Deck 16: The International Financial System and Monetary Policy

Question 1

Deliberate actions by a central bank to influence the exchange rate are known as

A)current account actions.
B)foreign-exchange market interventions.
C)dollar-value operations.
D)foreign-commerce maneuvers.

Answer 1

foreign-exchange market interventions.

Question 2

A sale of foreign assets by a central bank has the same effect on the monetary base as

A)a decrease in the discount rate.
B)a decrease in the required reserve ratio.
C)an open market sale of government bonds.
D)an open market purchase of government bonds.

Answer 2

an open market sale of government bonds.

Question 3

If the Fed sells $1 billion of short-term securities issued by the Bank of Japan and at the same time purchases $1 billion of short-term securities issued by the U.S. Treasury,

A)the monetary base will decline by $1 billion.
B)the monetary base will rise by $1 billion.
C)the Fed has conducted an unsterilized foreign-exchange intervention.
D)the Fed has conducted a sterilized foreign-exchange intervention.

Answer 3

the Fed has conducted a sterilized foreign-exchange intervention.

Question 4

When the Fed sells foreign assets and buy domestic assets at the same time,

A)its assets and liabilities rise by the same amount.
B)its assets and liabilities fall by the same amount.
C)the composition of its assets changes, but its liabilities are unaffected.
D)the composition of its liabilities changes, but its assets are unaffected.

Question 5

When a central bank buys foreign assets,

A)its assets and liabilities rise by the same amount.
B)its assets and liabilities fall by the same amount.
C)the composition of its assets changes, but its liabilities are unaffected.
D)the composition of its liabilities changes, but its assets are unaffected.

Question 6

If the Fed sells foreign assets, the monetary base will

A)fall by the amount of the sale, only if the Fed buys domestic bank deposits with the proceeds.
B)fall by the amount of the sale, only if the Fed buys domestic currency with the proceeds.
C)fall by the amount of the sale, whether the Fed buys domestic bank deposits or domestic currency with the proceeds.
D)rise by the amount of the sale.

Question 7

An unsterilized foreign-exchange intervention occurs

A)whenever a central bank purchases or sells domestic currency.
B)whenever a central bank purchases or sells foreign currency.
C)whenever a central bank allows the monetary base to respond to the sale or purchase of domestic currency.
D)whenever a central bank fails to reduce its holdings of gold by the amount of a foreign-exchange purchase.

Question 8

If the Fed wants to increase the value of the dollar, it will

A)sell foreign securities and buy dollars in international currency markets.
B)buy foreign securities and sell dollars in international currency markets.
C)buy foreign securities and also buy dollars in international currency markets.
D)sell foreign securities and also sell dollars in international currency markets.

Question 9

If the Fed sterilizes the purchase of foreign assets,

A)the monetary base is left unchanged.
B)the monetary base rises by the amount of the purchase.
C)the monetary base falls by the amount of the purchase.
D)the monetary base may rise, fall, or remain unchanged depending on the reaction of domestic interest rates to the purchase.

Question 10

Foreign-exchange market interventions will always

A)lead to a decline in domestic interest rates relative to foreign interest rates.
B)lead to a rise in domestic interest rates relative to foreign interest rates.
C)lead to a decline in the domestic money supply.
D)alter a central bank's holdings of international reserves.

Question 11

If the Fed buys $2 billion of short-term securities issued by the government of Japan and pays for them by writing a check for $2 billion,

A)its assets will rise by $2 billion and the monetary base will rise by $2 billion.
B)its assets will fall by $2 billion and the monetary base will fall by $2 billion.
C)its assets will rise by $2 billion and the monetary base will fall by $2 billion.
D)its assets will fall by $2 billion and the monetary base will rise by $2 billion.

Question 12

If the Fed sterilizes the purchase of foreign assets,

A)its assets and liabilities rise by the same amount.
B)its assets and liabilities fall by the same amount.
C)the composition of its assets changes, but its liabilities are unaffected.
D)the composition of its liabilities changes, but its assets are unaffected.

Question 13

International financial transactions are most likely to affect the U.S. monetary base when

A)the United States is in recession.
B)the United States is experiencing a severe inflation.
C)the Fed tries to influence the foreign-exchange value of the dollar.
D)interest rates in the United States are highly variable.

