Question 1

Adopting a fixed exchange rate promotes trade if the regime is:

Accepted Answer

A)  semi-floating. 
B)  indirectly pegged. 
C)  directly floating. 
D)  directly pegged. 
A)  semi-floating. 
B)  indirectly pegged. 
C)  directly floating. 
D)  directly pegged.

Question 2

Beginning in the early 1970s, many nations abandoned their dollar standard and moved toward a system of:

Accepted Answer

A)  fixed exchange rates based on gold. 
B)  fixed exchange rates based on the Deutsche Mark. 
C)  floating exchange rates. 
D)  real money systems in which currencies were backed by government bonds. 
A)  fixed exchange rates based on gold. 
B)  fixed exchange rates based on the Deutsche Mark. 
C)  floating exchange rates. 
D)  real money systems in which currencies were backed by government bonds.

Question 3

Suppose that the U.S. price of gold is $35 per ounce and the German price of gold is 100 Deutsche Marks (DMs) per ounce. What is the implied exchange rate between the dollar and the DM?

Accepted Answer

A)  $0.35 = DM1 
B)  $3500 = DM1 
C)  $2.8571 = DM1 
D)  $0.28571 = DM1 
A)  $0.35 = DM1 
B)  $3500 = DM1 
C)  $2.8571 = DM1 
D)  $0.28571 = DM1

Question 4

What best describes what makes a cooperative fixed exchange rate system work?

Accepted Answer

A)  There are too many cooks in the kitchen. 
B)  Take all you can get. 
C)  You scratch my back, I'll scratch yours. 
D)  Curiosity killed the cat. 
A)  There are too many cooks in the kitchen. 
B)  Take all you can get. 
C)  You scratch my back, I'll scratch yours. 
D)  Curiosity killed the cat.

Question 5

Suppose that the United Kingdom pegs the pound to the euro. If all other things remain unchanged, what would you expect to happen to European interest rates if all countries who use the euro decided to adopt expansionary fiscal policies?

Accepted Answer

A)  They would rise. 
B)  They would fall. 
C)  They would not change. 
D)  That cannot be determined using the information provided. 
A)  They would rise. 
B)  They would fall. 
C)  They would not change. 
D)  That cannot be determined using the information provided.

Question 6

Political tensions may arise from nations pegging to a center base country's currency if:

Accepted Answer

A)  asymmetric shocks cause the home nation to lose the power to stabilize. 
B)  it is determined that the center nation has been misrepresenting the value of its currency. 
C)  financing of military spending becomes more difficult. 
D)  interest rates are affected. 
A)  asymmetric shocks cause the home nation to lose the power to stabilize. 
B)  it is determined that the center nation has been misrepresenting the value of its currency. 
C)  financing of military spending becomes more difficult. 
D)  interest rates are affected.

Question 7

What happened to the international gold standard during WWI?

Accepted Answer

A)  It flourished, since no nation trusted the other nations' currencies. 
B)  It was abandoned. 
C)  It did not disappear but was weakened by a major decline in international trade. 
D)  It was relegated to government control. 
A)  It flourished, since no nation trusted the other nations' currencies. 
B)  It was abandoned. 
C)  It did not disappear but was weakened by a major decline in international trade. 
D)  It was relegated to government control.

Question 8

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (cooperatively) and to the center as a result of a demand shock, what is the effect?

Accepted Answer

A)  The center nation will require that the two line up their rates. 
B)  The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the impact of the demand shock). 
C)  The devaluing nation will see a larger increase in demand while its partner will suffer more (thus favoring the devaluing nation). 
D)  Both nations will suffer more because the center nation will match the devaluation, thus negating the effect. 
A)  The center nation will require that the two line up their rates. 
B)  The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the impact of the demand shock). 
C)  The devaluing nation will see a larger increase in demand while its partner will suffer more (thus favoring the devaluing nation). 
D)  Both nations will suffer more because the center nation will match the devaluation, thus negating the effect.

Question 9

Borrowing in one's own currency has many advantages for low-income nations (such as Chile). Which of the following is NOT an advantage?

Accepted Answer

A)  Service payments are usually retained in the nation. 
B)  Defaults are typically not an issue. 
C)  The nation is never obliged to repay-it can roll over the debt in perpetuity. 
D)  More national debt actually helps credit markets deepen and mature. 
A)  Service payments are usually retained in the nation. 
B)  Defaults are typically not an issue. 
C)  The nation is never obliged to repay-it can roll over the debt in perpetuity. 
D)  More national debt actually helps credit markets deepen and mature.

