Chapter 9

1. A managed float is also known as aa. Fixed exchange rate systemb. Pegged exchange rate systemc. Dirty float exchange rate systemd. Floating exchange rate system

2. According to some analysts, under a _____ regime, countries are limited in their ability to use monetary policy to expand or contract their economies by the need to maintain exchange rate parity.a. Fixed exchange rateb. Managed floatc. Floating exchange rated. Dirty float

3. A foreign debt crisisa. Occurs when a speculative attack on the exchange value of a

currency results in a sharp depreciation in the value of the currencyb. Is a situation in which a country cannot service its debt obligationsc. Refers to a loss of confidence in the banking system that leads to a

run on banks, as individuals withdraw their depositsd. Is a situation in which consumer spending patterns significantly

affect a country's balance of payments, thereby affecting its currency

4. A _____ means the value of the currency is fixed relative to a reference currency.a. Fixed exchange rateb. Floating exchange ratec. Pegged exchange rated. Dynamic exchange rate

5. A fixed exchange rate regimea. Leads to a situation where governments under political pressures

expand monetary supply too rapidly, causing unacceptably high price inflation

b. Modeled along the lines of the Bretton Woods system will not workc. Is characterized by speculation that adds to the uncertainty

surrounding future currency movementsd. Allows each country to choose its own inflation rate

6. A banking crisisa. Refers to a loss of confidence in the banking system that leads to a

run on banks, as individuals withdraw their depositsb. Is a situation in which a country cannot service its debt obligationsc. Is a situation in which consumer spending patterns significantly

affect a country's balance of payments, thereby affecting its currency

1

Chapter 9

d. Occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency

7. Bretton Woods set a restriction of _____ percent for devaluations of currency, if a currency became too weak to defend, without permission from the IMF.a. 15b. 20c. 5d. 10

8. Because of the long-term implications of volatile exchange rates firms shoulda. Get complete insurance coverage for exchange rates that might

occur several years in the futureb. Use the forward market because it is a perfect predictor of future

exchange ratesc. Pursue strategies that reduce economic exposured. Avoid transactions that involve foreign currencies

9. Hong Kong has a _____ system of exchange rates.a. Currency boardb. Fixedc. Floatingd. Pegged

10. In 2006, the highest percentage of IMF members had a _____ exchange rate policy.a. Managed floatb. Currency boardc. Free floatd. Adjustable peg

11. In 2006, about a quarter of the IMF members had a _____ exchange rate policya. Free floatb. Currency boardc. Fixed pegd. Adjustable peg

12. In a _____ exchange rate system, the value of a set of currencies is fixed against each other at some mutually agreed on exchange rate.a. Dirtyb. Fixedc. Directd. Pegged

2

Chapter 9

13. In 1976, the _____ formalized the floating exchange rate system that followed the collapse of fixed exchange rate system.a. Jamaica Agreementb. Gold standardc. Plaza Accordd. Louvre Accord

14. In 1997 the IMF agreed to provide the Thai government with $17.2 billion in loans to help its shattered economy. While doing so, IMF imposed all of the following restrictions excepta. Interest rates were to be reducedb. Several state-owned businesses were to be privatizedc. The government was to increase taxesd. Public spending needed to be cut

15. Most economists trace the break-up of the Bretton Woods fixed exchange rate system, in 1973, toa. The rise of communism in Eastern Europeb. The economic integration movement sweeping Western Europec. The macroeconomic policy package in the U.S. during 1965 to 1968d. The increase in inflation and the worsening of the British foreign

trade position

16. Pegged exchange rates are popular among many of the world'sa. Smaller nationsb. Large economiesc. Richest nationsd. All developed nations

17. The IMF has been criticized because of all of the following reasons, excepta. Its lax macroeconomic policies in the Asian crisis were not well

suited to countries suffering from a private sector debt crisis with deflationary undertones

b. It has become too powerful for an institution that lacks any real mechanism for accountability

c. Its rescue efforts are exacerbating a problem known to economists as moral hazard

d. It has a "one-size-fits-all" approach to macroeconomic policy is inappropriate for many countries

18. The great strength claimed for the gold standard was that it contained a powerful mechanism for achieving _____ by all countries.a. Equal tariff levelsb. Interest rate parity

3

Chapter 9

c. Economic stabilityd. Balance-of-trade equilibrium

19. The Bretton Woods IMF Articles of Agreement, tried to imposes discipline by adopting a _____ exchange rate system that was seen as a mechanism for controlling inflation and imposing economic discipline on countriesa. Fixedb. Floatingc. Peggedd. Dirty float

20. The United States returned to the gold standard in _____ after abandoning the system at the start of World War I.a. 1870b. 1925c. 1919d. 1932