Question 14

If the Fed buys $2 billion of short-term securities issued by the government of Japan and pays for them by writing a check for $2 billion,

A)its assets will rise by $2 billion and its liabilities will fall by $2 billion.
B)its assets will fall by $2 billion and its liabilities will rise by $2 billion.
C)its assets and liabilities will both fall by $2 billion.
D)its assets and liabilities will both rise by $2 billion.

Question 15

When the Fed allows the monetary base to respond to the purchase or sale of domestic currency in the foreign exchange market, the process is called

A)open market operations.
B)hedging.
C)sterilized intervention.
D)unsterilized intervention.

Question 16

Assets denominated in foreign currency and use in international transactions are referred to as:

A)foreign money
B)international reserves
C)international monetary base
D)foreign exchange

Question 17

If the Fed wants to reduce the value of the dollar, it will

A)sell foreign assets and buy dollars.
B)sell dollars and buy foreign assets.
C)buy foreign assets and also buy dollars.
D)sell foreign assets and also sell dollars.

Question 18

When a central bank buys foreign assets,

A)its holdings of foreign assets rise by the amount of the purchase, but the monetary base is unaffected.
B)its holdings of foreign assets and the monetary base rise by the amount of the purchase.
C)its holdings of foreign assets rise by the amount of the purchase, and the monetary base rises by the amount of the purchase times the money multiplier.
D)the monetary base falls by the amount of the purchase.

Question 19

International reserves are

A)assets denominated in a foreign currency and used in international transactions.
B)reserves the Fed requires banks to hold against Eurodollar deposits.
C)reserves the International Monetary Fund requires banks to hold if they wish to participate in the market for foreign exchange.
D)central bank holdings of gold.

Question 20

If the central bank buys foreign assets,

A)the domestic monetary base will decline.
B)domestic short-term interest rates will decline.
C)the foreign-exchange value of the domestic currency will rise.
D)its holdings of international reserves will rise.

Question 21

Why may a central bank intervene in the foreign exchange market when its currency is depreciating?

A)concerns about the country's exports becoming less competitive
B)concerns about inflation
C)concerns about deflation
D)to sterilize the effects on the domestic economy

Question 22

How does a sterilized intervention by the Fed in foreign exchange market differ from an unsterilized intervention?

Question 23

If the Japanese central bank performed a sterilized intervention to reduce the value of the yen, the most likely result is:

A)a lower value of the yen due to an increase in the monetary base in Japan.
B)a lower value of the yen due to a decrease in Japanese interest rates.
C)a higher value of the yen since the intervention was sterilized.
D)no change in the value of the yen since neither the monetary base nor Japanese interest rates would be affected.

Question 24

Capital inflow restrictions

A)receive less support from economists than full capital controls.
B)may lessen domestic lending booms and risk-taking by domestic banks.
C)were imposed in the United States during the late 1990s.
D)were imposed in Europe in May 2000.

Question 25

If a central bank wishes to raise the foreign-exchange value of its currency, it will

A)buy domestic currency and sell foreign assets.
B)sell domestic currency and buy foreign assets.
C)attempt to reduce domestic interest rates.
D)attempt to raise the domestic price level relative to foreign price levels.

Question 26

Which of the following will NOT result from an unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency?

A)Domestic interest rates will rise.
B)The foreign-exchange value of the domestic currency will rise.
C)The central bank will experience a decrease in international reserves.
D)The domestic money supply will rise.

Question 27

An unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency will result in

A)higher domestic interest rates.
B)lower domestic interest rates.
C)an increase in the money supply.
D)lower domestic interest rates and an increase in the money supply.

Question 28

If a central bank engages in an unsterilized foreign-exchange intervention with the intention of raising the foreign-exchange value of its currency,

A)the central bank's holdings of international reserves will fall.
B)the domestic money supply will rise.
C)domestic interest rates will fall.
D)it will buy foreign assets.

Question 29

Make use of a T-account to show the effect of the Fed's sale of $500 million worth of government securities on the Fed's balance sheet. (assume the Fed receives a check from the sale of securities)

Question 30

How would monetary easing by the Bank of Japan affect the value of the yen?

