Deck 15: The International Financial System

Question 1

The 'Bretton Woods System' was a:

A)system of fixed exchange rates based on the gold standard.
B)system of fixed exchange rates where central banks fixed the value of their currencies against the US$.
C)system of floating exchange rates where central banks floated the value of their currencies.
D)system of managed-float exchange rates where demand and supply mainly determined the value of currencies with occasional government intervention.

Answer 1

system of fixed exchange rates where central banks fixed the value of their currencies against the US$.

Question 2

A 'pegged exchange rate' is one in which:

A)the currency is backed by a fixed amount of gold.
B)demand and supply adjust so that there are no shortages or surpluses of currency in the market.
C)foreign exchange traders accept only a fixed price for their goods, regardless of the demand and supply for the currency.
D)the government defines its currency to be worth a certain amount in terms of another currency and ensures that the rate remains at that level.

Answer 2

the government defines its currency to be worth a certain amount in terms of another currency and ensures that the rate remains at that level.

Question 3

Under the gold standard, a chance discovery of gold such as a gold rush would:

A)decrease the general price level.
B)increase the general price level.
C)increase the rate of unemployment.
D)decrease the rate of economic growth.

Answer 3

increase the general price level.

Question 4

A 'fixed exchange rate system' is one in which:

A)the currency is backed by a fixed amount of gold.
B)the government defines its currency to be worth a certain amount in terms of another currency and ensures that the rate remains at that level.
C)foreign exchange traders accept only a fixed price for their goods, regardless of the demand and supply for the currency.
D)demand and supply adjust so that there are no shortages or surpluses of currency in the market.

Question 5

When the value of a currency is determined ________, the exchange rate system is defined as 'managed float'.

A)only by supply and demand
B)by the country's government
C)mostly by supply and demand, but with occasional government intervention
D)by the country's government, with occasional readjustments in value

Question 6

A country that allows its exchange rate to be determined by the market, without government intervention, has a:

A)floating currency.
B)fixed currency.
C)managed float exchange rate system.
D)gold standard.

Question 7

Under the 'gold standard', the government must have enough gold to back up any:

A)increase in money demand.
B)increase in the money supply.
C)change in its currency's exchange rate.
D)foreign currency deposits in its central bank.

Question 8

A 'floating exchange rate system' is one in which:

A)the central bank intervenes in the currency exchange market to influence, but not fix, the exchange rate.
B)trading firms establish the exchange rates for individual transactions in the foreign exchange market.
C)the central bank allows private banks to manage their exchange rates.
D)the central bank intervenes in the currency exchange market to fix the exchange rate.

Question 9

When countries aim to keep the value of their currency within a range against another currency, their exchange rate system is referred to as:

A)variable.
B)managed float.
C)floating.
D)a pegged float.

Question 10

When the value of a currency is determined ________, the exchange rate system is defined as a 'floating exchange rate system'.

A)only by supply and demand
B)by the country's government
C)mostly by supply and demand, but with occasional government intervention
D)by the country's government, with occasional readjustments in value

Question 11

A 'floating exchange rate system' is one in which:

A)the central bank does not intervene to adjust the exchange rate.
B)shortages of foreign exchange will result in an appreciation of the domestic currency.
C)foreign exchange traders accept only a fixed price for their goods, regardless of the demand and supply for the currency.
D)the government defines its currency to be worth a certain amount in terms of another currency and ensures that the rate remains at that level.

Question 12

By the early 20th century, the majority of the world's major trading nations had adopted the:

A)gold standard.
B)managed float exchange rate system.
C)Bretton Woods exchange rate system.
D)floating exchange rate system.

Question 13

The country's exchange rate system is a(n)_________ system when a country's exchange rate is allowed to vary within a particular target zone against the currencies of other countries.

A)floating rate
B)adjustable peg
C)pegged rate
D)managed floating rate

Question 14

Under a 'floating exchange rate', the exchange rate:

A)will change whenever the price of gold changes.
B)is controlled by central bank intervention.
C)is determined by the interaction of supply of the currency and demand for the currency.
D)is pegged against the euro.

Question 15

A currency exchange rate system under which the currency is determined by demand and supply, and occasional government intervention is a:

A)floating currency system.
B)fixed currency system.
C)managed float exchange rate system.
D)gold standard system.

