Question 1

If there is a greater degree of economic integration between markets in the home country and the base country:

Accepted Answer

A)  the home country will benefit to a greater degree by fixing its exchange rate with the base country. 
B)  efficiency will be reduced with fixed exchange rates. 
C)  flexible exchange rates will result in GDP stability. 
D)  the volume of transactions will be too low to justify an elaborate exchange rate policy.

Question 2

A recent study found that currency unions _____ bilateral trade by _____ compared with floating regimes.

Accepted Answer

A)  increased; 90% 
B)  increased; 38% 
C)  decreased; 10% 
D)  decreased; 50%

Question 3

Monetary policy to stabilize the nation is less desirable whenever:

Accepted Answer

A)  the nation is a net external debtor with liabilities denominated in foreign currency. 
B)  the nation is a net external creditor with assets denominated in foreign currency. 
C)  the central bank of the nation must also finance government deficits. 
D)  the government is unable to raise taxes sufficiently to lower its deficit.

Question 4

Suppose that the United States and the United Kingdom both use the gold standard. Their prices of gold are $35 = 1 ounce and £7 = 1 ounce, which yields an implied exchange rate of $5 = £1. Now suppose that the exchange rate temporarily rises to $5.50 = £1. What will happen to the U.S. and U.K. money supplies as a result of arbitrage?

Accepted Answer

A)  The U.S. money supply would rise and the U.K. money supply would fall. 
B)  Both the U.S. and the U.K. money supplies would rise. 
C)  The U.S. money supply would fall and the U.K. money supply would rise. 
D)  Both the U.S. and the U.K. money supplies would fall.

Question 5

All other things being equal, we expect fixed exchange rates to promote trade by lowering transactions costs. If that is true, then differences in prices measured in a common currency should be ________among countries with ______exchange rates than among countries with ______ rates.

Accepted Answer

A)  lower; fixed; floating 
B)  lower; floating; fixed 
C)  higher; fixed; floating 
D)  the same; fixed; floating

Question 6

If Mexico has foreign assets worth $100 billion and no liabilities, a 15% depreciation of the peso will result in a(n):

Accepted Answer

A)  increase in liabilities at home by 100 billion pesos. 
B)  decrease in assets at home by 150 billion pesos. 
C)  decrease in overall wealth by 15%. 
D)  increase in overall wealth.

Question 7

Europe's ERM, which preceded the advent of the euro, was a weighted basket of European currencies, the most important of which was:

Accepted Answer

A)  the U.S. dollar. 
B)  the Deutsche Mark. 
C)  the British pound. 
D)  the French franc.

Question 8

When a fixed exchange rate system is adopted, it results in all of the following except:

Accepted Answer

A)  reduced uncertainty about exchange rate. 
B)  decreased volatility in prices. 
C)  increased volume of trade. 
D)  decreased volume of trade.

Question 9

Comparing various exchange systems, which system offers a nation the least control over monetary policy?

Accepted Answer

A)  flexible exchange rates and a closed economy 
B)  a closed economy 
C)  an open nonpeg 
D)  an open peg

Question 10

In a fixed exchange rate system, the center country, to whose currency the other countries peg their exchange rate, will:

Accepted Answer

A)  find it difficult to conduct autonomous monetary policy. 
B)  find it difficult to conduct autonomous fiscal policy. 
C)  easily implement monetary and fiscal policy to suit its economy. 
D)  defer to advice from other countries in conducting its domestic policy.

Question 11

Low-income nations have a dilemma as to whether to fix or float. There are many factors that affect their decisions and how effectively they can manage a financial system. Discuss a few of these issues and the factors that play into the success of a policy.

Accepted Answer

The answer of Low-income nations have a dilemma as to...

Question 12

An advantage to a developing nation of fixed exchange rates is that it's:

Accepted Answer

A)  easier for the central bank to print money to finance its deficit. 
B)  harder for the central bank to print money to finance its deficit. 
C)  easier to conduct fiscal policy. 
D)  harder for the government to raise taxes.

Question 13

Economic integration refers to the growth of market linkages in:

Accepted Answer

A)  goods only. 
B)  labor. 
C)  capital and labor only. 
D)  goods, capital, and labor.

Question 14

During the Great Depression era, what happened to the gold standard?

Accepted Answer

A)  It remained the same. 
B)  It flourished and prospered. 
C)  It broke down completely. 
D)  It was replaced by a new system of centralized control.

Question 15

In the 1930s, some nations such as the United States and Britain abandoned their gold pegs by adopting ________, whereas other nations such as Germany and South American nations adopted ________.

Accepted Answer

A)  floating exchange rates and open capital markets; fixed exchange rates and capital controls 
B)  fixed exchange rates and open capital markets; floating exchange rates without capital controls 
C)  fixed exchange rates and closed capital markets; floating exchange rates and closed capital markets 
D)  floating exchange rates with closed capital markets; floating exchange rates and open capital markets

Question 16

When there are currency depreciations or appreciations, how is the external wealth of a nation affected?

Accepted Answer

A)  It rises (along with its GDP) when there is a depreciation and falls with an appreciation. 
B)  It usually does not change because external wealth is related to gold and capital. 
C)  The change in wealth depends on the exchange rates with the currencies in which the assets or liabilities are denominated. 
D)  If all assets are domestic and all liabilities are foreign, wealth always rises when there is any kind of exchange rate shift.

Question 17

The problem of currency mismatch of net external wealth can be mitigated by:

Accepted Answer

A)  ensuring the creditor countries always denominate loans in U.S. dollars. 
B)  promoting internal financial markets where foreign securities can be traded. 
C)  restricting borrowing yet encouraging lending. 
D)  piling up large stocks of foreign currency assets in central bank reserves and sovereign wealth funds.

Question 18

A noncooperative outcome after the center nation has undertaken a stabilization policy in response to an asymmetric shock would be that the:

Accepted Answer

A)  center country abandons its own stabilization policy in favor of the home country. 
B)  home country absorbs the losses resulting from the stabilization policy in the center country. 
C)  center country makes concessions, recognizing the impact on the home country and thereby sharing the pain. 
D)  peg is temporarily abandoned.

Question 19

The gold standard dominated exchange rate systems during what period?

Accepted Answer

A)  from 1776 to 1816 
B)  from 1836 to 1849 
C)  from 1870 to 1913 
D)  from 1945 to 1965

Question 20

Whenever a nation has substantial external debts and assets denominated in foreign currency:

Accepted Answer

A)  it is easier to manage, since changes in value are often offsetting. 
B)  there can be large and destabilizing wealth effects. 
C)  its interest payments on the debt will be matched by interest earnings on the assets. 
D)  the risk of default becomes very large.

Exam 19: Fixed Versus Floating: International Monetary Experience