A)It increases it since more people will take out loans at the low interest rates.
B)It reduces it since it reduces demand for yen since Japanese interest rates are now lower.
C)It increases it since it increases demand for yen since Japanese interest rates are now higher.
D)It reduces it since the supply of yen on the foreign exchange market is now lower.

Question 31

Countries in which region experienced disruptive capital flows in 1997-98?

A)Eastern Europe
B)Western Europe
C)Latin America
D)East Asia

Question 32

A purchase of foreign assets by a central bank has the same impact on the monetary base as:

A)an open market purchase of government securities
B)an open market sale of government securities
C)an increase in the discount rate
D)a reduction in the interest on reserves

Question 33

If a central bank wishes to lower the foreign-exchange value of its currency, it will

A)buy domestic currency and sell foreign assets.
B)sell domestic currency and buy foreign assets.
C)attempt to raise domestic interest rates.
D)attempt to lower the domestic price level relative to foreign price levels.

Question 34

The main reason central banks engage in foreign-exchange interventions is to

A)stabilize the domestic money supply.
B)stabilize domestic interest rates.
C)stabilize foreign interest rates.
D)stabilize the exchange rate.

Question 35

The sale of foreign assets by a central bank accompanied by an open market purchase of securities of the same size results in:

A)a reduction in the monetary base
B)an increase in the monetary base
C)a sterilized intervention
D)an unsterilized intervention

Question 36

A central bank may be reluctant to see its currency appreciate because

A)rising prices of imports will contribute to inflation.
B)falling prices of exports will contribute to inflation.
C)the country's goods may become uncompetitive in world markets.
D)the country's monetary base will increase.

Question 37

The main difference between a sterilized intervention and unsterilized intervention in the foreign exchange market is:

A)a sterilized intervention is coordinated with other nations
B)an unsterilized intervention does not change the exchange rate
C)an unsterilized intervention does not change the monetary base
D)a sterilized intervention does not change the monetary base

Question 38

Why may a central bank intervene in the foreign exchange market when its currency is appreciating?

A)concerns about the country's exports becoming less competitive
B)concerns about inflation
C)concerns about imports becoming less competitive
D)to sterilize the effects on the domestic economy

Question 39

Make use of a T-account to show the effect of the Fed's purchase of $5 billion worth of foreign government securities on the Fed's balance sheet (note: assume the Fed writes a check to purchase the securities)

Question 40

The yen is considered to be stronger if:

A)it takes fewer yen to acquire a foreign currency such as a dollar
B)it takes more yen to acquire a foreign currency such as a dollar
C)it takes fewer dollars to acquire a yen
D)it takes fewer dollars and fewer euros to acquire a yen

Question 41

Which of the following is NOT considered a payment in the balance of payments?

A)capital outflows
B)U)S. foreign aid to other countries
C)imports of goods
D)exports of services

Question 42

Make use of a graph of the foreign exchange market to show how the Central Bank of Mexico can use an unsterilized intervention to increase the value of its currency, the peso, in terms of the dollar.

Question 43

Discuss the problems associated with the imposition of capital controls.

Question 44

Which of the following is NOT considered a receipt in the balance of payments?

A)exports of goods
B)capital inflows
C)import of services
D)unilateral transfers to U.S. citizens

Question 45

Historically, the leading official reserve asset was

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

Question 46

Throughout most of the post-World War II period, the use of capital controls by governments around the world was declining. But in the late 1990s, a number of governments expressed renewed interest in capital controls. What accounts for this renewed interest?

Question 47

If the U.S. current account balance is negative,

A)its financial account is likely to be positive.
B)its financial account is likely to be negative
C)it must use official settlements to balance its payments.
D)its balance of payments cannot be zero

Question 48

What alternative to restrictions on capital inflows do some economists recommend to minimize the possibility of increased lending booms and risk taking by domestic banks?

Question 49

When someone in a country buys an asset abroad, the transaction is recorded

A)in the current account.
B)in the official settlements balance.
C)in the financial account as a capital inflow.
D)in the financial account as a capital outflow.

Question 50

The current account balance plus the financial account balance

A)equals the trade balance.
B)equals the net outflow of currency from the domestic economy.
C)will be negative during economic expansions and positive during economic contractions.
D)equals zero.

