Question 1

State the advantages and disadvantages of a foreign country adopting the U.S. dollar as its own currency.

Accepted Answer

The major advantage for a country dollar

Question 2

Dollarization is a method to:

Accepted Answer

A) increase the country's seigniorage profit. 
B) allow flexibility in the country's exchange-rate. 
C) remove exchange-rate risk. 
D) sterilize interventions by the central bank. 
A) increase the country's seigniorage profit. 
B) allow flexibility in the country's exchange-rate. 
C) remove exchange-rate risk. 
D) sterilize interventions by the central bank.

Question 3

An international trade shock arising from a sudden increase in import demand is likely to be least disruptive to a country with:

Accepted Answer

A) a floating exchange-rate system. 
B) a fixed exchange-rate system with sterilization. 
C) a fixed exchange-rate system without sterilization. 
D) a surplus in the overall payment balance. 
A) a floating exchange-rate system. 
B) a fixed exchange-rate system with sterilization. 
C) a fixed exchange-rate system without sterilization. 
D) a surplus in the overall payment balance.

Question 4

A reduction in taxes on domestic financial investments usually leads to capital outflows.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements about dollarization is accurate?

Accepted Answer

A) A country that chooses to dollarize will enhance its control over its monetary policy. 
B) Dollarization decreases exchange-rate risks by removing the risks of speculative attacks on its currency. 
C) A country that dollarizes gains interest income on what had been the country's holdings of international reserve assets. 
D) Dollarization enables a country to adopt a measure countering adverse foreign shocks without disrupting the country's economy. 
A) A country that chooses to dollarize will enhance its control over its monetary policy. 
B) Dollarization decreases exchange-rate risks by removing the risks of speculative attacks on its currency. 
C) A country that dollarizes gains interest income on what had been the country's holdings of international reserve assets. 
D) Dollarization enables a country to adopt a measure countering adverse foreign shocks without disrupting the country's economy.

Question 6

A fixed exchange-rate system in which most countries participate imposes price discipline on the countries.

Accepted Answer

A) True 
 B)False

Question 7

For an international capital flow shock in which foreign investors lose confidence in a country:

Accepted Answer

A) the country's real domestic product is affected if the country has a fixed exchange rate but is not affected if the country has a floating exchange rate. 
B) the country's real GDP decreases regardless of whether the country has a fixed or floating exchange rate, but the country's real GDP declines less if the country has a floating exchange rate. 
C) the country's real domestic product is affected if the country has a floating exchange rate but not affected if the country has a fixed exchange rate. 
D) the country's real GDP tends to decline if the country has fixed exchange rate, but the country's real GDP tends to increase if the country has a floating exchange rate. 
A) the country's real domestic product is affected if the country has a fixed exchange rate but is not affected if the country has a floating exchange rate. 
B) the country's real GDP decreases regardless of whether the country has a fixed or floating exchange rate, but the country's real GDP declines less if the country has a floating exchange rate. 
C) the country's real domestic product is affected if the country has a floating exchange rate but not affected if the country has a fixed exchange rate. 
D) the country's real GDP tends to decline if the country has fixed exchange rate, but the country's real GDP tends to increase if the country has a floating exchange rate.

Question 8

In 2001, which of the following countries replaced its currency with the U.S. dollar?

Accepted Answer

A) Panama 
B) El Salvador 
C) Hong Kong 
D) Argentina 
A) Panama 
B) El Salvador 
C) Hong Kong 
D) Argentina

Question 9

If a country wants to make extensive use of monetary policy to address domestic issues, then that country should adopt a floating exchange-rate.

Accepted Answer

A) True 
 B)False

Question 10

Japanese economists worry that changes in the U.S. inflation rate have too large an effect on the Japanese economy. What type of exchange rate regime should Japan have if it does not want the U.S. inflation changes to impact the Japanese internal economy? Explain, and use relative PPP in your explanation.

Accepted Answer

If a country wishes to isolate itself fr

Question 11

In the absence of national monetary policy and national exchange rates in the European Monetary Union,

Accepted Answer

A) that Union cannot survive. 
B) that Union will have to expel members who do not agree to austerity measures. 
C) there are still steps that the Union can take to survive. 
D) That Union will have to be bailed out by the European Central Bank. 
A) that Union cannot survive. 
B) that Union will have to expel members who do not agree to austerity measures. 
C) there are still steps that the Union can take to survive. 
D) That Union will have to be bailed out by the European Central Bank.

Question 12

The central bank of which of the following countries dominated monetary policy within the Exchange Rate Mechanism?

Accepted Answer

A) Germany 
B) France 
C) The United States 
D) The United Kingdom 
A) Germany 
B) France 
C) The United States 
D) The United Kingdom

Question 13

Which of the following is true?

