Deck 16: The International Financial System

Question 1

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal ________ in its international reserves and the monetary base.

A) sale; purchase; increase
B) sale; sale; decline
C) purchase; sale; increase
D) purchase; purchase; decline

Answer 1

A

Question 2

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called

A) an unsterilized foreign exchange intervention.
B) a sterilized foreign exchange intervention.
C) an exchange rate feedback rule.
D) a money-neutral foreign exchange intervention.

Answer 2

B

Question 3

A Federal Reserve decision to sell dollars in order to buy foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply.

A) sale; decrease
B) purchase; decrease
C) sale; increase
D) purchase; increase

Answer 3

D

Question 4

If the current account balance shows a surplus,and capital account receipts exceed capital account payments,then the net change in government international reserves must be ________,indicating a(n)________ in U.S.international reserves.

A) positive; increase
B) negative; increase
C) negative; decrease
D) positive; decrease

Question 5

A current account ________ indicates that the United States is ________ its claims on foreign wealth.

A) surplus; increasing
B) surplus; decreasing
C) deficit; increasing
D) balance; decreasing

Question 6

An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to

A) a gain in international reserves.
B) an increase in the money supply.
C) an appreciation in the domestic currency.
D) all of the above.
E) only A and B of the above.

Question 7

Holding other factors constant,which of the following would decrease the size of the U.S.current account deficit?

A) An increase in the amount of services purchased from foreigners
B) An increase in the amount of goods purchases from foreigners
C) An increase in the amount of goods sold to foreigners
D) Only A and B of the above

Question 8

Which of the following statements is correct?

A) Current account balance = capital account balance
B) Current account balance = capital account balance + net change in government international reserves
C) Current account balance + capital account balance = net change in government international reserves
D) Current account balance + net change in government international reserves = capital account balance

Question 9

A current account ________ indicates that the United States is ________ its claims on foreign wealth.

A) deficit; decreasing
B) deficit; increasing
C) surplus; decreasing
D) balance; increasing

Question 10

An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to

A) a gain in international reserves.
B) a decrease in the money supply.
C) an appreciation in the domestic currency.
D) all of the above.
E) only A and B of the above.

Question 11

The current account balance plus the capital account balance equals

A) the amount of unsterilized exchange market intervention.
B) the trade balance.
C) the net change in government international reserves.
D) both A and C of the above.

Question 12

A central bank sale of ________ to purchase ________ in the foreign exchange market results in an equal decline in its international reserves and the monetary base.

A) foreign assets; domestic currency
B) foreign assets; foreign currency
C) domestic currency; foreign assets
D) domestic currency; domestic currency

Question 13

Holding other factors constant,which of the following would increase the size of the U.S.current account deficit?

A) Sales of U.S. farm products in Europe
B) Visits by European tourists to the United States
C) Increasing travel by American college students in Europe
D) Both A and B of the above

Question 14

A central bank sale of ________ to purchase ________ in the foreign exchange market results in an equal rise in its international reserves and the monetary base.

A) foreign assets; domestic currency
B) foreign assets; foreign currency
C) domestic currency; foreign assets
D) domestic currency; domestic currency

Question 15

A Federal Reserve decision to purchase dollars by selling foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply.

A) sale; decrease
B) purchase; decrease
C) sale; increase
D) purchase; increase

Question 16

The difference between merchandise exports and imports is called the

A) current account balance.
B) capital account balance.
C) balance of payments.
D) trade balance.

Question 17

Because sterilized interventions mean offsetting open market operations,there is no impact on the monetary base and the money supply,and therefore a sterilized intervention

A) causes the exchange rate to overshoot in the short run.
B) causes the exchange rate to undershoot in the short run.
C) causes the exchange rate to depreciate in the short run, but has no effect on the exchange rate in the long run.
D) has no effect on the exchange rate.

Question 18

Because sterilized interventions mean offsetting open market operations,

A) there is no impact on the monetary base.
B) there is no impact on the money supply.
C) there is no effect on the exchange rate.
D) all of the above occur.
E) only A and B of the above occur.

Question 19

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal ________ in its international reserves and the monetary base.

A) sale; purchase; decline
B) sale; sale; increase
C) purchase; sale; increase
D) purchase; sale; decline

Question 20

When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base,it is called

A) a sterilized foreign exchange intervention.
B) an unsterilized foreign exchange intervention.
C) an exchange rate feedback rule.
D) a money-neutral foreign exchange intervention.

Question 21

Revaluation of a currency's value occurs when

A) a floating exchange rate adjusts upward.
B) a floating exchange rate adjusts downward.
C) a fixed exchange rate is adjusted upward.
D) a fixed exchange rate is adjusted downward.

