Deck 22: The International Financial System and Monetary Policy

Question 1

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.

Answer 1

its assets and liabilities rise by the same amount.

Question 2

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 2

foreign-exchange market interventions.

Question 3

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.

Answer 3

sell dollars and buy foreign assets.

Question 4

When the Fed sells foreign assets to buy domestic 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 5

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 6

In the early 2000s, the Argentine government's fiscal policy guaranteed which of the following may take place?

A)Default on government debt
B)Inflationary financing
C)Both default and inflationary financing
D)Neither default nor inflationary financing

Question 7

In the early 2000s, what problem did the Argentine central bank face?

A)Maintaining the exchange rate at the current level while speculators took actions that would cause it to depreciate
B)Maintaining the exchange rate at the current level while speculators took actions that would cause it to appreciate
C)Reducing the Argenine budget deficit
D)Curbing Argentine inflation

Question 8

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.

Question 9

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 10

Foreign central banks

A)can affect the U.S. money supply, but cannot affect U.S. interest rates.
B)can affect U.S. interest rates, but cannot affect the U.S. money supply.
C)cannot affect either U.S. interest rates or the U.S. money supply.
D)can affect both U.S. interest rates and the U.S. money supply.

Question 11

If the Fed buys $2 billion of short-term securities issued by the Bank 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

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 13

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.

Question 14

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 15

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 16

If the Fed buys $2 billion of short-term securities issued by the Bank 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 17

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 18

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 19

International financial transactions are most likely to affect the U.S. money supply 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 20

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 21

A sterilized intervention will have its greatest effect on

A)expected domestic return.
B)expected foregin return.
C)It will have no effect on either domestic or foreign return.
D)It depends on the type of sterilized intervention.

Question 22

If the central bank buys foreign assets,

A)the expected rate of return on domestic assets will fall relative to the expected rate of return on foreign assets.
B)the expected rate of return on domestic assets will rise relative to the expected rate of return on foreign assets.
C)the domestic monetary base will decline.
D)the foreign-exchange value of the domestic currency will rise.

Question 23

Capital controls were imposed in 1998 by

A)the United States.
B)Canada.
C)Japan.
D)some emerging economies.

Question 24

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 25

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 26

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 27

If the Fed conducts an open market sale to increase domestic interest rates, what is likely to occur in the foreign exchange market?

A)The dollar will depreciate.
B)The dollar will appreciate.
C)Foreign assets become more attractive.
D)Domestic assets become less attractive.

Question 28

A sterilized intervention will not affect the exchange rate if

A)capital controls are in place.
B)domestic and foreign assets are perfect substitutes.
C)domestic assets are more liquid than foreign assets.
D)domestic assets are less liquid than foreign assets.

Question 29

Explicit capital controls are

A)used by most industrialized countries.
B)an important reason why domestic and foreign assets are not perfect substitutes.
C)less important than information barriers as an obstacle to the international diversification of portfolios.
D)the most important reason why interest rates differ internationally on assets with similar risk and liquidity characteristics.

Question 30

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 31

A central bank might attempt to offset an increase in the cost of foreign goods by

A)selling its own currency in the foreign-exchange market.
B)buying its own currency in the foreign-exchange market.
C)lowering domestic interest rates.
D)raising the prices of domestic goods by a similar amount.

Question 32

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 33

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 34

The equilibrium exchange rate

A)is determined by the relative amounts of gold contained in each country's currency.
B)is determined monthly by the International Monetary Fund.
C)in the short run reflects the relative purchasing power of each country's currency.
D)makes investors indifferent between holding domestic and foreign assets.

Question 35

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 36

Which of the following statements about a currency risk premium is not true?

A)They arise since domestic and foreign assets may be imperfect substitutes.
B)They arise since investors may have a more difficult time gathering information about foreign assets.
C)They may arise because foreign assets may be exposed to risks of seizure by foreign governments.
D)They can only be positive (not negative).

Question 37

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 38

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 39

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 40

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 41

Which of the following was a result of Thailand imposing capital controls in December 2006?

A)Sharp decline in Thai stock prices
B)Appreciation of Thai currency
C)Stabilization of Thai currency
D)Capital inflows to Thailand

Question 42

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 43

The trade balance is

A)by definition, identical to the current account balance.
B)the difference between merchandise exports and merchandise imports.
C)almost invariably larger than the financial account balance.
D)the difference between merchandise exports and merchandise imports and by definition identical to the currency account balance.

