Question 1

When a nation is economically integrated with trading partners, fixed exchange rates:

Accepted Answer

A)  would be very harmful to the dynamic nature of trade. 
B)  could promote integration and economic efficiency by keeping transaction costs low. 
C)  would be the best choice if that nation became the dominant nation in the transactions. 
D)  would be adequate but have the disadvantage of discouraging trade because of uncertainty.

Question 2

If Britain had not joined the ERM, the policy options it would have had available to avoid recession would have been:

Accepted Answer

A)  severely limited. 
B)  more numerous and varied. 
C)  subject to veto by the European Parliament. 
D)  a conflict with its desire to maintain a stable economy.

Question 3

From 1929 to 1935, countries that:

Accepted Answer

A)  abandoned the gold standard had higher rates of growth of GDP than countries that continued on the gold standard. 
B)  continued on the gold standard had higher rates of growth of GDP than countries that abandoned the gold standard. 
C)  maintained capital controls had lower rates of growth of GDP than countries that continued on the gold standard. 
D)  removed capital controls had lower rates of growth of GDP than countries that abandoned the gold standard.

Question 4

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (noncooperatively) and to the center as a result of a demand shock, what is the effect?

Accepted Answer

A)  The center nation will require that the two line up their rates. 
B)  The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the effect of the demand shock). 
C)  The devaluing nation will devalue more steeply and will see a larger increase in demand while its partner will suffer more (thus favoring the devaluing nation). 
D)  Both nations will suffer more because the center nation will match the devaluation, thus negating the effect.

Question 5

Under the gold standard system, if the par exchange rate is $1 = 2 pounds, but the market exchange rate in the United Kingdom is $1 = 1 pound, then a person interested in arbitrage would:

Accepted Answer

A)  buy dollars in the United Kingdom to be shipped to the United States and exchanged for a larger quantity of gold. 
B)  find that it is not possible to engage in arbitrage. 
C)  convert dollars into pounds in the United States and sell it for gold in the United Kingdom. 
D)  lose money by trying to exploit any price difference.

Question 6

Economists studying the impact of currency unions on trade found currency unions:

Accepted Answer

A)  increased levels of trade by 221%. 
B)  increased levels of trade by 104%. 
C)  increased levels of trade by 38%. 
D)  had no effect on trade levels.

Question 7

Seventeen European countries use the euro as their common currency. This arrangement is best described as a:

Accepted Answer

A)  currency union. 
B)  free trade area. 
C)  common market. 
D)  monetary union.

Question 8

Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. How would the European Central Bank's monetary policy affect European interest rates?

Accepted Answer

A)  They would rise. 
B)  They would fall. 
C)  The combination of the expansionary fiscal policy and the monetary policy would cause interest rates to return to their level prior to the expansionary fiscal policy. 
D)  The combination of the expansionary fiscal policy and the monetary policy would not affect interest rates.

Question 9

Suppose that Argentina's dollar-denominated external assets and liabilities are $10 billion and $100 billion, respectively, and its Argentine peso-denominated external assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes its exchange rate at P1 = $US1. Suppose that Argentina changes its exchange rate to P3 = $US1. Now what is the peso value of Argentina's total external wealth?

Accepted Answer

A)  -270 billion pesos 
B)  -150 billion pesos 
C)  0 
D)  -210 billion pesos

Question 10

In the example of the peg between Britain and Germany, what would have been the case if Britain had adhered to the pegged exchange rate?

Accepted Answer

A)  It would not have had the option of raising its own rate. 
B)  It would have been able to inflate its currency to keep output stable. 
C)  It would not have been able to inflate its currency to keep output stable. 
D)  It would have had to raise taxes and balance its budget.

Question 11

If the center nation operates under a cooperative peg agreement, how does the cooperation work?

Accepted Answer

A)  The home nation will try to resist any changes coming from the center. 
B)  The home nation will accept all changes coming from the center without discussion. 
C)  The center nation will make policy concessions to other nations in its cooperative currency agreement. 
D)  Cooperation usually does not work well.

Question 12

In a noncooperative environment of pegged exchange rates, if the home nation is experiencing high inflation due to excessive demand, it may choose to ______, which would cause______.