Question 22

Which of the following are true statements about the Bretton Woods system?

A) The Bretton Woods system was a flexible exchange rate regime, in which central banks allowed their currencies to float within a wide trading band.
B) The U.S. dollar was called a reserve currency because it was used to denominate the securities central banks held as international reserves.
C) The Bretton Woods agreement broke down in 1945.
D) Only A and B of the above are true.

Question 23

The Bretton Woods agreement created the ________,which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.

A) IMF
B) World Bank
C) Central Settlements Bank
D) Bank of International Settlements
E) European Exchange Rate Mechanism (ERM)

Question 24

The Bretton Woods system was one in which central banks

A) agreed to limit domestic money growth to the average of the seven largest industrial nations.
B) agreed not to intervene in the foreign exchange market to maintain a fixed exchange rate regime that had existed prior to World War I.
C) agreed to limit domestic money growth to the average of the five largest industrial nations.
D) bought and sold their own currencies to keep their exchange rates fixed.

Question 25

If a country's central bank eventually runs out of international reserves,it cannot keep its currency from ________ and a ________ must occur in which the par exchange value is reset at a ________ level.

A) appreciating; revaluation; higher
B) depreciating; revaluation; higher
C) depreciating; devaluation; lower
D) appreciating; devaluation; lower

Question 26

Under a fixed exchange rate regime,if the domestic currency is initially ________,that is ________ par,the central bank must intervene to buy the domestic currency by selling foreign assets.

A) overvalued; below
B) overvalued; above
C) undervalued; below
D) undervalued; above

Question 27

If a central bank does not want to see its currency fall in value,it may pursue ________ monetary policy to ________ the domestic interest rate,thereby strengthening its currency.

A) expansionary; raise
B) contractionary; raise
C) expansionary; lower
D) contractionary; lower

Question 28

In the Bretton Woods system,the anchor currency was the

A) euro.
B) British pound.
C) German mark.
D) U.S. dollar.

Question 29

Policymakers may not want to see their country's currency appreciate because

A) this would hurt consumers in their country by making foreign goods more expensive.
B) this would hurt domestic businesses by making foreign goods cheaper in their country.
C) this would increase inflation in their country.
D) this would decrease the wealth of the country.

Question 30

Under a fixed exchange rate regime,when the domestic currency is undervalued,the central bank must ________ the domestic currency to keep the exchange rate fixed; as a result,it ________ international reserves.

A) purchase; gains
B) sell; gains
C) purchase; loses
D) sell; loses

Question 31

The Bretton Woods agreement set up the ________,which currently provides long-term loans to assist developing countries to build dams,roads,and other physical capital that contributes to economic development.

A) International Monetary Fund
B) World Bank
C) Central Settlements Bank
D) Bank of International Settlements
E) European Exchange Rate Mechanism (ERM)

Question 32

Under a managed float exchange rate regime,policymakers frequently do not want to see their currencies depreciate because it makes ________ goods more expensive for ________ consumers and contributes to inflation.

A) foreign; foreign
B) foreign; domestic
C) domestic; foreign
D) domestic; domestic

Question 33

If a central bank does not want to see its currency rise in value,it may pursue ________ monetary policy to ________ the domestic interest rate,thereby weakening its currency.

A) expansionary; raise
B) contractionary; raise
C) expansionary; lower
D) contractionary; lower

Question 34

If the domestic currency is initially undervalued,that is below par,the central bank must intervene to sell the ________ currency by purchasing ________ assets.

A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic

Question 35

Depreciation of a currency occurs when

A) a floating exchange rate adjusts upward.
B) a floating exchange rate adjusts downward.
C) a fixed exchange rate is adjusted upward.
D) a fixed exchange rate is adjusted downward.

Question 36

Under a fixed exchange rate regime,if the domestic currency is initially ________,that is ________ par,the central bank must intervene to sell the domestic currency by purchasing foreign assets.

A) overvalued; below
B) overvalued; above
C) undervalued; below
D) undervalued; above

Question 37

Which of the following are true statements about the Bretton Woods system?

A) The Bretton Woods system was a fixed exchange rate regime, in which central banks bought and sold their own currencies to keep their exchange rates fixed.
B) To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the IMF would loan deficit countries international reserves contributed by other members.
C) The German mark was called a reserve currency because it was used to denominate the securities central banks held as international reserves.
D) All of the above are true.
E) Only A and B of the above are true.

Question 38

Which of the following policies is not part of the "policy trilemma"?

