Deck 10: The International Monetary System

Question 1

The gold standard emerged at the center of the international monetary system during the

A) 1790s.
B) 1830s.
C) 1870s.
D) 1910s.
E) 1940s.

Answer 1

C

Question 2

Balance-of-payments adjustments

A) in a fixed exchange system, intervention does not change the money supply.
B) in a fixed exchange system, intervention changes the money supply.
C) in a fixed exchange system, does not change the relative prices of imports and exports between two trading countries.
D) in a floating exchange system, does not change through exchange-rate movements.
E) in a floating exchange system, internal prices do not remain stable.

Answer 2

B

Question 3

According to the Oatley book,the difference between total US owned assets abroad and foreign owned assets in the United States for 2007 was

A) a surplus of $767.8 billion.
B) a deficit of $767.8 billion.
C) a deficit of $1.289 trillion.
D) a surplus of $2.057 trillion.
E) a deficit of $733.0 billion.

Answer 3

A

Question 4

The most important feature of a fixed exchange-rate system is that

A) markets establish the values for currencies.
B) central banks establish the values for their currencies.
C) governments establish the values for gold and silver.
D) governments establish the fixed values for their currencies.
E) governments buy and sell their currencies.

Question 5

In the balance of payments accounting system,if a country

A) has a current account deficit, it must have a capital account surplus.
B) has a current account deficit, it must have a capital account deficit.
C) has a current account surplus, it must have a capital account surplus.
D) has a capital account deficit, it must have a current account deficit.
E) has a capital account surplus, it must have a current account surplus.

Question 6

The sole purpose of the international monetary system is to

A) maximize the profits of MNCs.
B) protect the rights of home countries of MNCs.
C) protect the rights of host countries of MNCs.
D) control and regulate the currencies of countries.
E) facilitate international economic exchange.

Question 7

The most important feature of a floating exchange-rate system is that

A) markets establish the values for currencies.
B) central banks establish the values for their currencies.
C) governments establish the values for gold and silver.
D) governments establish the fixed values for their currencies.
E) governments buy and sell their currencies.

Question 8

The income subcategory of the balance of payments current account system registers

A) imports and exports of manufacturing and agricultural products.
B) imports and exports of service sector activities.
C) payments such as royalties, interest payments and profits.
D) remittances, gifts and foreign aid.
E) direct foreign investment.

Question 9

Which of the following innovations was not introduced by the Bretton Woods system?

A) Greater exchange-rate flexibility
B) Capital controls
C) A stabilization fund
D) The IMF
E) The World Bank

Question 10

If a government is unwilling to accept occasional deflation and inflation caused by balance of payments adjustments,

A) it cannot maintain a fixed exchange rate system.
B) it must maintain a fixed exchange system.
C) it can both stabilize exchange rates and domestic prices at the same time.
D) it cannot trade with other countries.
E) it cannot maintain a floating exchange system.

Question 11

In a managed float exchange-rate system

A) governments commit themselves to maintaining a specific fixed price against other currencies
B) governments allow their currencies to float freely.
C) governments intervene in the foreign exchange market to influence the value of their currency.
D) currency speculation is prohibited.
E) governments only change the value of their currency very rarely.

Question 12

The emergence of political constraints on domestic adjustment after WW II

A) mandated a return to rigidly fixed exchange rates.
B) mandated a return to successful floating rates from the 1930s.
C) was not influenced by the emergence of mass-based democracies.
D) ruled out a return to rigidly fixed exchange rates.
E) weakened the gold standard during a fundamental exchange disequilibrium.

Question 13

Imports and exports of activities such as banking,insurance,transportation and tourism are registered in the

A) the trade account.
B) the service account.
C) the income account.
D) the expense account.
E) unilateral transfers account.

Question 14

The capital account of the balance of payments accounting system registers the financial flows between the United States and the rest of the world.Which of the following is not one of its subcategories?

A) Total US Owned Assets Abroad
B) Foreign assets in the United States
C) Balance of Trade
D) Balance on Capital Account
E) Overall Balance (statistical adjustment)

Question 15

The trade in goods subcategory of the balance of payments current account system registers

A) imports and exports of manufacturing and agricultural products.
B) imports and exports of service sector activities.
C) payments such as royalties, interest payments and profits.
D) remittances, gifts and foreign aid.
E) direct foreign investment.

Question 16

Between 1880 and 1913,the gold standard stabilized exchange rates

A) but at the price of modest external price instability.
B) as well as domestic prices.
C) but at the price of substantial domestic price instability.
D) and neutralized potential political conflict caused by falling domestic prices.
E) until bimetallic standards were re-established after WWI.