Question 51

Why do restrictions on capital inflows receive more support from some economists than restrictions of capital outflows?

Question 52

In 2011, the net financial account balance was approximately

A)$790 billion.
B)-$790 billion.
C)$394 billion.
D)-$394 billion.

Question 53

The official settlement balance

A)is an amount that the IMF requires each member country to pay annually.
B)must by definition always be zero.
C)equals the current account balance divided by the capital account balance.
D)equals the net increase in a country's official reserve assets.

Question 54

What was the approximate value of the U.S. current account balance in 2011?

A)+$10 billion
B)+$79 billion
C)-$380 billion
D)-$475 billion

Question 55

Which of the following is true of the U.S. balance of payments?

A)It includes as receipts all inflows of funds from foreigners to the United States.
B)It includes as receipts only inflows of funds used to purchase U.S. produced goods and services.
C)It includes as receipts inflows of funds used to purchase U.S. goods or services or to acquire U.S. assets but not funds received as unilateral transfers.
D)It includes as receipts inflows of funds used to purchase U.S. goods or services and funds received as unilateral transfers but not inflows of funds used to acquire U.S. assets.

Question 56

The trade balance is

A)by definition, identical to the current account balance.
B)is a major portion, but not the only component, of the current account balance.
C)almost invariably larger than the financial account balance.
D)the largest component of the financial account.

Question 57

In the balance-of-payments accounts, the statistical discrepancy

A)equals the capital account balance minus the current account balance.
B)equals the current account balance minus the capital account balance.
C)probably reflects hidden capital flows.
D)must equal zero.

Question 58

When a nation is said to be running a balance of payments surplus, this means its

A)official settlements balance is positive.
B)trade balance is positive.
C)net financial account balance is positive.
D)current account is positive.

Question 59

Make use of a graph of the foreign exchange market to show how the Brazilian Central Bank can use an unsterilized intervention to reduce the value of its currency, the real, in terms of the dollar.

Question 60

What accounted for much of policymakers' concern over U.S. current account deficits in the 1980s, 1990s, and 2000s?

A)The current account deficits were thought to be largely responsible for the federal budget deficit.
B)Current account deficits lower U.S. interest rates, thereby leading to reduced domestic saving.
C)Current account deficits require the United States to borrow funds from foreign savers.
D)The United States had signed international agreements in which it had pledged not to run a current account deficit for more than three years in a row.

Question 61

Under the Bretton Woods system, exchange rates were supposed to be adjusted

A)only when a country experienced fundamental disequilibrium.
B)daily.
C)weekly.
D)following each annual meeting of the board of governors of the International Monetary Fund.

Question 62

If a nation's current account is -$200 billion and its financial account (excluding its official settlements balance)is $175 billion, how much is its official settlements balance?

A)-$25 billion
B)+$25 billion
C)-$375 billion
D)+$ 375 billion

Question 63

How did the global savings glut in the 2000s affect the U.S. current account balance?

A)It caused it to decline by increasing the value of the dollar.
B)It caused it to decline by reducing the value of the dollar.
C)It caused it to increase by increasing the value of the dollar.
D)It caused it to increase by reducing the value of the dollar.

Question 64

Which of the following was NOT considered to have been a drawback of the pre-1914 gold standard?

A)It sometimes led to inflation, which several times in the late nineteenth century caused recessions in the United States.
B)Countries had little control over their domestic monetary policies.
C)Countries with trade deficits experienced deflation.
D)Changes in the world money supply were strongly influenced by gold discoveries.

Question 65

A nation with an official settlements balance of -$100 billion is likely to experience a:

A)balance of payments surplus and accumulate $100 billion in international reserves
B)balance of payments deficit and accumulate $100 billion in international reserves
C)balance of payments surplus and a decline of $100 billion in international reserves
D)balance of payments deficit and a decline of $100 billion in international reserves

Question 66

Under the Bretton Woods system the international reserve currency was the

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

Question 67

In the early 1930s

A)countries that abandoned the gold standard suffered severe inflation.
B)countries that tried to defend the gold standard suffered more depression than countries that abandoned the gold standard.
C)the gold standard was abandoned by every major industrial country except England.
D)the United States was the first major industrial country to abandon the gold standard.

