Chapter 19 International Financial System
5) A central bank sale of _____ to purchase ______ in the foreign exchange market results in an equal rise in its international reserves and the monetary base.
A) foreign assets, domestic currency B) foreign assets, foreign currency
C) domestic currency, foreign assets D) domestic currency, domestic currency
Answer: C
10) An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to
A) a gain in international reserves.
B) an increase in the money supply.
C) an appreciation in the domestic currency.
D) all of the above.
E) only (a) and (b) of the above.
Answer: E
15) A higher domestic money supply leads to a higher domestic price level in the long run, resulting in an expected _____ of the domestic currency that shifts the RETF schedule to the _____.
A) depreciation, right B) appreciation, right
C) depreciation, left D) appreciation, left
Answer: A
20) A lower domestic money supply means a higher domestic interest rate in the short run, thereby causing the _____ to shift to the _____, leading to exchange rate overshooting in which the exchange rate rises by more in the short run than it does in the long run.
C) RETD, left D) RETF, left
Answer: A
25) An unsterilized intervention in which domestic currency is purchased by selling foreign assets leads to
A) a fall in international reserves.
B) an increase in the money supply.
C) a depreciation of the domestic currency.
D) all of the above.
E) only (a) and (b) of the above.
Answer: A
30) If the Federal Reserve decides to sell dollars in order to buy foreign assets in the foreign exchange market,
A) this works just like an open market sale of bonds to decrease the monetary base and the money supply.
B) this works just like an open market purchase of bonds to decrease the monetary base and the money supply.
C) this works just like an open market sale of bonds to increase the monetary base and the money supply.
D) this works just like an open market purchase of bonds to increase the monetary base and the money supply.
Answer: D
35) If the central bank increases the money supply, domestic interest rates fall causing _____ to shift in while causing _____ to shift in because of the expected depreciation of the dollar.
A) RETF, RETD B) RETF, RETF
C) RETD, RETD D) RETD, RETF
Answer: D
40) Which of the following does not appear in the current account part of the balance of payments?
A) A loan of $1 million from Chase Manhattan bank to Brazil.
B) Foreign aid to El Salvador.
C) An Air France Ticket bought by an American.
D) Income earned by General Motors from its plants abroad.
Answer: A
45) In the balance of payments accounting system, the sale of Compaq computers abroad are entered in the _____ column with a _____ sign.
A) receipts; negative B) receipts; positive
C) payments; negative D) payments; positive
Answer: B
50) In the balance of payments bookkeeping system, payments from foreigners to Americans are entered in the
A) "Receipts" column with a plus (+) sign to reflect that they are credits.
B) "Receipts" column with a minus (-) sign to reflect that they are debits.
C) "Payments" column with a minus (-) sign to reflect that they are debits.
D) "Payments" column with a plus (+) sign to reflect that they are credits.
Answer: A
55) In the balance of payments, receipts include:
A) American purchases of foreign products.
B) payments from foreign tourists.
C) income earned from foreign investment in the U.S.
D) all of the above.
Answer: B
60) A current account _____ indicates that the United States is _____ its claims on foreign wealth.
A) surplus; increasing B) surplus; decreasing
C) deficit; increasing D) balance; decreasing
Answer: A
65) Which of the following appear as credits in the U.S. balance of payments?
A) merchandise exports
B) payments from foreign tourists
C) foreign aid, gifts and pensions paid to foreigners
D) only (a) and (b) of the above
Answer: D
70) Which of the following appear as debits in the U.S. balance of payments?
A) American purchases of foreign products
B) American travel abroad
C) foreign aid, gifts and pensions paid to foreigners
D) all of the above
Answer: D
75) In the U.S. balance of payments, payments include:
A) American purchases of foreign products.
B) American purchases of foreign services.
C) income earned by foreigners from investments in the U.S.
D) all of the above.
Answer: D
80) Holding other factors constant, which of the following would increase the size of the U.S. current account deficit?
A) An increase in the amount of services purchased from foreigners
B) An increase in unilateral transfers from Americans to foreigners
C) An increase in American's net investment income.
D) Only (a) and (b) of the above
Answer:
85) Which of the following appear as credits in the U.S. balance of payments?
A) American purchases of Volvos
B) Germany's contributions to the United States to help defer the costs of the Persian Gulf war
C) Expenditures by American college students studying abroad
D) none of the above
Answer: B
90) The current account balance provides
A) information about what will be happening to U.S. claims on foreign wealth in the long run.
B) some indication of what is happening to the demand for imports and exports.
C) information on the future movement of exchange rates.
D) all of the above.
Answer: D
95) A balance of payments _____ is associated with a _____ of international reserves.
A) surplus; loss B) surplus; gain
C) deficit; gain D) balance; loss
Answer: B
100) The official reserve transactions balance
A) equals the current account balance plus the items in the capital account.
