Global Business Today 7th Edition Test Bank Charles W. L. Hill

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Global Business Today 7th Edition Test Bank Charles W. L. Hill

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Chapter 10
The International Monetary System

True / False Questions

1. A floating exchange rate is a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand.
True False

2. The exchange rates for almost all currencies are determined by the free play of market forces.
True False

3. Many of the worlds most developed nations peg their currencies, primarily to the dollar or the euro.
True False

4. A dirty float is called so because the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency.
True False

5. Since the Bretton Woods system of floating exchange rates collapsed in 1973, the world has operated with a fixed exchange rate system.
True False

6. The amount of a currency needed to purchase one ounce of gold was referred to as the gold monetary value.
True False

7. The gold standard worked well from the 1870s until the start of World War II in 1939, when it was abandoned.
True False

8. Under the Bretton Woods agreement, all countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold.
True False

9. The Bretton Woods agreement legalized the use of devaluation as a tool of competitive trade policy.
True False

10. A fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation.
True False

11. During the Bretton Woods era, countries were not allowed to borrow any funds from the IMF without adhering to specific agreements.
True False

12. If the IMF agreed that the countrys balance of payments was in fundamental disequilibrium, the system of adjustable parities allowed for the devaluation of a countrys currency by more than 10 percent.
True False

13. Under the International Development Association (IDA) scheme, the World Bank raises money through bond sales in the international capital market.
True False

14. The Bretton Woods system could work only as long as the U.S. inflation rate remained low and the United States did not run a balance-of-payments deficit.
True False

15. The Jamaica meeting in 1976 revised the IMFs Articles of Agreement to reflect the new reality of floating exchange rates.
True False

16. Since March 1973, exchange rates have become much more stable and predictable than they were between 1945 and 1973.
True False

17. The dollar fell in value between 1980 and 1985 as the United States was running a large and growing trade deficit, importing substantially more than it exported.
True False

18. From mid-2008 through early 2009 the U.S. dollar staged a moderate rally against major currencies, as foreign investors were excited at the possibility of unusually high returns from low-risk U.S. assets.
True False

19. In a fixed exchange rate scenario, monetary expansion can lead to inflation, which puts downward pressure on a fixed exchange rate.
True False

20. Advocates of fixed exchange rates argue that each country should be allowed to choose its own inflation rate.
True False

21. Approximately 14 percent of the IMFs members allow their currency to float freely.
True False

22. Pegged exchange rates are popular among many of the worlds smaller nations.
True False

23. Under the arrangement that exists in countries like Hong Kong, the currency board can issue additional domestic notes and coins even if there are no foreign exchange reserves to back it.
True False

24. Since the early 1970s, developed countries such as Great Britain and the United States, have financed their deficits by borrowing private money, as opposed to drawing on IMF funds.
True False

25. Financial crises tend to have common underlying macroeconomic causes: low relative price inflation rates, a narrowing current account deficit, and an excessive expansion of domestic borrowing.
True False

26. In a break from its practices of the past, the IMF waived away the requirement for tight monetary policies and cuts in public spending, when it helped bail Mexico out of the currency crisis in 1995.
True False

27. Before the Asian crisis of 1997, the nature of exports from Southeast Asian countries had shifted from semiconductors and consumer electronics to basic materials and products such as textiles.
True False

28. A complicating factor of the Asian crisis was that by the mid-1990s, although exports were still expanding across the region, imports declined steadily.
True False

29. One criticism of the IMF is that its traditional policy prescriptions represent one-size-fits-all approach to macroeconomic policy that is inappropriate for many countries.
True False

30. The IMF has become a powerful institution with sufficient checks and balances to ensure accountability.
True False

31. In response to the global financial crisis of 2008-2009, the IMF began to urge countries to adopt policies that included fiscal stimulus and monetary easing.
True False

32. The current foreign exchange system is a mixed system in which a combination of government intervention and speculative activity can drive the foreign exchange market.
True False

33. The forward market offers coverage for exchange rate changes for a few years.
True False

34. One of the ways of building strategic flexibility and reducing economic exposure involves contracting out manufacturing. This kind of strategy may be suited for low-value-added manufacturing than high-value-added manufacturing.
True False

35. Exchange rate volatility such as the world experienced during the 1980s and 1990s creates an environment less conducive to international trade and investment than one with more stable exchange rates.
True False

Multiple Choice Questions

36. Which of the following refers to the institutional arrangements countries adopt to govern exchange rates?
A. International Monetary Fund
B. Global agreement on exchange rates
C. International monetary system
D. Bretton Woods Agreement

37. When the foreign exchange market determines the relative value of a currency, the country is said to adhere to a _____ exchange rate regime.
A. fixed
B. floating
C. dirty float
D. pegged

38. When the value of a currency is fixed relative to a reference currency, this is referred to as a.
A. variable exchange rate
B. pegged exchange rate
C. linked exchange rate
D. floating exchange rate

39. Many of the states around the Gulf of Arabia have long pegged their currencies to the:
A. dollar.
B. British pound.
C. euro.
D. Saudi riyal.