Question 16

Under the gold standard, if one United States dollar could be traded for one half ounce of gold, and one British pound could be redeemed for one ounce gold, the exchange rate would be:

A)$1 = £4.
B)$2 = £1.
C)$4 = £1.
D)$1 = £2.

Question 17

When the value of a currency is fixed relative to a particular country's currency, this is referred to as a ________ exchange rate.

A)permanent
B)variable
C)floating
D)pegged

Question 18

When countries agree to keep the exchange rates between their countries at an unchanging rate, the exchange rate system is called a:

A)fixed exchange rate system.
B)pegged exchange rate system.
C)pre-determined exchange rate system.
D)managed float exchange rate system.

Question 19

Australia currently uses which of the following exchange rate systems?

A)a fixed exchange rate system
B)the Bretton Woods System
C)a managed float system
D)a gold standard system

Question 20

An example of a 'fixed exchange rate system' is:

A)a floating currency exchange rate system.
B)the gold standard.
C)a managed float exchange rate system.
D)an exchange rate system where currencies are determined by the market.

Question 21

The International Monetary Fund was established during the Bretton Woods System to:

A)determine the rate of British pounds per ounce of gold.
B)determine which central banks were eligible to have a fixed exchange rate.
C)provide loans to central banks that did not have reserves to maintain fixed exchange rates.
D)try and move countries to floating exchange rates.

Question 22

Australian currency continues to be backed by the gold standard to this day.

Question 23

Under the Bretton Woods System, the par rate per British pound was defined as a fixed number of United States (US)dollars per pound. If this were set above its equilibrium value, then:

A)the British central bank would have to sell pounds for US dollars.
B)a surplus of pounds would exist.
C)the demand for pounds would exceed the supply of pounds.
D)the British central bank would have to buy pounds with US dollars.

Question 24

The anchoring feature of the Bretton Woods System was the:

A)fixed value of the United States dollar against gold.
B)fixed value of the rate of exchange of the United States dollar and special drawing rights.
C)law of supply and demand applied to currencies.
D)tying of all currencies to the British pound to reduce the exchange rate fluctuations that occurred during the Great Depression.

Question 25

In the late 1960s, speculators were counting on the value of the German mark to ________ and the German central bank responded by ________ marks.

A)increase; selling more
B)increase; selling less
C)decrease; buying more
D)decrease; buying less

Question 26

Under the 'Bretton Woods System':

A)the United States of America pledged to buy gold at $35 an ounce.
B)the central banks of the members of the system agreed to allow their currencies to float.
C)the members of the system agreed to redeem their paper currency domestically.
D)exchange rates were floating, determined in the market.

Question 27

Limits on the flow of foreign exchange and financial investment across countries are called:

A)capital controls.
B)fixed exchange rates.
C)credit constraints.
D)currency restrictions.

Question 28

One problem with the Bretton Woods System was that:

A)the total number of United States (US)dollar reserves held by central banks was greater than US gold reserves.
B)some countries with overvalued currencies refused to devalue them.
C)in the early days of the system, many currencies were undervalued versus the US dollar.
D)gold discoveries caused worldwide inflation.

Question 29

Under the Bretton Woods System, Germany did not want to revalue its currency because the revaluation would:

A)make imports more expensive to Germans.
B)rapidly increase the money supply, causing inflation.
C)make exported goods more expensive.
D)cause a recession.

Question 30

The countries that abandoned the gold standard the earliest during the Great Depression suffered the least loss of production.

Question 31

The Australian dollar is partially backed by the gold held at the Reserve Bank of Australia.

Question 32

Refer to Figure 15.1 for the following questions.
Figure 15.1

Suppose the above graph in Figure 15.1 represents the market for the British pound under the Bretton Woods System. If the par exchange rate was set at 2 United States dollars and the situation persisted:

A)the currency would be overvalued.
B)there would need to be devaluation of the currency.
C)the supply of pounds would be less than the demand for pounds.
D)the supply of pounds would be greater than the demand for pounds.

Question 33

During the Great Depression, many countries left the gold standard because:

A)central banks could not pursue active monetary policy under the gold standard.
B)active fiscal policy could not be pursued under the gold standard.
C)people began to lose faith in gold as a medium of exchange and would no longer accept it as a means of payment.
D)gold supplies could be increased rapidly to expand the money supply.

Question 34

Under the 'gold standard':

A)there was no inflation.
B)the central bank had more complete control over the money supply.
C)technological change in the production of gold did not affect the money supply.
D)the central bank lacked control over the money supply.

