Deck 29: The International Monetary System: Past, Present, and Future

Question 1

Under the international monetary system as it actually operated between 1947 and 1971, the emergence of seemingly chronic deficits and surpluses in various countries' balance- of- payments positions (i.e., deficits and surpluses which did not seem to get eliminated) was called

A) the liquidity problem.
B) the confidence problem.
C) the adjustment problem.
D) the IMF problem.

Answer 1

C

Question 2

In the current exchange rate arrangements of IMF members,

A) a substantial number of countries do not have a freely floating exchange rate.
B) the European Union countries fix their exchange rates against the U.S. dollar.
C) no countries are tied or "pegged" to the U.S. dollar.
D) no developing country allows its currency to "float."

Answer 2

A

Question 3

Proposals to alter the international monetary system have included (1) a return to the international gold standard, and (2) establishing a single world currency under the control of an international central bank. How would the adoption of each of these plans affect the ability of any given country to carry out independent monetary and fiscal policy? Explain.

Answer 3

not answered

Question 4

In the economic and monetary union in Europe (EMU), the member countries

A) tie their currencies to the U.S. dollar.
B) use a common currency (the euro)..
C) tie their currencies to the SDR.
D) have completely flexible exchange rates with each other.

Question 5

Some economists doubt whether the Bretton Woods system could have survived the OPEC and primary product price "shocks" of the mid-1970s and the subsequent stagflation period. What reasons could be used to support this position? Would a gold standard have performed 'better" or "worse" than the Bretton Woods system during this time? Explain.

Question 6

The post-Bretton Woods international monetary system is generally thought to have been characterized by all except one of the following features. Which one does NOT seem to have been a characteristic of the system?

A) There has been substantial variability in the nominal exchange rates of developed Countries, and this variability has included the phenomenon of "overshooting."
B) Real exchange rates have been relatively constant during the period, and so the Existence of the system per se has not had real economic effects.
C) Countries with basically floating rates have not been completely insulated from Outside economic disturbances.
D) The size of international reserves held by central banks has increased substantially During the period.

Question 7

The event that essentially led to the end of the Bretton Woods system was

A) the devaluation of the British pound in 1967.
B) the introduction of the euro in 1999.
C) the introduction of Special Drawing Rights (SDRs) in 1970.
D) the U.S. government's declaration in 1971 that it would no longer buy and sell gold From or to foreign central banks in exchange for dollars.

Question 8

At the present time in the international monetary system,

A) gold is the largest component of international reserves held by central banks.
B) no country is permitted to have a flexible (or floating) exchange rate.
C) no country uses, as part or all of its money, another country's currency unit.
D) one form of international monetary arrangement that has similarities with the Old gold standard is a currency board.

Question 9

Because different inflation/unemployment trade-offs can make it very difficult for a fixed-rate system to be maintained, how could the creators of the Bretton Woods system have thought that that system would provide for some autonomy in domestic macroeconomic policy? Explain.

Question 10

Under the Bretton Woods system set up at the end of World War II, exchange rates were

A) absolutely fixed, i.e., no deviations from parity were permitted.
B) permitted to vary 1 percent above or below parity.
C) permitted to vary 2¼ percent above or below parity.
D) permitted to vary 10 percent above or below parity.

Question 11

In a target zone system in which the money supply is to be varied in response to exchange rate variations as the exchange rate hits the ceiling or floor, if a country's exchange rate (units of home currency per unit of foreign currency) hits the ceiling, the monetary authorities would be required to __________ the money supply; this change in the money supply would be carried out in order to __________ the value of the home currency.

A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate

Question 12

Compare and contrast the "target zone system" and the "world central bank" system for organizing exchange rates and the international monetary system. Which of the two systems would you prefer and why?

Question 13

Why did the Bretton Woods system break down? Do you think that that breakdown and the subsequent adoption of much greater flexibility in the value of the dollar have been "good" from the standpoint of the United States? Why or why not?

Question 14

In order for monetary union to occur, why are "convergence criteria" desirable?

Question 15

When a country joins the International Monetary Fund, the country is assigned a quota, or Subscription fee. At the present time, this quota is paid

A) entirely in the country's own currency.
B) 25 percent in gold and 75 percent in the ountry's own currency.
C) 25 percent in internationally acceptable currencies ("hard currencies") and 75 percent In the country's own currency.
D) 75 percent in internationally acceptable currencies ("hard currencies") and 25 percent In Special Drawing Rights (SDRs).