Question 17

Immigrant worker remittances,gifts and foreign aid are registered in the

A) direct foreign investment account subcategory of the balance of payments current account system.
B) unilateral transfers account subcategory of the balance of payments current account system.
C) the income account subcategory of the balance of payments current account system.
D) the service account subcategory of the balance of payments current account system.
E) the trade account subcategory of the balance of payments current account system.

Question 18

The current account of the balance of payments accounting system has several subcategories.Which of the following is not one of those subcategories?

A) The trade account
B) The service account
C) The income account
D) The expense account
E) Unilateral transfers account

Question 19

The Bretton Woods system

A) represented the first time that governments explicitly made exchange rates a matter of international cooperation.
B) was a form of floating exchange rates.
C) was not fully implemented until 1949.
D) was an attempt to limit domestic economic autonomy after WW II.
E) was unsuccessful at establishing exchange rate stability in spite of rapid growth in international trade after WW II.

Question 20

An exchange-rate system is a set of rules governing how much currencies in the foreign exchange market can

A) rise or fall in value.
B) be traded for imports.
C) be traded for exports.
D) be used to make debt payments.
E) be regulated by the IMF.

Question 21

Why do we live in a world where currencies are so unstable?

Question 22

In floating exchange rate systems,balance of payments adjustment occurs through changes in domestic prices.

Question 23

The shift to floating exchange rates reflected agreement among governments that the international monetary system would perform better under floating rates than under fixed rates.

Question 24

The IMF was intended to limit two kinds of behavior:

A) competitive devaluations and abuse of the stabilization fund.
B) competitive revaluations and exchange restrictions.
C) abuse of the gold standard and conditionality agreements.
D) exchange restrictions and conditionality agreements.
E) competitive devaluations and conditionality agreements.

Question 25

A currency's exchange-rate is determined by the interaction between the supply and demand for currencies in the foreign exchange market.

Question 26

What political reasons explain why most governments prefer domestic price stability over exchange rate stability?

Question 27

Explain the differences between fixed and floating currency exchange systems.Which is better?

Question 28

Most countries have national currencies that are not generally accepted as legal payment outside their borders.

Question 29

Because the dollar served as the Bretton Wood's system's primary reserve asset,reducing the number of dollars circulating in the global economy would reduce the liquidity that financed world trade.

Question 30

What role has the gold standard played in currency exchange systems since 1870?

Question 31

Exchange restrictions are government regulations that

A) require substantial domestic adjustments that governments are unwilling to accept.
B) allow a central bank to establish a monopoly on foreign exchange.
C) in the 1930s allowed governments to maximize capital flows.
D) Americans wanted to restore after WW II to liberalize international capital markets.
E) were used by the IMF to disallow residents to convert domestic currency into foreign currencies to settle current-account transactions.

Question 32

According to Oatley,the world currently has a floating exchange rate system because

A) markets are recognized as the best means of establishing values of currencies.
B) of government corruption that accompanied the timing of dramatic devaluations in a fixed system.
C) the Smithsonian realignments solved the problem of economic imbalances.
D) of political unwillingness to accept the domestic costs imposed by fixed exchange rates.
E) it solved the inflationary problems caused by oil being priced in US dollars.

Question 33

In a pure floating exchange-rate system governments engage in foreign exchange market intervention to influence the value of their currency.

Question 34

The Smithsonian realignment solved neither the economic imbalances nor the political conflicts that were the cause of the Bretton Woods system's weakening.

Question 35

What are "balance of payment" devices? How are adjustments made under fixed and floating systems?

Question 36

The Bretton Woods system represented the first time that governments explicitly made exchange rates a matter of international cooperation.

Question 37

The IMF was created to limit competitive devaluations and currency speculation.

Question 38

According to Oatley,the fundamental cause of collapse of the Bretton Woods international monetary system was

A) dollar overhang.
B) unfair advantages of the dollar as the reserve currency.
C) unstable gold prices.
D) speculative attacks on weak currencies.
E) governments' unwillingness to accept the domestic costs of balance-of payments adjustments.

Question 39

Fixed exchange-rates provide exchange rate stability but they also prevent governments from using monetary policy to manage domestic economic activity.

Question 40

According to Oatley,the American dollar became the post WWII's foreign exchange system's reserve currency

A) at the insistence of American MNCs.
B) as an unintended consequence of the Bretton Woods system.
C) as an intended consequence of the Bretton Woods system.
D) at the insistence of the IMF.
E) because of the inability of the US government to exchange dollars for gold.

Question 41

Explain each of the four innovations introduced by the Bretton Woods system.

Question 42

Why was the postwar attempt to create an international monetary system that provided both exchange rate stability and domestic economic autonomy ultimately unsuccessful?

Question 43

What is "dollar overhang" and how did it threaten the stability of the Bretton Woods system?

Question 44

How does the IMF stabilization fund work?

Question 45

What were the three policy options for governments to resolve the payments imbalances that worsened with the onset of the war in Vietnam in 1965?