Deck 3: The International Monetary System

Question 1

The price of one country's currency in units of another currency or commodity is the ________.

A) foreign interest rate
B) foreign currency exchange rate
C) par value
D) international rate

Answer 1

foreign currency exchange rate

Question 2

Members of the International Monetary Fund may settle transactions among themselves by transferring Special Drawing Rights (SDRs).

Answer 2

True

Question 3

A United States firm had chosen to deposit money in a British bank and have it denominated in U.S. dollars. This is an example of a (an) ________ deposit.

A) imPounded
B) Euroyen
C) Europound
D) Eurodollar

Answer 3

Eurodollar

Question 4

The International Monetary Fund (IMF)

A) in recent years has provided large loans to Russia, South Korea, and Brazil.
B) was created as a result of the Bretton Woods Agreement.
C) aids countries with balance of payment and exchange rate problems.
D) is all of the above.

Question 5

The post WWII international monetary agreement that was developed in 1944 is known as the ________.

A) United Nations
B) League of Nations
C) Yalta Agreement
D) Bretton Woods Agreement

Question 6

Another name for the International Bank for Reconstruction and Development is

A) the Recon Bank.
B) the European Monetary System.
C) the Marshall Plan.
D) the World Bank.

Question 7

You check the Yahoo.com currency web page and find that the Japanese yen is trading at a rate of
113 yen per dollar. This rate of exchange is typically referred to as the ________.

A) forward rate
B) par rate
C) spot rate
D) 113 rate

Question 8

The ________, as of December 2007, is the common currency for 13 of the countries that are members of the European Union.

A) SDR (Special Drawing Rights)
B) ECU (European Currency Unit)
C) Euro
D) Yugo

Question 9

A speculative technique whereby the speculator sells an asset that he/she doesn't own, such as a currency, to another party for delivery at a future date is called ________.

A) selling ahead
B) selling behind
C) selling short
D) selling long

Question 10

Today, the United States has been ejected from the International Monetary Fund for refusal to pay annual dues.

Question 11

A country that regulates the rate at which its currency is exchanged for all other currencies is considered to have a ________ exchange rate system.

A) fixed or managed
B) floating or flexible
C) forward
D) spot

Question 12

Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20.67 in U.S. dollars and £4.2474 in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was

A) £4.8665/$.
B) £0.2055/$.
C) always changing because the price of gold was always changing.
D) unknown because there is not enough information to answer this question.

Question 13

The increase in value of a currency pegged to gold or another currency is known as ________.

A) appreciation
B) revaluation
C) strengthened
D) hardened

Question 14

A currency that has decreased in foreign exchange value relative to a floating rate currency has ________.

A) revalued
B) appreciated
C) devalued
D) depreciated

Question 15

A currency that has increased in foreign exchange value relative to a floating rate currency has ________.

A) revalued
B) violated international trade agreements
C) appreciated
D) deteriorated

Question 16

World War I caused the suspension of the gold standard for fixed international exchange rates because the war

A) cost too much money.
B) interrupted the free movement of gold.
C) lasted too long.
D) used gold as the main ingredient in armament plating.

Question 17

A ________ currency is expected to devalue or depreciate relative to major currencies.

A) soft or weak
B) hard or strong
C) deteriorated
D) devalued

Question 18

Which of the following investment strategies will allow me to make a profit if I anticipate that the value of the Euro, a currency that I do not own, is going to fall over the next 90 days and I am correct in my prediction?

A) Sell Euros short.
B) Buy Euros short.
C) Sell dollars short.
D) Buy Euros long.

Question 19

Under the terms of Bretton Woods countries tried to maintain the value of their currencies to within 1% of a hybrid security made up of the U.S. dollar, British pound, and Japanese yen.

Question 20

The drop in value of a currency pegged to gold or another currency is known as ________.

A) revaluation
B) depreciation
C) deterioration
D) devaluation

Question 21

A small economy country whose GDP is heavily dependent on trade with the United States could use a (an) ________ exchange rate regime to minimize the risk to their economy that could arise due to unfavorable changes in the exchange rate.

A) pegged exchange rate with the United States
B) pegged exchange rate with the Euro
C) independent floating
D) managed float

Question 22

Which of the following correctly identifies exchange rate regimes from less fixed to more fixed?

A) independent floating, currency board arrangement, crawling pegs
B) independent floating, currency board arrangement, managed float
C) independent floating, crawling pegs, exchange arrangements with no separate legal tender
D) exchange arrangements with no separate legal tender, currency board arrangement, crawling pegs

Question 23

If exchange rates were fixed, investors and traders would be relatively certain about the current and near future exchange value of each currency.

Question 24

The authors discuss the concept of the "Impossible Trinity" or the inability to achieve simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve?