Question 44

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

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 45

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

A)U.S. citizens must have purchased more merchandise abroad than they sold abroad.
B)the foreign-exchange value of the dollar must be rising.
C)the foreign-exchange value of the dollar must be falling.
D)U.S. citizens have funds to lend to foreigners.

Question 46

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 capital account as a capital inflow.
D)in the capital account as a capital outflow.

Question 47

In 2005, the financial account balance was approximately

A)$780 billion.
B)-$790 billion.
C)$425 billion.
D)$780 million.

Question 48

Historically, the leading official reserve asset was

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

Question 49

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 50

What was the approximate value of the U.S. current account balance in 2005?

A)+$10 billion
B)+$79 billion
C)-$480 billion
D)-$790 billion

Question 51

Although coordinated changes in monetary policy are likely to affect the exchange rate,

A)it has proven impossible to achieve such coordination among the world's central banks.
B)sterilized interventions by themselves are unlikely to have a long-term effect on the exchange rate.
C)they can do so only at the cost of increasing the worldwide inflation rate.
D)they can do so only at the cost of significantly increasing the chances of worldwide recession.

Question 52

When domestic and foreign assets are imperfect substitutes, an increase in the supply of domestic assets

A)implies greater exchange rate risk.
B)implies lower exchange rate risk.
C)raises the exchange rate.
D)implies lower exchange rate risk and raises the exchange rate.

Question 53

In the U.S. 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 54

What is the approximate daily volume of trading in the foreign-exchange market?

A)$1 million
B)$1 billion
C)$10 billion
D)$1 trillion

Question 55

In 1987, the so-called Louvre Accord

A)formally abolished the Bretton Woods system.
B)established unofficial trading ranges for currencies.
C)committed the United States to defend a fixed price for gold.
D)designated the Japanese yen as an official reserve currency.

Question 56

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 57

U.S. officials carry out foreign-exchange interventions through

A)the U.S. Treasury's Office of Foreign Exchange Management.
B)the U.S. Treasury's Exchange Stabilization Fund.
C)the Fed's Brussels office.
D)the International Monetary Fund's Office of Official Interventions.

Question 58

During the 1980s, the Reagan administration intervened in foreign-exchange markets

A)when directly required to do so by the International Monetary Fund.
B)only to raise the foreign-exchange value of the dollar.
C)only to lower the foreign-exchange value of the dollar.
D)both to lower and raise the foreign-exchange value of the dollar.

Question 59

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 60

Which of the following is NOT included in the current account balance?

A)Exports and imports of services
B)Capital inflows and outflows
C)Net investment income
D)Unilateral transfers

Question 61

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 62

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 63

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

A)a country experiencing an excess demand for its currency on foreign-exchange markets was limited in its ability to defend its exchange rate by its stock of international reserves.
B)a country experiencing an excess supply of its currency on foreign-exchange markets 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 64

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 65

At the 1976 IMF conference in Jamaica,

A)the United States reaffirmed its commitment to buy and sell gold at a fixed price.
B)currencies were formally allowed to float.
C)the major countries of the world agreed to continue a system of fixed exchange rates.
D)the gold standard was reestablished.

Question 66

The formal name of the World Bank is

A)the International Monetary Fund.
B)the International Bank for Reconstruction and Development.
C)the United Nations Bank for Economic Stability.
D)the Bank for International Financial Stability and Reform.

Question 67

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 68

Under the Bretton Woods system, the value of the dollar could be changed

A)only by a coordinated realignment of all other currencies.
B)only if the Fed were willing to buy large amounts of foreign currency.
C)only if the Fed were willing to sell large amounts of foreign currency.
D)by adjusting short-term interest rates in the United States.

Question 69

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 70

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 71

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 72

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 73

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.

Question 74

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 75

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 76

Fixed exchange rate regimes

A)existed prior to the nineteenth century but were then superseded by the gold standard.
B)lower the transactions costs of buying and selling goods and assets.
C)result in higher world interest rates.
D)were first established by the GATT in 1971.

Question 77

On August 15, 1971, the United States

A)returned to the gold standard.
B)suspended the convertibility of dollars into gold.
C)provided unlimited dollar reserves to the German central bank to help end a speculative attack on the mark.
D)provided unlimited dollar reserves to the Bank of England to help end a speculative attack on the pound.

Question 78

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 79

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 80

The Bretton Woods system lasted from

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