Question 35

Under the Bretton Woods System, central banks were committed to selling ________ in exchange for their own currencies.

A)gold
B)British pounds
C)US dollars
D)German marks

Question 36

If a currency's par rate (defined as United States (US)dollars per unit of foreign currency)was ________ the equilibrium rate and this persisted, then under the Bretton Woods System, the country would be allowed a currency ________.

A)above; devaluation
B)equal to; devaluation
C)below; devaluation
D)above; overvaluation

Question 37

Foreign currency prices of the Australian dollar are currently determined by a managed float exchange rate system.

Question 38

Refer to Figure 15.1 for the following questions.
Figure 15.1

Suppose the graph in Figure 15.1 represents the market for the British pound under the Bretton Woods System. If the par exchange rate was set at 4 United States dollars:

A)a shortage of pounds will exist.
B)the British central bank will have to buy pounds with US dollars.
C)the pound will be undervalued versus the US dollar.
D)the demand for pounds will be greater than the supply.

Question 39

Countries abandoned the 'gold standard' during periods of:

A)expansion.
B)inflation.
C)war.
D)low unemployment.

Question 40

The Bretton Woods System was a system of ________ exchange rates against the United States dollar.

A)flexible
B)variable
C)floating
D)fixed

Question 41

Soon after the Australia dollar was floated, it ________ against the United States dollar and ________ against other major currencies.

A)appreciated; appreciated
B)depreciated; appreciated
C)appreciated; depreciated
D)depreciated; depreciated

Question 42

Describe how the 'Bretton Woods System' operated.
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Question 43

What is a 'gold standard'? What kind of exchange rate system is it? What problem does it present during a depression?
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Question 44

All of the following explain why purchasing power parity does not completely explain long-run fluctuations in exchange rates, except:

A)not all goods and services produced in any country are traded internationally.
B)consumer preferences for goods and services differ across countries.
C)some countries impose barriers to trade.
D)most countries have free markets with little, if any, government regulation.

Question 45

Explain the difference between a 'floating exchange rate', a 'managed float' and a 'fixed exchange rate'.
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Question 46

Suppose the price of a mobile phone in Australia is $400 and 30 000 yen in Japan. If the current exchange rate is 100 yen to the dollar, then purchasing power parity theory would predict that in the long run:

A)the yen will depreciate relative to the dollar.
B)the yen will appreciate relative to the dollar.
C)the value of the yen relative to the dollar will not change.
D)both the yen and the dollar will appreciate.

Question 47

The 'purchasing power parity theory' of exchange rate determination states that:

A)in the short run, costs of labour are the most important determinant of the exchange rate.
B)in the long run, a government agency sets the exchange rate between countries to maintain purchasing power.
C)in the long run, exchange rates will move to equalise the purchasing power of different countries.
D)in the long run, exchange rates are mainly driven by currency speculators' expectations.

Question 48

Exchange rates will equalise purchasing power parity in the long run unless:

A)all products can be traded internationally.
B)products do not differ across countries.
C)countries practise free trade.
D)countries impose barriers to trade, such as tariffs and quotas.

Question 49

The 'theory of purchasing power parity' implies that:

A)in the long run, the prices of goods in different countries will be the same when measured in a common currency.
B)the prices of goods in different countries are always the same.
C)the nominal exchange rates will equate over time.
D)demand and supply have no influence over the exchange rate.

Question 50

The trade weighted index (TWI)is a measure of the:

A)difference between exports and imports, to establish the balance of trade on goods and services.
B)value of the Australian dollar against a basket of currencies of its major trading partners.
C)volume of international trade throughout the world.
D)price changes in goods and services traded between Australia and the rest of the world.

Question 51

'Purchasing power parity' is the theory that in the long run, exchange rates move to equalise:

A)nominal interest rates across countries.
B)real GDP across countries.
C)corporate profits across countries.
D)the relative purchasing power of currencies across countries.

Question 52

Exchange rates under the Bretton Woods System were determined by relative supplies of gold held by countries within the system.

Question 53

Assume that a Big Mac burger costs $3.57 in Australia and 7.80 zlotys in Poland. If the exchange rate is 3 zlotys per dollar, what is the dollar cost of a Big Mac in Poland?

A)$1.19
B)$2.60
C)$4.23
D)$10.71

Question 54

Which of the following is not a feature of the current exchange rate system?