A) monetary independence and exchange rate stability
B) exchange rate stability and full financial integration
C) full financial integration and monetary independence
D) A country cannot attain any of the exchange rate goals with a pure float exchange rate regime.

Question 25

Which of the following is NOT an argument against dollarization?

A) The dollarized country's central bank can no longer act as a lender of last resort.
B) The dollarized country can no longer profit from seignorage (the ability to profit from the creation of money within its economy).
C) The dollarized country losses sovereignty over its own monetary policy.
D) All of the above are arguments against dollarization from the viewpoint of the affected country.

Question 26

In January 2002, the Argentine Peso was officially valued at a rate of Peso1.40/USD. More recently the exchange rate is Peso 3.10/USD, thus, the Argentine Peso ________ against the U.S. dollar.

A) strengthened
B) weakened
C) remained neutral
D) all of the above

Question 27

You have been hired as a consultant to the central bank for a country that has for many years suffered from repeated currency crises and depends heavily on the U.S. financial and product markets. Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the United States?

A) dollarization
B) an exchange rate pegged to the U.S. dollar
C) an exchange rate with a fixed price per ounce of gold
D) an internationally floating exchange rate

Question 28

Based on the premise that, other things equal, countries would prefer a fixed exchange rate: Variable rates provide stability in international prices for the conduct of trade.

Question 29

Even though the Euro currency has been designed and printed, it is still not available for general use by the public, except for tourists, in the European Union.

Question 30

The United States currently uses a ________ exchange rate regime.

A) crawling peg
B) pegged
C) floating
D) fixed

Question 31

Which of the following led to the eventual demise of the fixed currency exchange rate regime worked out at Bretton Woods?

A) widely divergent national monetary and fiscal policies among member nations
B) differential rates of inflation across member nations.
C) several unexpected economic shocks to member nations
D) all of the above

Question 32

As of January 2002, the Independent Floating regime of exchange rate classifications was used by over 75% of the 186 countries identified by the IMF.

Question 33

The Euro currency is fixed against other currencies on the international currency exchange markets, but allows member country currencies to float against each other.

Question 34

Which of the following is not an attribute of the "ideal" currency?

A) monetary independence
B) full financial integration
C) exchange rate stability
D) All are attributes of an ideal currency.

Question 35

Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true?

A) Fixed rates provide stability in international prices for the conduct of trade.
B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate.
C) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies.
D) Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses.

Question 36

The attempt by many countries to stimulate their domestic economies and to gain access to global financial markets, is causing more and more countries to choose a ________ or ________ exchange rate regime.

A) floating; monetary union
B) monetary union; full capital controls
C) full capital controls; floating
D) pegged; fixed

Question 37

Beginning in 1991 Argentina conducted its monetary policy through a currency board. In January 2002, Argentina abandoned the currency board and allowed its currency to float against other currencies. The country took this step because

A) the Argentine Peso had grown too strong against major trading powers thus the currency board policies were hurting the domestic economy.
B) the United States required the action as a prerequisite to finalizing a free trade zone with all of North, South, and Central America.
C) the Argentine government lost the ability to maintain the pegged relationship as in fact investors and traders perceived a lack of equality between the Argentine Peso and the U.S. dollar.
D) all of the above.

Question 38

On September 9, 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre, with the U.S. dollar. This practice is known as ________.

A) bi-currencyism
B) sucrerization
C) a Yankee bailout
D) dollarization

Question 39

The IMFs exchange rate regime classification identifies ________ as the most rigidly fixed, and ________ as the least fixed.

A) exchange arrangements with no separate legal tender; independent floating
B) crawling pegs; managed float
C) currency board arrangements; independent floating
D) pegged exchange rates within horizontal bands; exchange rates within crawling pegs

Question 40

A bank holiday

A) occurs every day after 3:00 p.m.
B) is a term used when a country's central government freezes (temporarily) all deposits in commercial banks.
C) is observed in Europe every fourth Friday.
D) occurs the last three working days of the year to prepare financial statements for tax purposes.

Question 41

Which of the following groups of countries have replaced their individual currencies with the Euro?

A) France, Germany, and the United Kingdom
B) Sweden, Denmark, and Greece
C) The United Kingdom, The Netherlands, and Austria
D) Germany, The Netherlands, and Italy

Question 42

Which of the following is NOT an example of a Eurocurrency deposit?

A) British pounds deposited outside of the United Kingdom
B) Japanese yen deposited outside of Japan
C) U.S. dollars deposited outside of the United States
D) All of the above could be considered Eurocurrency deposits.

Question 43

What was the annualized forward premium on the pound if the spot rate on January 20, 2005 was £0.5156$ and the 180 day forward rate was £0.5000/$?