Question 10

Research in the performance of developing nations with exchange rate pegs has shown that:

Accepted Answer

A)  fixed exchange rates are 100% effective in curbing inflation and preventing hyperinflation. 
B)  fixed exchange rates are 100% ineffective in curbing inflation and preventing hyperinflation. 
C)  floating exchange rates are more effective in curbing inflation and preventing hyperinflation. 
D)  fixed exchange rates are neither necessary nor sufficient to curb inflation and prevent hyperinflation. 
A)  fixed exchange rates are 100% effective in curbing inflation and preventing hyperinflation. 
B)  fixed exchange rates are 100% ineffective in curbing inflation and preventing hyperinflation. 
C)  floating exchange rates are more effective in curbing inflation and preventing hyperinflation. 
D)  fixed exchange rates are neither necessary nor sufficient to curb inflation and prevent hyperinflation.

Question 11

Suppose that Canada pegs its currency to the U.S. dollar at a rate of $C1 = $US1 and that Canada is a major exporter of crude oil to the United States. The increase in the price of oil that occurred in the second half of 2007 is likely to:

Accepted Answer

A)  cause Canada to adopt a contractionary monetary policy and the United States to adopt an expansionary monetary policy. 
B)  cause Canada to adopt an expansionary monetary policy and the United States to adopt a contractionary monetary policy. 
C)  cause both Canada and the United States to adopt contractionary monetary policies. 
D)  cause both Canada and the United States to adopt expansionary monetary policies. 
A)  cause Canada to adopt a contractionary monetary policy and the United States to adopt an expansionary monetary policy. 
B)  cause Canada to adopt an expansionary monetary policy and the United States to adopt a contractionary monetary policy. 
C)  cause both Canada and the United States to adopt contractionary monetary policies. 
D)  cause both Canada and the United States to adopt expansionary monetary policies.

Question 12

Trilemma refers to policy conflicts among:

Accepted Answer

A)  fixed exchange rate, monetary autonomy, and free capital mobility goals. 
B)  floating exchange rate, monetary autonomy, and free capital mobility goals. 
C)  fixed exchange rate, monetary autonomy, and floating exchange rate goals. 
D)  floating exchange rate, fiscal autonomy, and monetary autonomy goals. 
A)  fixed exchange rate, monetary autonomy, and free capital mobility goals. 
B)  floating exchange rate, monetary autonomy, and free capital mobility goals. 
C)  fixed exchange rate, monetary autonomy, and floating exchange rate goals. 
D)  floating exchange rate, fiscal autonomy, and monetary autonomy goals.

Question 13

When exchange rates are fixed and the foreign nation's interest rate increases, what happens next?

Accepted Answer

A)  The home nation's IS curve shifts out because of a depreciation and an increase in the trade balance. 
B)  The home nation's LM curve shifts right, and its interest rate falls. 
C)  Fixed exchange rates force the home nation to raise its interest rates. 
D)  The home nation and the foreign nation are always in equilibrium, so no changes occur. 
A)  The home nation's IS curve shifts out because of a depreciation and an increase in the trade balance. 
B)  The home nation's LM curve shifts right, and its interest rate falls. 
C)  Fixed exchange rates force the home nation to raise its interest rates. 
D)  The home nation and the foreign nation are always in equilibrium, so no changes occur.

Question 14

Under the gold standard:

Accepted Answer

A)  the United States set the price of gold at $35 per ounce, and other countries then established their exchange rates against the U.S. dollar . 
B)  Great Britain and the United States set the price of gold at $35 per ounce and £7 per ounce, and then other countries established their exchange rates against either the British pound or the U.S. dollar. 
C)  all countries pegged the values of their currencies to gold. 
D)  only gold was used to settle international transactions. 
A)  the United States set the price of gold at $35 per ounce, and other countries then established their exchange rates against the U.S. dollar . 
B)  Great Britain and the United States set the price of gold at $35 per ounce and £7 per ounce, and then other countries established their exchange rates against either the British pound or the U.S. dollar. 
C)  all countries pegged the values of their currencies to gold. 
D)  only gold was used to settle international transactions.

Question 15

What currency was the base, or center, currency in the ERM used in Europe during the 1980s and 1990s?

Accepted Answer

A)  the French franc 
B)  the British pound 
C)  the German mark 
D)  the Italian lira 
A)  the French franc 
B)  the British pound 
C)  the German mark 
D)  the Italian lira

Question 16

A country is using a beggar-thy-neighbor policy whenever:

Accepted Answer

A)  it uses contractionary monetary policy to attract capital inflows from other countries. 
B)  it devalues its currency to improve its macroeconomic position at the expense of its trading partners. 
C)  it revalues its currency to improve its macroeconomic position and that of its trading partners. 
D)  it cooperates with other countries in establishing its monetary policy. 
A)  it uses contractionary monetary policy to attract capital inflows from other countries. 
B)  it devalues its currency to improve its macroeconomic position at the expense of its trading partners. 
C)  it revalues its currency to improve its macroeconomic position and that of its trading partners. 
D)  it cooperates with other countries in establishing its monetary policy.

Question 17

What would happen to a low-income nation if its liability currency appreciated against its own currency?