B) tells us the net amount of international reserves that must move between central banks in order to finance international transactions.
C) has an important impact on the money supply.
D) all of the above.
Answer: D
105) Which of the following are true statements?
A) The U.S. dollar and dollar-denominated assets comprise a majority of international reserves held by countries.
B) A U.S. balance of payments deficit can be financed by a decrease in U.S. international reserves and/or an increase in foreign central banks' holdings of international reserves (dollar assets).
C) A U.S. balance of payments surplus can be financed by a decrease in U.S. international reserves and/or an increase in foreign central banks' holdings of international reserves (dollar assets).
D) Both (a) and (b) are true.
Answer: D
110) Under the gold standard if a country's currency _____, the country would gain international reserves (gold), causing its monetary base to rise and putting _____ pressure on its currency.
A) appreciated, upward B) appreciated, downward
C) depreciated, upward D) depreciated, downward
115) Under a gold standard in which one dollar could be turned in to the U.S. Treasury and exchanged for 1/20th of an ounce of gold and one German mark could be exchanged for 1/100th of an ounce of gold, an exchange rate of _____ marks to the dollar would stimulate a flow of gold from the United States to Germany.
A) 7 B) 6
C) 5 D) 4
Answer: D
120) Before World War I, the economy operated under a gold standard. Under this international financial system all of the following would occur if the British pound began to depreciate relative to the dollar, except for
A) gold flowing from Great Britain to the United States.
B) the money supply rising in the United States.
C) the money supply declining in Great Britain.
D) the monetary base rising in Great Britain.
Answer: D
125) Under the gold standard, a country that abided by the "rules of the game"
A) lost control over its monetary policy because its money supply was largely determined by gold flows between countries.
B) would experience deflation when world gold production slowed.
C) would experience inflation when world gold production increased.
D) would experience all of the above.
E) would experience only (a) and (b) of the above.
Answer: D
130) The Bretton Woods agreement created the following international agencies:
A) the International Development Association.
B) the International Monetary Fund.
C) the World Bank.
D) each of the above.
E) only (b) and (c) of the above.
Answer: E
135) Which of the following are true statements about the Bretton Woods system?
A) The Bretton Woods system was a fixed exchange rate regime, in which central banks bought and sold their own currencies to keep their exchange rates fixed.
B) To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the IMF would loan deficit countries international reserves contributed by other members.
C) The Bretton Woods agreement created the International Monetary Fund (IMF), which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.
D) All of the above are true.
Answer: D
140) Like an open market sale, a central bank purchase of the _____ currency by selling _____ assets reduces the monetary base and the money supply, causing the interest rate on domestic deposits to rise.
A) foreign, foreign B) foreign, domestic
C) domestic, foreign D) domestic, domestic
Answer: C
145) When the domestic currency is undervalued,
A) the central bank must purchase the domestic currency to keep the exchange rate fixed, but as a result it gains international reserves.
B) the central bank must sell the domestic currency to keep the exchange rate fixed, but as a result it gains international reserves.
C) the central bank must purchase the domestic currency to keep the exchange rate fixed, but as a result it loses international reserves.
D) the central bank must sell the domestic currency to keep the exchange rate fixed, but as a result it loses international reserves.
Answer: B
150) Which of the following were weaknesses of the Bretton Woods system?
A) The IMF had no way to force surplus countries to either revalue their exchange rates upwards or pursue more expansionary policies.
B) The reserve-currency country, the United States, could not devalue its currency even if the dollar was overvalued.
C) The IMF could not loan deficit countries international reserves.
D) All of the above.
E) Only (a) and (b) of the above.
Answer: E
155) Under the Bretton Woods system, a country running a balance of payments _____ gained international reserves, and had to implement _____ monetary policy to weaken its currency.
A) surplus, expansionary B) surplus, contractionary
C) deficit, expansionary D) deficit, contractionary
Answer: A
160) Under a fixed exchange rate regime, if the domestic currency is initially _____, that is _____ par, the central bank must intervene to purchase the domestic currency by selling foreign assets.
A) overvalued, below B) overvalued, above
C) undervalued, below D) undervalued, above
Answer: B
165) Which of the following is true?
A) Special drawing rights are loans to countries made by the IMF.
B) Changes in the quantity of special drawing rights are tied to changes in the quantity of gold.
C) Special drawing rights are a paper substitute for gold.
D) Special drawing rights are not held as international reserves.
Answer: C
170) If a central bank does not want to allow the domestic currency to appreciate, it will _____ international reserves by selling its currency, thereby _____ the monetary base and increasing the risk of higher inflation.
A) lose; decreasing B) lose; increasing
C) acquire; decreasing D) acquire; increasing
Answer: D
175) Under the Bretton Woods system, if IMF loans were insufficient to prevent ______ of a currency, then the country was allowed to revalue its currency by setting a new, _____ exchange rate.