Accepted Answer

A) Countries that want to have a fixed exchange-rate regime should be willing to refrain from policy changes that lead to large international capital flows. 
B) For a floating exchange-rate to work for a country, it cannot have an inflation rate that is much above the inflation rate(s) of its primary trading partners. 
C) Fixed exchange-rates encourage countries to have different goals, priorities and policies with respect to macroeconomic variables. 
D) If capital is highly mobile, fiscal policy then loses its effectiveness under a fixed exchange rate. 
A) Countries that want to have a fixed exchange-rate regime should be willing to refrain from policy changes that lead to large international capital flows. 
B) For a floating exchange-rate to work for a country, it cannot have an inflation rate that is much above the inflation rate(s) of its primary trading partners. 
C) Fixed exchange-rates encourage countries to have different goals, priorities and policies with respect to macroeconomic variables. 
D) If capital is highly mobile, fiscal policy then loses its effectiveness under a fixed exchange rate.

Question 14

Under a gold standard, a major discovery of a new gold deposit would:

Accepted Answer

A) decrease the volume of world trade. 
B) increase the inflation rate. 
C) decrease output growth. 
D) increase private demand for gold. 
A) decrease the volume of world trade. 
B) increase the inflation rate. 
C) decrease output growth. 
D) increase private demand for gold.

Question 15

Monetary policy is most effective in influencing aggregate demand:

Accepted Answer

A) under a freely floating exchange-rate system. 
B) under a fixed exchange-rate system with sterilization. 
C) under a fixed exchange-rate system without sterilization. 
D) when there is low capital mobility. 
A) under a freely floating exchange-rate system. 
B) under a fixed exchange-rate system with sterilization. 
C) under a fixed exchange-rate system without sterilization. 
D) when there is low capital mobility.

Question 16

The Maastricht Treaty laid out the convergence criteria for the Exchange Rate Mechanism.

Accepted Answer

A) True 
 B)False

Question 17

If two countries choose to fix the exchange rates among their currencies, then:

Accepted Answer

A) the nominal exchange rate will remain consistent independent of inflation rates. 
B) the country with high rate of inflation will eventually suffer current account deficits. 
C) the country with a current account deficit can increase its money supply to delay the need for intervention. 
D) there usually is more pressure on the government whose country has an overall payments surplus than on the government whose country has an overall payments deficit. 
A) the nominal exchange rate will remain consistent independent of inflation rates. 
B) the country with high rate of inflation will eventually suffer current account deficits. 
C) the country with a current account deficit can increase its money supply to delay the need for intervention. 
D) there usually is more pressure on the government whose country has an overall payments surplus than on the government whose country has an overall payments deficit.

Question 18

What are the five criteria for a country to join the European Monetary Union? What is the purpose of the criteria? What are the gains from establishing the monetary union?

Accepted Answer

The five criteria for a country to join

Question 19

One advantage of joining a monetary union is that a member country does not have to run an independent monetary policy.

Accepted Answer

A) True 
 B)False

Question 20

_____ occurs when a country abolishes its own currency and uses the currency of some other country.

Accepted Answer

A) Demonetization 
B) Dollarization 
C) Revaluation 
D) Seigniorage profit 
A) Demonetization 
B) Dollarization 
C) Revaluation 
D) Seigniorage profit

Exam 25: National and Global Choices: Floating Rates and the Alternatives

State the advantages and disadvantages of a foreign country adopting the U.S. dollar as its own currency.

Dollarization is a method to:

An international trade shock arising from a sudden increase in import demand is likely to be least disruptive to a country with:

A reduction in taxes on domestic financial investments usually leads to capital outflows.

Which of the following statements about dollarization is accurate?

A fixed exchange-rate system in which most countries participate imposes price discipline on the countries.

For an international capital flow shock in which foreign investors lose confidence in a country:

In 2001, which of the following countries replaced its currency with the U.S. dollar?

If a country wants to make extensive use of monetary policy to address domestic issues, then that country should adopt a floating exchange-rate.

In the absence of national monetary policy and national exchange rates in the European Monetary Union,

The central bank of which of the following countries dominated monetary policy within the Exchange Rate Mechanism?

Which of the following is true?

Under a gold standard, a major discovery of a new gold deposit would:

Monetary policy is most effective in influencing aggregate demand:

The Maastricht Treaty laid out the convergence criteria for the Exchange Rate Mechanism.

If two countries choose to fix the exchange rates among their currencies, then:

What are the five criteria for a country to join the European Monetary Union? What is the purpose of the criteria? What are the gains from establishing the monetary union?

One advantage of joining a monetary union is that a member country does not have to run an independent monetary policy.

_____ occurs when a country abolishes its own currency and uses the currency of some other country.

International Economics Is Different

The Basic Theory Using Demand and Supply

Why Everybody Trades: Comparative Advantage

Trade: Factor Availability and Factor Proportions Are Key

Who Gains and Who Loses From Trade

Scale Economies, Imperfect Competition, and Trade

Growth and Trade Part II: Trade Policy

Analysis of a Tariff

Nontariff Barriers to Imports

Arguments for and Against Protection

Pushing Exports

Trade Blocs and Trade Blocks

Trade and the Environment

Trade Policies for Developing Countries

Multinationals and Migration: International Factor Movements

Payments Among Nations

The Foreign Exchange Market

Forward Exchange and International Financial Investment

What Determines Exchange Rates

Government Policies Toward the Foreign Exchange Market

International Lending and Financial Crises

How Does the Open Macroeconomy Work

Internal and External Balance With Fixed Exchange Rates

Floating Exchange Rates and Internal Balance

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