A)Some developing countries attempt to keep their currencies' exchange rates fixed against the US dollar or other major currencies.
B)Developed countries rely on the gold standard to fix their currencies' exchange rates.
C)Most Western European countries have adopted a single currency: the euro.
D)Australia allows the dollar to float against other major currencies, only intervening occasionally.

Question 55

Assume that a Big Mac burger costs $3.57 in Australia and 7.80 zlotys in Poland. If the exchange rate is 3 zlotys per dollar, purchasing power parity predicts that the dollar will:

A)appreciate as the demand for dollars rises in the long run.
B)appreciate as the supply of dollars falls in the long run.
C)depreciate as the demand for dollars falls in the long run.
D)depreciate as the supply of dollars rises in the long run.

Question 56

Because of inflation, the prices of Australian goods are rising faster than prices of goods in Great Britain. If purchasing power parity holds, then:

A)the Australian dollar will depreciate against the British pound.
B)the Australian dollar will appreciate against the British pound.
C)the value of the Australian dollar relative to the British pound will remain the same.
D)it will take fewer Australian dollars to buy one British pound.

Question 57

What was the General Agreement on Tariffs and Trade (GATT)? What did it accomplish?
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Question 58

The Australian dollar was floated in:

A)1974.
B)1983.
C)1989.
D)2001.

Question 59

According to the theory of 'purchasing power parity', the foreign exchange market will:

A)no longer demand Australian dollars if the inflation rate in Australia is higher than the inflation rates in other countries.
B)undervalue the Australian dollar if inflation in Australia is higher than the inflation rates in other countries.
C)adjust the value of currencies to reflect differing inflation rates between countries.
D)result in an increase in the supply of dollars whenever Australia's inflation rate is lower than the inflation rates in other countries.

Question 60

What determined the exchange rates among currencies under the gold standard and what caused the gold standard to collapse?
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Question 61

The United States of America implements a quota on imported cotton. This will ________ the supply of United States dollars relative to the currencies of foreign cotton producers and lead to a(n)________ of United States dollars relative to these foreign currencies.

A)increase; appreciation
B)increase; depreciation
C)decrease; appreciation
D)decrease; depreciation

Question 62

If Australians develop an increased preference for foreign goods, how will the exchange rate for the dollar respond in the long run, ceteris paribus?

A)Exchange rates will rise.
B)Exchange rates will fall.
C)Exchange rates will be unaffected by changes in the preference for imported goods by Australians, both in the short run and in the long run.
D)The exchange rate will be affected in the short run, but not in the long run.

Question 63

By 2017, there were ________ member countries in the European Union (still including the UK).

A)12
B)16
C)28
D)57

Question 64

The demand by other countries for Australian dollars will increase when:

A)there is a decrease in demand by other countries for Australia's goods and services.
B)more Australians travel overseas.
C)Australians import more goods.
D)foreigners purchase more Australian goods.

Question 65

All of the following are considered among the four most important determinants in explaining exchange rate fluctuations in the long run, except:

A)tariffs and quotas.
B)preferences for domestic and foreign goods.
C)interest rates.
D)relative rates of productivity growth across countries.

Question 66

If inflation in Australia is higher than inflation in Japan, what will happen to the exchange rate between the Australian dollar and the Japanese yen in the long run, ceteris paribus?

A)The dollar will appreciate against the yen.
B)The dollar will depreciate against the yen.
C)The dollar's value relative to the yen will not change.
D)Both the dollar and the yen will appreciate.

Question 67

Which of the following will cause the Australian dollar to depreciate against the Japanese yen?

A)Prices in Japan rise faster than prices in Australia.
B)The average productivity of Japanese firms is higher than Australian firms.
C)Australian consumers decrease their preferences for Japanese goods.
D)A quota is placed on Australian products.

Question 68

Refer to Figure 15.2 for the following questions.
Figure 15.2

Which of the following would cause the change depicted in Figure 15.2? Note that the figure depicts the quantity of euros traded.

A)Australian productivity falls relative to European productivity.
B)Australians decrease their preferences for goods produced in the European Union (EU)relative to Australian goods.
C)The EU increases its quotas on Italian wine.
D)The price level of goods produced in the EU decreases relative to the price level of goods produced in Australia.

Question 69

What factors are most important for determining exchange rate fluctuations in the long run?