A) depreciation; lower B) depreciation; higher
C) appreciation; lower D) appreciation; higher
Answer: A
180) When the domestic currency is initially overvalued in a fixed exchange rate regime,
A) the central bank must intervene in the foreign exchange market to purchase the domestic currency, thereby allowing the money supply to decline.
B) the central bank must intervene in the foreign exchange market to sell the domestic currency, thereby allowing the money supply to decline.
C) the central bank must intervene in the foreign exchange market to purchase the domestic currency, thereby allowing the money supply to increase.
D) the central bank must intervene in the foreign exchange market to sell the domestic currency, thereby allowing the money supply to increase.
Answer: A
185) When the domestic currency is initially undervalued in a fixed exchange rate regime, the central bank
A) must intervene in the foreign exchange market to sell the domestic currency, thereby allowing the money supply to increase.
B) must intervene in the foreign exchange market to sell the domestic currency, thereby allowing the money supply to increase.
C) must intervene in the foreign exchange market to purchase the domestic currency, thereby allowing the money supply to increase.
D) need not intervene in the foreign exchange market, as other currencies will adjust to maintain the par exchange rates.
Answer: A
190) Under a fixed exchange rate regime, if a country has an overvalued exchange rate, then its central bank's attempt to keep its currency from _____ will result in a _____ of international reserves.
A) depreciating; gain B) depreciating; loss
C) appreciating; gain D) appreciating; loss
Answer: B
195) Under the Bretton Woods system, the United States was designated as the
A) reserve-currency country. B) fixed-rate country.
C) par-standard country. D) dollar-standard country.
Answer: A
200) In order to maintain fixed exchange rates under the Bretton Woods system, the IMF would
A) encourage countries with large, persistent balance of payments surpluses to pursue contractionary monetary policies.
B) encourage countries with large, persistent balance of payments deficits to pursue expansionary monetary policies.
C) encourage countries with large, persistent balance of payments surpluses to pursue expansionary monetary policies.
D) encourage countries with large, persistent balance of payments deficits to pursue contractionary monetary policies.
Answer: D
205) When countries that had balance of payments surpluses refused to revalue their exchange rates upward in response to the overvalued dollar in the late 1960s,
A) the adjustment in the Bretton Woods system did not take place and the system collapsed in 1971.
B) the adjustment in the Bretton Woods system was significantly delayed and led to a return to the gold standard.
C) the IMF was forced to lend international reserves to the surplus countries to keep their currencies from appreciating.
D) none of the above occurred.
Answer: A
210) In response to the overvalued dollar in early 1971, the German Bundesbank bought _____ and sold _____ to keep the exchange rate fixed, gaining international reserves.
A) marks, dollars B) marks, pounds
C) dollars, marks D) dollars, pounds
Answer: C
215) Since an appreciation might hurt sales for domestic businesses, countries with surpluses in their balance of payments often
A) purchase their currencies in the foreign exchange market.
B) sell their currencies in the foreign exchange market.
C) sell other countries' currencies in the foreign exchange market.
D) do both (a) and (c) of the above.
Answer: B
220) The current international financial system is a managed float exchange rate system because
A) exchange rates fluctuate in response to, but are not determined solely by, market forces.
B) some countries keep their currencies pegged to the dollar, which is not allowed to fluctuate.
C) all countries allow their exchange rates to fluctuate in response to market forces.
D) all countries peg their currencies to the dollar which is allowed to fluctuate in response to market forces.
Answer: A
225) Under the Bretton Woods system, when a nonreserve-currency country was running a balance of payments deficit
A) it gained international reserves.
B) it lost international reserves.
C) it would have been necessary for the policymakers to implement an expansionary monetary policy.
D) both (a) and (c) of the above.
Answer: B
230) If a central bank does not want to see its currency fall in value, it can strengthen its currency by
A) pursuing an expansionary monetary policy.
B) pursuing a contractionary monetary policy.
C) increasing inflation.
D) doing both (a) and (b) of the above.
Answer: B
235) An ECU is:
A) a paper substitute for gold issued by the IMF.
B) a loan by European countries to the IMF.
C) a paper currency issued by the European Common Market.
D) a monetary unit issued by the European Monetary System for conducting international financial transactions.
Answer: D
240) Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciates below its lower limit against the Italian lira, the Bank of Italy must buy _____ and sell _____, thereby _____ international reserves.
A) lira; marks; losing B) lira; marks; gaining
C) marks; lira; gaining D) marks; lira; losing
Answer: B
245) A central bank sale of _____ to purchase ______ in the foreign exchange market results in an equal _____ in its international reserves and the monetary base.
A) foreign assets, domestic currency; decline
B) foreign assets, foreign currency; increase
C) domestic currency, foreign assets; decline
D) domestic currency, domestic currency; increase
Answer: A
250) Although capital controls sound like a good idea, they suffer from several disadvantages including:
Answer: D