Accepted Answer

A)  forgo the pegged exchange rate; extreme depreciation 
B)  devalue its currency; the foreign nation to suffer deficient demand for its products 
C)  cut the monetary growth rate; a rise in interest rates 
D)  revalue its currency; the foreign nation to suffer excessive demand for its products

Question 13

Suppose that country A pegs its currency to the currency of country B. Which of the following will NOT be a benefit of this arrangement to country A?

Accepted Answer

A)  lower transactions costs for A to conduct international trade with country B 
B)  increased capital flows between the two countries because of increased certainty of future exchange rates 
C)  decreased migration between the two countries because of increased certainty of future exchange rates 
D)  lower costs of economic transactions costs between the two countries, leading to welfare gains for country A

Question 14

Suppose that Canada pegs its dollar to the U.S. dollar at a rate of $C1 = $US1 and that Canada is a major exporter of crude oil to the United States. The increase in the price of oil that occurred in the second half of 2007 is likely to:

Accepted Answer

A)  cause asymmetric shocks to the U.S. and Canadian economies that will make it difficult for Canada to maintain the $C1 = $US1 exchange rate. 
B)  cause symmetric shocks to the U.S. and Canadian economies that will make it difficult for Canada to maintain the $C1 = $US1 exchange rate. 
C)  cause asymmetric shocks to the U.S. and Canadian economies and make it easier for Canada to maintain the $C1 = $US1 exchange rate. 
D)  cause symmetric shocks to the U.S. and Canadian economies and make it difficult for Canada to maintain the $C1 = $US1 exchange rate.

Question 15

Based on economic criteria, a nation should choose a fixed exchange rate if:

Accepted Answer

A)  the monetary authorities are capable of handling shocks. 
B)  the net benefits of fixing versus floating are positive. 
C)  the net benefits of fixing versus floating are negative. 
D)  there is a liberal political agenda that restricts government authority over capital flows.

Question 16

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 actions would you follow to take advantage of this temporary opportunity for arbitrage?

Accepted Answer

A)  Sell gold for pounds in the United Kingdom, buy dollars with pounds in currency markets, and buy gold with dollars in the United States. 
B)  Sell gold for dollars in the United States, buy pounds with dollars in currency markets, and buy gold with pounds in the United Kingdom. 
C)  Sell gold for dollars in the United States, sell pounds for dollars in currency markets, and buy gold with dollars in the United Kingdom. 
D)  Sell gold for dollars in the United Kingdom, buy pounds with dollars in currency markets, and buy gold with pounds in the United States.

Question 17

Suppose that the United States and the United Kingdom return to the gold standard. The United States sets the price of gold equal to $500 per ounce, and the United Kingdom sets the price of gold at £200 per ounce. What is the $-£ exchange rate?

Accepted Answer

A)  $0.40 = £1 
B)  $2.50 = £1 
C)  $500 = 1 ounce 
D)  £200 = 1 ounce

Question 18

If China has domestic assets of $50 billion, domestic liabilities of $100 billion, and $50 billion in foreign assets, a 10% appreciation of the Chinese yuan will:

Accepted Answer

A)  cause the Chinese domestic assets to increase in value. 
B)  cause the Chinese domestic liabilities to decrease in value. 
C)  cause the overall wealth to decrease by 5%. 
D)  cause the overall wealth to increase by 5%.

Question 19

Symmetric shocks pose fewer problems for nations linked by fixed exchange rates to a base currency. In general:

Accepted Answer

A)  because there are common problems, the economic policy taken by the base currency nation is beneficial for both nations. 
B)  it gives the nation maintaining the peg more autonomy to deal with financial crises. 
C)  the base currency nation can just do nothing, and the issue will resolve itself. 
D)  when there are symmetric shocks, the home nation unlinks its exchange rate from the base currency nation.

Question 20

When developing countries borrow in international credit markets, many find that they must borrow in currencies other than their own (such as dollars, yen, or euros). Why are international creditors willing to make loans in dollars, yen, or euros but not in the developing countries' currencies?

Accepted Answer

A)  Lenders are not well-informed about developing countries' economic situations. 
B)  Lenders believe that the currencies of developing countries will always appreciate. 
C)  Lenders receive higher interest rates on loans in dollars, yen, or euros than on loans made in the currencies of developing countries. 
D)  Lenders believe that developing countries have a history of weak macroeconomic management and imprudent monetary and fiscal policies.

Exam 19: Fixed Versus Floating: International Monetary Experience