Question 68

The gold standard probably made the Great Depression more severe in the United States because

A)the value of gold declined sharply during those years.
B)the existence of the gold standard kept prices from falling.
C)the money supply in the United States increased rapidly as gold flowed into the country.
D)the Fed attempted to reduce gold outflows by raising the discount rate.

Question 69

Under the Bretton Woods system, an asymmetry in the ability of central banks to defend their exchange rates existed because

A)a country experiencing a balance of payments surplus was limited in its ability to defend its exchange rate by its stock of international reserves.
B)a country experiencing a balance of payments deficit was limited in its ability to defend its exchange rate by its stock of international reserves.
C)central banks were allowed by the IMF to adjust their exchange rates upward whenever they chose, but were rarely allowed to adjust their exchange rates downward.
D)central banks were allowed by the IMF to adjust their exchange rates downward whenever they chose, but were rarely allowed to adjust their exchange rates upward.

Question 70

Why do some economists think a global savings glut contributed to the U.S. running a current account deficit in the 2000s?

Question 71

The speculative attack on the German mark in 1971 resulted in

A)a large increase in the German monetary base.
B)a decline in the value of the mark relative to the dollar.
C)a decision to end the floating of the mark against the dollar.
D)a large decrease in the German monetary base.

Question 72

The promise that was to hold the Bretton Woods system together was the agreement that

A)no industrial country would allow high rates of inflation.
B)foreign central banks would be able to convert U.S. dollars into gold at a fixed price.
C)no country would raise tariffs on the products of other countries.
D)all countries would be willing to redeem their paper currencies for gold.

Question 73

The Bretton Woods system lasted from

A)1801 to 1861.
B)1863 to 1914.
C)1945 to 1971.
D)1981 to 1993.

Question 74

The speculative attack on the British pound in 1967 succeeded because

A)the pound was seriously undervalued relative to the dollar.
B)Britain decided to drop out of the Bretton Woods system.
C)British exports greatly exceeded British imports, causing a large inflow of gold.
D)the Bank of England lacked the international reserves to defend the existing exchange rate indefinitely.

Question 75

Under the gold standard, if the demand for U.S. goods increased, which of the following would happen?

A)Gold would flow into the United States.
B)The U.S. monetary base would decline.
C)Prices in the United States would fall.
D)The United States would experience a balance of trade deficit.

Question 76

The fixed exchange rates of the Bretton Woods system were maintained

A)by central bank interventions in the foreign-exchange market.
B)by the requirement that short-term interest rates be equalized in all participating countries.
C)by the requirement that long-term interest rates be equalized in all participating countries.
D)through the automatic workings of the foreign-exchange market.

Question 77

A nation with an official settlements balance of $50 billion is likely to experience a:

A)balance of payments surplus and accumulate $50 billion in international reserves
B)balance of payments deficit and accumulate $50 billion in international reserves
C)balance of payments surplus and a decline of $50 billion in international reserves
D)balance of payments deficit and a decline of $50 billion in international reserves

Question 78

Why has the IMF come in for widespread criticism for its handling of the Asian financial crisis?

A)It refused to make loans to any of the countries whose currencies were under speculative attack.
B)Its policies did not sufficiently punish speculators with losses, giving rise to moral hazard.
C)Its policies led to unsustainably low interest rates in a number of Asian countries.
D)Its policies failed to lead to sufficient hardship for citizens in a number of Asian countries, giving rise to moral hazard.

Question 79

Which of the following statements is correct?

A)A devaluation of the British pound would result in more dollars to the pound.
B)A revaluation of the British pound would raise the prices of U.S. goods in Britain.
C)A devaluation of the British pound would lower the prices of British goods in the United States.
D)Revaluations and devaluations of a country's currency were not allowed under the Bretton Woods system.

Question 80

The Bretton Woods system was expected to be more stable than the gold standard because

A)the world supply of gold had increased greatly by the time the Bretton Woods system was established.
B)large trade deficits and surpluses would be unlikely to occur under the Bretton Woods system.
C)fewer countries were involved in the Bretton Woods system than had been involved in the gold standard.
D)the IMF was set up to be a lender of last resort.