A) 6.24%
B) 3.12%
C) 1.56%
D) 6.05%

Question 44

The tremendous international mobility of financial capital is forcing emerging market nations to adopt one of two polarized choices, free float or currency board, for their foreign currency exchange regimes. Which of the following would NOT be a reason for an emerging nation to choose to have their currency freely float?

A) The country desires to lose political influence on the valuation of their currency.
B) The emerging nation desires an independent monetary policy.
C) The emerging nation is willing to tradeoff exchange rate stability to gain free movement of capital.
D) All of the above.

Question 45

Which of the following would NOT be a valuable Eurocurrency market transaction?

A) Ford Motor Company holds temporary excess dollars in a London bank.
B) Dell Computer borrows dollars from a German bank to fund accounts receivable.
C) Volkswagen borrows Euros in France to finance working capital.
D) A Russian oil firm deposits dollars in Moscow Narodny Bank in London.

Question 46

For at least two years from early 2006 to early 2008, the euro maintained a strong and steady rise in value against the U.S. dollar (USD). Which of the following were NOT a contributing factor in the assent of the euro and the decline in the dollar?

A) severe U.S. balance of payments deficits
B) a general weakening of the dollar after the attacks of September 11, 2001
C) large U.S. balance of payment surpluses
D) All of the above were contributing factors.

Question 47

Most Western nations were on the gold standard for currency exchange rates from 1876 until 1914. Today we have several different exchange rate regimes in use, but most larger economy nations have freely floating exchange rates today and are not obligated to convert their currency into a predetermined amount of gold on demand. Occasionally several parties still call for the "good old days" and a return to the gold standard. Develop an argument as to why this is a good idea.

Question 48

A special Drawing Right is a unit of account established by

A) the Federal Reserve Bank.
B) the World Bank.
C) the International Monetary Fund.
D) the European Central Bank.

Question 49

Which of the following is NOT a required convergence criteria to become a full member of the European Economic and Monetary Union (EMU)?

A) National birthrates must be at 2.0 or lower per person.
B) The fiscal deficit should be no more than 3% of GDP.
C) Nominal inflation should be no more than 1.5% above the average inflation rate for the three members with the lowest inflation rates in the previous year.
D) Government debt should be no more than 60% of GDP.

Question 50

________ are domestic currencies of one country on deposit in a second country.

A) LIBORs
B) Eurocurrencies
C) Global Federal Funds
D) FOREX Funds

Question 51

Eurocurrency markets are subject to more stringent reserve requirements than those imposed on U.S. banks by the Federal Reserve.

Question 52

A currency is considered hard if

A) it is expected to be revalued or appreciate.
B) it is expected to be devalued or depreciate.
C) it is backed in part by a precious metal such as gold.
D) it is difficult to trade on the international currency exchange markets.

Question 53

Ignoring transaction costs and based solely on the change in currency exchange rates, a speculator who sold short a two-year contract for the euro (receiving dollars) in January 2006 would have realized a profit upon the exercise of the contract in January 2008.

Question 54

Which of the following is a way in which the euro affects markets?

A) Countries within the Euro zone enjoy cheaper transaction costs.
B) Currency risks and costs related to exchange rate uncertainty are reduced.
C) Consumers and business enjoy price transparency and increased price-based competition.
D) All of the above.

Question 55

Generally, Eurocurrency loans are based on the London Interbank Offered Rate (LIBOR) and have a lower offering rate because

A) Eurocurrency markets are a wholesale market.
B) transaction sizes are for very large amounts of money.
C) market participants have very good credit ratings.
D) all of the above.

Question 56

On January 4, 1999 the member nations of the EMU introduced a new unified currency, the euro, to replace the individual national currencies of many member nations. Identify and explain several of the arguments made both for and against the euro. Do you think the euro has proven to be a "good" idea? Why/Why not?

Question 57

The mobility of international capital flows is causing emerging market nations to choose between a free-floating currency exchange regime and a currency board (or taken to the limit, dollarization). Describe how each of the regimes would work and identify at least two likely economic results for each regime.

Question 58

Under a fixed exchange rate regime, the government of the country is officially responsible for

A) intervention in the foreign exchange markets using gold and reserves.
B) setting the fixed/parity exchange rate.
C) maintaining the fixed/parity exchange rate.
D) all of the above.

Question 59

According to the authors, what is the single most important mandate of the European Central Bank?

A) Promote international trade for countries within the European Union.
B) Price, in euros, all products for sale in the European Union.
C) Promote price stability within the European Union.
D) Establish an EMU trade surplus with the United States.

Question 60

In London an investor can buy a U.S. dollar for £0.5356. In New York the £/$ exchange rate is the same as found in London. Given this information, what is the $/£ exchange rate in New York?

A) $1.8671/£
B) £0.5356/$
C) £1.8671/$
D) $0.5356/£