Question 16

In the Williamson "target zone" plan, the major industrialized countries would negotiate mutually consistent __________ target exchange rates, and there would be __________ deviation permitted from these target rates.

A) nominal effective; some
B) nominal effective; no
C) real effective; some
D) real effective; no

Question 17

Do you think that "conditionality" on IMF loans to developing country is desirable or undesirable? Why? From what standpoint should "conditionality" be assessed - the IMF's or the developing countries'?

Question 18

In its lending to member countries, the International Monetary Fund (IMF)

A) concentrates on long-term development loans and does not engage in short-term Balance-of-payments loans.
B) can lend to a country, at a maximum, only 25 percent of the value of that country's "quota" in the IMF.
C) lends whatever amounts member countries may wish to borrow, and at a zero interest Rate and no service charge on all loans.
D) may increase the difficulty of obtaining loans and may insist on internal policy Changes by borrowing countries as the borrowers ask for additional loans.

Question 19

SDRs were first introduced as a means of strengthening the Bretton Woods system. If the Bretton Woods system had not collapsed soon after the introduction of SDRs, how (if at all) could SDRs have potentially contributed to alleviating the liquidity problem? The confidence problem? The adjustment problem? Why do you suppose that, since their introduction, SDRs have remained such a small fraction of international reserves? Explain.

Question 20

Two of the "convergence criteria" pertaining to initial membership in the EMU were that a country's ratio of government debt to GDP must be __________ and that a country's ratio of government budget deficit to GDP must __________.

A) 60 percent or less; 3 percent or less
B) 60 percent or less; 60 percent or less
C) 3 percent or less; also be 3 percent or less
D) 3 percent or less; 60 percent or less

Question 21

The "Asian crisis" of 1997-1998 importantly involved movement of short-term financial Capital __________ countries such as Thailand and Malaysia, with a consequent __________ of their currencies, which in turn caused __________ in the trade balances of other countries of the world.

A) out of; depreciation; an improvement
B) out of; appreciation; a deterioration
C) out of; depreciation; a deterioration
D) into; appreciation; an improvement

Question 22

In the Bretton Woods international monetary system, a country's currency, unless its par
Value or parity value were officially changed, could not deviate more than __________ from its par value or parity value. If the country's currency depreciated to its low point in this range, central banks needed to __________ the currency in the exchange markets in order to keep the currency's value within the specified range.

A) plus or minus 1 percent; buy
B) plus or minus 1 percent; sell
C) plus or minus 10 percent; buy
D) plus or minus 10 percent; sell

Question 23

Under the original Bretton Woods agreement,

A) countries were to permit absolutely no variation in exchange rates.
B) gold was demonetized as an international reserve asset.
C) the IMF was primarily to engage itself in long-term development loans.
D) a country joining the IMF was assigned a quota to be paid in gold and the country's
Own currency.

Question 24

If a country's currency's external value is tied or pegged to the currency values of the country's leading trading partners, this arrangement is known as a

A) peg against the SDR.
B) managed float.
C) peg against a "basket" of currencies or a "composite."
D) currency board.

Question 25

The original monetary unit in the European monetary system (EMS) in which currencies'
Parity values were defined was the

A) European currency unit (ecu).
B) Special Drawing Right (SDR).
C) euro.
D) German mark.

Question 26

In the current international monetary system, countries

A) must keep their currency values absolutely fixed.
B) must keep their currency values fixed within a certain small deviation from par values.
C) must adopt floating exchange rates.
D) have considerable latitude in choosing an exchange rate arrangement.

Question 27

Suppose that, using a system of multiple exchange rates, India wishes to discourage investors from sending their funds abroad relative to employing the funds in production for export. If the exchange rate for exports were set at 33⅓ Indian rupees = $1.00, then which one of the following exchange rates for capital transactions would potentially be appropriate for implementing the strategy?

A) 20 Indian rupees = $1.00
B) 1 Indian rupee = $0.03
C) 1 Indian rupee = $0.02
D) 1 Indian rupee = $0.06

Question 28

If a country ties its currency to a specific foreign currency and allows its holdings of that currency to govern the country's money supply, this arrangement is known as a

A) currency board.
B) floating exchange rate.
C) monetary union.
D) Special Drawing Right.