A) Dollarization
B) Free capital mobility
C) Fixed exchange rate
D) Independent monetary policy

Question 39

Under a fixed exchange rate regime,when the domestic currency is overvalued,the central bank must ________ the domestic currency to keep the exchange rate fixed; as a result,it ________ international reserves.

A) purchase; loses
B) sell; loses
C) purchase; gains
D) sell; gains

Question 40

What kind of exchange rate system did the Bretton Woods agreement establish?

A) Floating
B) Managed float
C) Dirty float
D) Fixed

Question 41

Under dollarization,a country

A) backs its currency 100 percent with foreign reserves.
B) earns seigniorage because it no longer bears the cost of issuing its own currency.
C) abandons its own currency and adopts the money of another country.
D) must worry about a speculative attack on its currency.

Question 42

A disadvantage of dollarization is that it

A) prevents a central bank from creating inflation.
B) avoids the possibility of a speculative attack on the domestic currency.
C) does not allow a country to pursue its own independent monetary policy.
D) is a strong commitment to exchange rate stability.

Question 43

Under a fixed exchange rate system,

A) an anchor country loses control over its monetary policy.
B) a country that ties its currency to that of another country gains control of the other country's monetary policy.
C) a country that ties its currency to that of another country loses control over its monetary policy.
D) a country that ties its currency to that of another country acquires greater control over its monetary policy.

Question 44

Under the Bretton Woods system,when a nonreserve-currency country was running a balance of payments deficit,

A) it gained international reserves.
B) it lost international reserves.
C) it was necessary for the policymakers to implement a contractionary monetary policy.
D) both A and C of the above occurred.
E) both B and C of the above occurred.

Question 45

The capital account describes the flow of capital between the United States and other countries.Capital inflows are

A) American purchases of foreign assets.
B) foreign purchases of American assets.
C) both A and B of the above.
D) neither A nor B of the above.

Question 46

Which of the following appears in the capital account part of the balance of payments?

A) A gift to an American from his English aunt
B) A purchase by the Honda corporation of a U.S. Treasury bill
C) A purchase by the Bank of England of a U.S. Treasury bill
D) Income earned by the Honda corporation on its automobile plant in Ohio

Question 47

Leading up to the foreign exchange crisis of September 1992,the Bank of England wanted to pursue a(n)________ monetary policy and the German Bundesbank wanted to pursue a(n)________ monetary policy.

A) expansionary, expansionary
B) expansionary; contractionary
C) contractionary; expansionary
D) contractionary; contractionary

Question 48

When the Bundesbank lowered German mark interest rates in September 1992,

A) there was a massive sell-off of German marks, requiring intervention to support the value of the mark.
B) there was a massive sell-off of British pounds, requiring intervention to support the value of the pound.
C) there was a gradual sell-off of German marks, which avoided the need for intervention to support the value of the mark.
D) there was a gradual sell-off of British pounds, which avoided the need for intervention to support the value of the pound.

Question 49

The most effective way to deal with currency crises is to

A) impose controls on capital inflows.
B) impose controls on capital outflows.
C) impose controls on both capital inflows and outflows.
D) improve bank regulation and supervision.

Question 50

Because other countries hold dollars as international reserves,a U.S.official reserve transactions deficit can be financed by

A) an increase in U.S. international reserves.
B) an increase in foreign holdings of dollars.
C) a decrease in foreign holdings of dollars.
D) only A and B of the above.

Question 51

A balance of payments ________ is associated with a ________ of international reserves.

A) surplus; loss
B) surplus; gain
C) deficit; gain
D) balance; loss

Question 52

(I)Controls on capital outflows may increase capital flight by weakening confidence in the government.
(II)Controls on capital outflows are an inadequate substitute for financial reform to deal with currency crises.

A) (I) is true; (II) false.
B) (I) is false; (II) true.
C) Both are true.
D) Both are false.

Question 53

A balance of payments ________ is associated with a ________ of international reserves.

A) deficit; loss
B) deficit; gain
C) surplus; loss
D) balance; gain

Question 54

When a reserve currency country runs a balance of payments deficit and a nonreserve currency country buys the reserve currency to finance the reserve country's deficits,the monetary base in the nonreserve country ________ and the monetary base in the reserve country ________.

A) increases; decreases
B) increases; does not change
C) decreases; does not change
D) decreases; increases

Question 55

The official reserve transactions balance

A) equals the current account balance plus the items in the capital account.
B) tells us the net amount of international reserves that must move between central banks in order to finance international transactions.
C) has an important impact on the money supply.
D) is all of the above.