Accepted Answer

A)  Its external wealth would rise because low-income nations have more assets than liabilities. 
B)  Its external wealth would not be affected because currency values are fixed. 
C)  Its external wealth would fall because low-income nations tend to have more external liabilities denominated in other currencies. 
D)  Its external wealth would rise because of the ability of its monetary authority to print more money. 
A)  Its external wealth would rise because low-income nations have more assets than liabilities. 
B)  Its external wealth would not be affected because currency values are fixed. 
C)  Its external wealth would fall because low-income nations tend to have more external liabilities denominated in other currencies. 
D)  Its external wealth would rise because of the ability of its monetary authority to print more money.

Question 18

Asymmetric shocks pose a problem for nations linked by fixed exchange rates to a base currency. In general:

Accepted Answer

A)  the home nation always has a better outcome than its foreign trading partner. 
B)  both nations share a common currency and so will experience equal results. 
C)  when the base currency nation takes any action to counteract the shock, it forces its exchange rate partner to do the same to maintain its peg. 
D)  both nations only get half the benefit of any economic policy. 
A)  the home nation always has a better outcome than its foreign trading partner. 
B)  both nations share a common currency and so will experience equal results. 
C)  when the base currency nation takes any action to counteract the shock, it forces its exchange rate partner to do the same to maintain its peg. 
D)  both nations only get half the benefit of any economic policy.

Question 19

A fixed exchange rate causes:

Accepted Answer

A)  transaction costs to increase. 
B)  efficiency to increase only if the economies are integrated. 
C)  efficiency to increase under all circumstances. 
D)  volume of trade to decline. 
A)  transaction costs to increase. 
B)  efficiency to increase only if the economies are integrated. 
C)  efficiency to increase under all circumstances. 
D)  volume of trade to decline.

Question 20

In September 1992, Great Britain changed its exchange rate system. How?

Accepted Answer

A)  It abandoned the gold standard in favor of pegging to the U.S. dollar. 
B)  It joined in with the new euro. 
C)  It switched from an exchange rate peg to floating. 
D)  It abandoned the sterling backing for the British pound. 
A)  It abandoned the gold standard in favor of pegging to the U.S. dollar. 
B)  It joined in with the new euro. 
C)  It switched from an exchange rate peg to floating. 
D)  It abandoned the sterling backing for the British pound.

Exam 19: Fixed Versus Floating: International Monetary Experience

Adopting a fixed exchange rate promotes trade if the regime is:

Beginning in the early 1970s, many nations abandoned their dollar standard and moved toward a system of:

Suppose that the U.S. price of gold is $35 per ounce and the German price of gold is 100 Deutsche Marks (DMs) per ounce. What is the implied exchange rate between the dollar and the DM?

What best describes what makes a cooperative fixed exchange rate system work?

Suppose that the United Kingdom pegs the pound to the euro. If all other things remain unchanged, what would you expect to happen to European interest rates if all countries who use the euro decided to adopt expansionary fiscal policies?

Political tensions may arise from nations pegging to a center base country's currency if:

What happened to the international gold standard during WWI?

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (cooperatively) and to the center as a result of a demand shock, what is the effect?

Borrowing in one's own currency has many advantages for low-income nations (such as Chile). Which of the following is NOT an advantage?

Research in the performance of developing nations with exchange rate pegs has shown that:

Suppose that Canada pegs its currency to the U.S. dollar at a rate of $C1 = $US1 and that Canada is a major exporter of crude oil to the United States. The increase in the price of oil that occurred in the second half of 2007 is likely to:

Trilemma refers to policy conflicts among:

When exchange rates are fixed and the foreign nation's interest rate increases, what happens next?

Under the gold standard:

What currency was the base, or center, currency in the ERM used in Europe during the 1980s and 1990s?

A country is using a beggar-thy-neighbor policy whenever:

What would happen to a low-income nation if its liability currency appreciated against its own currency?

Asymmetric shocks pose a problem for nations linked by fixed exchange rates to a base currency. In general:

A fixed exchange rate causes:

In September 1992, Great Britain changed its exchange rate system. How?

Trade in the Global Economy

Trade and Technology: The Ricardian Model

Gains and Losses From Trade in the Specific-Factors Model

Trade and Resources: the Heckscher-Ohlin Model

Movement of Labor and Capital Between Countries

Increasing Returns to Scale and Monopolistic Competition

Offshoring of Goods and Services

Import Tariffs and Quotas Under Perfect Competition

Import Tariffs and Quotas Under Imperfect Competition

Export Subsidies in Agriculture and High-Technology Industries

International Agreements: Trade, Labor, and the Environment

The Global Macroeconomy

Introduction to Exchange Rates and the Foreign Exchange Market

Exchange Rates I: the Monetary Approach in the Long Run

Exchange Rates II: the Asset Approach in the Short Run

National and International Accounts: Income, Wealth, and the Balance of Payments

Balance of Payments I: the Gains From Financial Globalization

Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run

Exchange Rate Crises: How Pegs Work and How They Break

The Euro

Topics in International Macroeconomics

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