21. The main elements of the 1976 Jamaica agreement include all of the following excepta. Total annual IMF quotas were increased to $41 billionb. Floating rates were declared unacceptablec. Gold was abandoned as a reserve assetd. IMF members were permitted to sell their own gold reserves at the

market price

22. The Bretton Woods system of fixed exchange rates collapsed ina. 1963b. 1993c. 1973d. 1983

23. The gold standard had its origin in the use of _____ as a medium of exchange, unit of account and store of value.a. Paper currencyb. The U.S. dollarc. Gold coinsd. The British pound

24. The International bank for Reconstruction and Development is also known asa. The IMFb. The European Central Bankc. The World Bankd. The International Development Agency

4

Chapter 9

25. The Bretton Woods Agreement could only work if the U.S. hada. Low inflation and a current account deficitb. Low inflation and no balance of payments deficitc. High inflation and no balance of payments deficitd. High inflation and a capital account surplus

26. The institutional arrangement that governs exchange rates is known as thea. International monetary systemb. International monetary fundc. International financial regimed. Financial control system

27. The Bretton Woods agreement differed from the gold standard in that ita. Was a rigid system of fixed exchange ratesb. Was a floating rate systemc. Incorporated both discipline and flexibilityd. Was based on the British pound

28. The use of the forward market and swaps to protect against foreign exchange risk has increased markedly sincea. The Louvre Accord ended in 1968b. The breakdown of the gold standardc. The end of the Plaza Accordd. The collapse of Bretton Woods system in 1973

29. The great virtue claimed for a pegged exchange rate is that ita. Leads to high inflationb. Leads to devaluationc. Imposes monetary discipline on a countryd. Increases fluctuations in exchange rates

30. The 1995 Mexican currency crisis and the 1997 Asian financial crisis were the result of all of the following excepta. A weak or poorly regulated banking systemb. High balance of trade surplusc. High inflation ratesd. Excessive foreign borrowings

31. The amount of a currency need to purchase one ounce of gold under the gold standard was known asa. The gold par valueb. Fixed gold ratec. The pegged rated. The gold standard

5

Chapter 9

32. The _____ suggested that it would be desirable for most major currencies to appreciate relative to the dollar and signatories pledged to intervene in the foreign exchange markets, selling dollars, to achieve this objective.a. Bretton Woods Agreementb. Plaza Accordc. Louvre Accordd. Gold Standard

33. Under a pegged exchange rate regime, a country will peg the value of its currency toa. That of a major currencyb. Its foreign exchange reservesc. Its interest ratesd. Domestic inflation rate

34. Under the Bretton Woods, all countries fixed the value of their currency in terms ofa. The eurob. The British poundc. The U.S. dollard. Gold

35. Under the gold standard, the U.S. dollar could be converted into _____ grains of fine gold.a. 17.3b. 10.1c. 480d. 23.33

36. Under the _____ of 1987, the Group of Five agreed that exchange rates had realigned sufficiently from earlier levels and pledged to support the stability of exchange rates around their current levels by intervening in the foreign exchange market when necessary.a. Bretton Woods Agreementb. Louvre Accordc. Plaza Accordd. Jamaica Agreement

37. Under a strict currency board system, interest ratesa. Are constantb. Rarely movec. Decline consistentlyd. Adjust automatically

6

Chapter 9

38. When a country commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate, the country has adopted a _____ system of exchange rates.a. Floatingb. Currency boardc. Fixedd. Pegged

39. When a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of a currency, a _____ has occurred.a. Banking crisisb. Foreign debt crisisc. Exchange crisisd. Currency crisis

40. When the foreign exchange market determines the relative value of a currency, we say that the currency is adhering to aa. Pegged exchange rateb. Volatile exchange ratec. Fixed exchange rated. Floating exchange rate

41. Which of the following currencies is not part of a floating exchange rate regime?a. The Chinese Yuanb. The U.S. dollarc. The British poundd. The Japanese yen

42. When the central bank of a country intervenes in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency, the country is said to be following a _____ system.a. Floating exchange rateb. Clean floatc. Dirty floatd. Fixed exchange rate

43. When a country pegs its currencies to gold and guarantees convertibility, the country is following thea. Floating exchange rate systemb. Bretton Woods systemc. Gold standardd. Fixed exchange system

7

Chapter 9

44. When the income a country's residents earn from exports is equal to the money its residents pay to other countries for imports, the country is said toa. Be in balance-of-trade equilibriumb. Be in capital account equilibriumc. Be in current account equilibriumd. Have a managed float

45. _____ arises when people behave recklessly because they know they will be saved if things go wrong.a. Policy failureb. A debt situationc. Fire saled. Moral hazard

8