pressures in a country.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-04 Identify exchange rate regimes that are used in the world today and why countries adopt
different exchange rate regimes.
Topic: Exchange Rate Regimes in Practice
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.
TRUE
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-04 Identify exchange rate regimes that are used in the world today and why countries adopt
different exchange rate regimes.
Topic: Exchange Rate Regimes in Practice
26.
A currency board system limits the ability of the government to print money
and, thereby, create inflationary pressures.
TRUE
The currency board can issue additional domestic notes and coins only
when there are foreign exchange reserves to back it. This limits the ability
of the government to print money and, thereby, create inflationary
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-04 Identify exchange rate regimes that are used in the world today and why countries adopt
different exchange rate regimes.
Topic: Exchange Rate Regimes in Practice
27.
Interest rates adjust automatically under a strict currency board system.
TRUE
Under a strict currency board system, interest rates adjust automatically. If
investors want to switch out of domestic currency into, for example, U.S.
dollars, the supply of domestic currency will shrink. This will cause interest
rates to rise until it eventually becomes attractive for investors to hold the
local currency again.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-04 Identify exchange rate regimes that are used in the world today and why countries adopt
different exchange rate regimes.
Topic: Exchange Rate Regimes in Practice
28.
Currencies of countries with currency boards will become uncompetitive
and overvalued if local inflation rates are lower than the inflation rate in the
country to which the currency is pegged.
FALSE
If local inflation rates remain higher than the inflation rate in the country to
which the currency is pegged, the currencies of countries with currency
boards can become uncompetitive and overvalued.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-04 Identify exchange rate regimes that are used in the world today and why countries adopt
different exchange rate regimes.
Topic: Exchange Rate Regimes in Practice
29.
The IMF’s original function was to provide a pool of money from which
members could borrow in the short term.
TRUE
The IMF’s original function was to provide a pool of money from which
members could borrow, short term, to adjust their balance-of–payments
position and maintain their exchange rate.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
30.
A currency crisis occurs when investors lose confidence in a country’s
banking system.
FALSE
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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the management of financial crises.
Topic: Crisis Management by the IMF
31.
A foreign debt crisis is a situation in which a country cannot service its
foreign debt obligations.
TRUE
A foreign debt crisis is a situation in which a country cannot service its
foreign debt obligations, whether private-sector or government debt.
AACSB: Analytic
32.
The IMF made pegging Mexican peso to the dollar, a condition for lending
money to the Mexican government in the 1980s.
TRUE
The Mexican peso had been pegged to the dollar since the early 1980s
when the International Monetary Fund made it a condition for lending
money to the Mexican government.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the management of financial crises.
Topic: Crisis Management by the IMF
33.
Government projects were a factor behind the investment boom in most
Southeast Asian economies.
TRUE
An added factor behind the investment boom in most Southeast Asian
economies was the government. In many cases, the governments had
embarked on huge infrastructure projects.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the management of financial crises.
Topic: Crisis Management by the IMF
34.
The quality of investments declined significantly in the Asian countries
during the 1990s.
TRUE
Volume of investments increased in the Asian countries during the 1990s.
As the volume of investments ballooned, often at the bequest of national
governments, the quality of many of these investments declined
significantly.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the management of financial crises.
Topic: Crisis Management by the IMF
35.
In the 1990s, most of the borrowing by the companies who invested in Asian
countries had been in local currencies.
FALSE
The companies that had made the investments in Asia, in 1990s, were
under huge debt burdens and they were finding it difficult to service. Much
of the borrowing had been in U.S. dollars, as opposed to local currencies.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
36.
Most of the loans issued by the IMF are unconditional loans.
FALSE
All IMF loan packages come with conditions attached. Until very recently,
the IMF has insisted on a combination of tight macroeconomic policies,
including cuts in public spending, higher interest rates, and tight monetary
policy.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the management of financial crises.
Topic: Crisis Management by the IMF
37.
Moral hazard arises when people behave recklessly because they know they
will be saved if things go wrong.
TRUE
Moral hazard arises when people behave recklessly because they know they
will be saved if things go wrong.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the management of financial crises.
Topic: Crisis Management by the IMF
38.
The Asian economic crisis was caused by high inflation rates.
FALSE
The Asian economic crisis and the global financial of 2008-2009 crisis were
caused not by high inflation rates, but by excessive debt.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the management of financial crises.
Topic: Crisis Management by the IMF
39.
The current system of foreign exchange is a mixed system of government
intervention and speculative activity.
TRUE
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-06 Explain the implications of the global monetary system for currency management and business
strategy.
Topic: Implications for Managers