Question 56

The euro is unlikely to seriously challenge the dollar as a reserve currency as long as

A) the European Union's share of world GDP remains significantly smaller than that of the United States.
B) the European Union's share of world exports remains significantly smaller than that of the United States.
C) Europe neglects to integrate its financial markets.
D) the European Union is unable to function as a cohesive political entity.

Question 57

Many believe that the statistical discrepancy is primarily the result of

A) large hidden capital flows into the United States.
B) large hidden capital flows out of the United States.
C) measurement errors due to exchange rate calculations.
D) none of the above.

Question 58

In September 1992,the Bundesbank attempted to keep the mark from appreciating relative to the British pound,but it failed because participants in the foreign exchange market came to expect the

A) appreciation of the mark.
B) depreciation of the mark.
C) revaluation of the dollar.
D) the end of the Exchange Rate Mechanism.

Question 59

An argument that supports the view that the world needs an international lender of last resort such as the IMF is that

A) central banks in emerging-market countries lack credibility as inflation fighters.
B) an international lender of last resort creates a safety net that protects bank depositors.
C) the IMF is slow to lend, which ultimately reduces the amount that must be borrowed.
D) the IMF imposes requirements that borrowing countries must enact microeconomic policies to reform their financial systems.

Question 60

Given the size of the statistical discrepancy needed to balance the balance of payments account,one can infer that

A) hidden capital flows into the U.S. are inconsequential.
B) items in the balance of payments are measured quite accurately.
C) many international transactions go unrecorded.
D) all of the above occur.

Question 61

The official reserve transactions balance is referred to as

A) the capital account.
B) the current account.
C) the trade balance.
D) the net change in government international reserves.

Question 62

A central bank's international reserves are its holdings of assets denominated in foreign currencies.

Question 63

An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to a gain in international reserves.

Question 64

What is the bookkeeping system for recording all receipts and payments that have a direct bearing on the movement of funds between a nation and foreign countries?

A) Current account
B) Capital account
C) Balance of payments
D) Trade balance

Question 65

Seigniorage is

A) when a country abandons its currency altogether and adopts that of another country.
B) when a country loses the revenue that it received by issuing money.
C) when the par exchange rate is reset at a lower level.
D) when the domestic currency is backed 100% by a foreign currency.

Question 66

The capital account describes ________.

A) international transactions that involve currently produced goods and services
B) the flow of capital between the U.S. and other countries
C) payments between the U.S. and other countries
D) current IOUs of the U.S.

Question 67

What shows international transactions that involve currently produced goods and services?

A) Current account
B) Balance of payments
C) Trade balance
D) Capital account

Question 68

The current account shows ________.

A) international transactions that involve currently produced goods and services
B) the flow of capital between the U.S. and other countries
C) payments between the U.S. and other countries
D) current IOUs of the U.S.

Question 69

In a fixed exchange rate system,a country whose currency is undervalued will lose international reserves.

Question 70

When it acts as a lender of last resort,the IMF may increase the likelihood that financial institutions take excessive risks and thus increase moral hazard.

Question 71

An anchor currency provides the base for a floating exchange rate system.

Question 72

A sterilized intervention leaves the money supply changed and has a direct way of affecting interest rates or the expected future exchange rate.

Question 73

In contrast to other countries' currencies,the Japanese yen and yen-denominated assets are the major component of international reserves held by countries.

Question 74

A dirty float is

A) when the value of a currency is pegged relative to the value of one other currency.
B) when the value of a currency is allowed to fluctuate against all other currencies.
C) when countries intervene in foreign exchange markets in an attempt to influence their exchange rates by buying and selling foreign assets.
D) when the value of a currency is pegged relative to an anchor currency.

Question 75

The Bretton Woods system was a fixed exchange rate regime in which central banks bought and sold their own currencies to keep their exchange rates fixed.

Question 76

The difference between merchandise exports and imports is called the current account balance.

Question 77

________ is when the domestic currency is backed 100% by a foreign currency and in which the note-issuing authority establishes a fixed exchange rate to this foreign currency and stands ready to exchange domestic currency for the foreign currency at this rate whenever the public requests it.

A) dollarization
B) currency board
C) devaluation
D) revaluation

Question 78

The current account balance plus the capital account balance equals the net change in government international reserves.

Question 79

An unsterilized intervention in which domestic currency is purchased by selling foreign assets leads to a rise in international reserves,a decrease in the money supply,and an appreciation of the domestic currency.

Question 80

If a country's central bank eventually runs out of international reserves,it cannot keep its currency from depreciating and a devaluation must occur.