A)relative price levels across countries
B)relative rates of productivity growth across countries
C)preferences for domestic and foreign goods across countries
D)All of these options are correct.

Question 70

Because of the emissions testing scandal at Volkswagen, Australians develop an aversion to German cars relative to cars manufactured in Australia. This will, ceteris paribus:

A)decrease the demand for German cars relative to Australian cars, decrease the demand for the euro and the euro should depreciate against the dollar.
B)increase the demand for German cars relative to Australian cars, increase the demand for the euro and the euro should appreciate against the dollar.
C)decrease the demand for German cars relative to Australian cars, decrease the demand for the euro and the euro should appreciate against the dollar.
D)increase the demand for German cars relative to Australian cars, decrease the demand for the euro and the euro should depreciate against the dollar.

Question 71

If there is ________ in prices overseas relative to Australia, the demand for ________ in the foreign exchange market.

A)a decrease; Australian dollars will decrease
B)an increase; Australian dollars will decrease
C)an increase; foreign currencies will increase
D)None of these options is correct.

Question 72

Suppose that average productivity of Chinese firms increases more rapidly than the average productivity of Australian firms, then:

A)production costs in China fall, quantity demanded for Chinese products rises and the value of yuan falls against the dollar.
B)production costs in China rise, quantity demanded for Chinese products falls and the value of yuan falls against the dollar.
C)production costs in China fall, quantity demanded for Chinese products rises and the value of yuan rises against the dollar.
D)production costs in China rise, quantity demanded for Chinese products rises and the value of yuan rises against the dollar.

Question 73

Australians demand Japanese yen to:

A)enable them to export goods and services to Japan.
B)enable them to buy Japanese products.
C)allow Japanese businesses to import Australian products.
D)be able to supply Australian goods to Japan.

Question 74

Refer to Figure 15.2 for the following questions.
Figure 15.2

Which of the following would cause the change depicted in Figure 15.2? Note that the figure depicts the quantity of euros traded.

A)European productivity rises relative to Australian productivity.
B)Japanese decrease their preferences for goods produced in the EU relative to Australian goods.
C)The European Union increases its quotas on German wrist watches.
D)The price level of goods produced in the EU increases relative to the price level of goods produced in Australia.

Question 75

If one United States dollar could be exchanged for one Australian dollar in 1970, and one United States dollar can now be exchanged for 1.27 Australian dollars, which of the following is true?

A)The United States dollar lost value against the Australian dollar.
B)The Australian dollar gained value against the United States dollar.
C)The Australian dollar lost value against the United States dollar.
D)The United States dollar lost value against the Australian dollar; and the Australian dollar gained value against the United States dollar.

Question 76

Which of the following would increase the value of the Australian dollar in the long run?

A)A decrease in inflation in Australia relative to other countries.
B)A decrease in the demand for Australian goods relative to goods from other countries.
C)An increase in Australian tariffs on foreign goods.
D)A decrease in the supply of Australian dollars on the foreign exchange market.

Question 77

If the average rate of productivity growth in Indian firms is greater than in Australia, then:

A)the Indian rupee will decrease relative to the Australian dollar in the foreign exchange market.
B)the prices of Indian products will increase.
C)the quantity demanded of Indian products will increase relative to Australian products.
D)All of these options are correct.

Question 78

If prices rise slower in the United States of America (USA)than in Australia, then:

A)demand for the $US declines and the $US appreciates relative to the A$.
B)demand for the $US declines and the $US depreciates relative to the A$.
C)demand for the $US increases and the $US appreciates relative to the A$.
D)demand for the $US increases and the $US depreciates relative to the A$.

Question 79

How will the exchange rate (foreign currency per dollar)respond to a decrease in the relative rate of productivity growth in Australia in the long run?

A)Exchange rates will rise.
B)Exchange rates will fall.
C)Exchange rates will be unaffected by changes in the relative rate of productivity growth in Australia, both in the short run and in the long run.
D)The exchange rate will be affected in the short run, but not in the long run.

Question 80

All else being equal, if the rate of growth in productivity in Spain is lower than the rate of growth in productivity in Australia, the euro will:

A)decrease in value relative to the Australian dollar.
B)increase in value relative to the Australian dollar.
C)nominally appreciate against the Australian dollar, but its real value relative to the dollar will remain unchanged.
D)nominally depreciate against the Australian dollar, but its real value relative to the dollar will remain unchanged.