40. Some countries try to hold the value of their currency within some range against an important reference currency. This is referred to as a:
A. dirty float.
B. free float.
C. pegged float.
D. variable alternative.

41. Which of the following is a system under which a countrys currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value?
A. Fixed exchange rate
B. Free float
C. Pegged float
D. Dirty float

42. Which of the following is the policy adopted by the Chinese since 2005?
A. Pegged exchange rate
B. Clean float
C. Dirty float
D. Fixed exchange rate

43. The ____ was a system to regulate fixed exchange rates before the introduction of the euro.
A. European Free Trade Association
B. European Monetary System
C. International monetary system
D. European Community

44. The values of a set of currencies are set against each other at some mutually agreed on exchange rate in a:
A. permanent exchange rate system.
B. floating exchange rate system.
C. fixed exchange rate system.
D. dirty float system.

45. The Bretton Woods conference of 1944 established the basic framework for the:
A. World Trade Organization.
B. post-World War II international monetary system.
C. General Agreement on Tariffs and Trade.
D. floating exchange rate system.

46. Which of the following was a major international institution created by the Bretton Woods conference?
A. General Agreement on Tariffs and Trade
B. European monetary system
C. World Trade Organization
D. World Bank

47. Which of the following is associated with the Bretton Woods system?
A. Pegged exchange rates
B. Floating exchange rates
C. Fixed exchange rates
D. Dirty float

48. Which of the following is the most accurate description of the gold standard?
A. Pegging currencies to gold and guaranteeing convertibility
B. Conducting international trade by physically exchanging gold
C. The most valuable currency in the world at any given point in time
D. Trading gold for other valuable commodities

49. Assume that under gold standard, one unit of Currency A was defined as equivalent to 48 grains of fine gold while one unit of Currency B was defined as equivalent to 120 grains of fine gold. There are 480 grains in an ounce. Based on this information, one unit of Currency B is equal to:
A. 0.4 units of currency A.
B. 2.5 units of currency A.
C. 4 units of currency A.
D. 10 units of currency A.

50. Under the gold standard, the amount of currency needed to purchase one ounce of gold was referred to as the gold _____ value.
A. standard
B. monetary
C. legal
D. par

51. When is a country said to be in balance-of-trade equilibrium?
A. When it does not have a trade deficit
B. When the income its residents earn from exports is less than the money its residents pay to other countries for imports
C. When the current account of its balance of payments is in balance
D. When the income its residents earn from exports is greater than the money its residents pay to other countries for imports

52. Which of the following is a great strength claimed for the gold standard?
A. It helped establish the dollar as a predominant vehicle currency.
B. It helped governments raise foreign exchange reserves thereby increasing economic stability.
C. It contained a mechanism for achieving balance-of-trade equilibrium by all countries.
D. It helped reduce inflation to near-zero levels in all countries engaged in international trade.

53. The gold standard was abandoned in:
A. 1870.
B. 1889.
C. 1914.
D. 1924.

54. In the 1930s, confidence in the _____ was shattered because countries were devaluing their currencies at will.
A. fixed exchange system
B. gold standard
C. currency boards
D. Bretton Woods system

55. Which of the following was a major international institution established by the Bretton Woods conference?
A. General Agreement on Tariffs and Trade
B. European monetary system
C. World Trade Organization
D. International Monetary Fund

56. Which of the following was the objective of establishing the International Monetary Fund (IMF)?
A. Maintain order in the international monetary system
B. Promote general economic development
C. Provide loans to the World Bank
D. Help finance the building of Europes economy by providing low-interest loans

57. Which of the following was the objective of establishing the World Bank?
A. Become the lender of last resort to reserve banks
B. Promote general economic development
C. Maintain stability in the international monetary system
D. Regulate exchange rates of member nations

58. According to the Bretton Woods agreement of 1944, which currency remained convertible to gold?
A. Dollar
B. Pound
C. Yen
D. Mark

59. Which of the following observations is true of the Bretton Woods agreement?
A. All countries participating were required to exchange their currencies for gold.
B. Devaluation was accepted as a tool of competitive trade policy.
C. All participating countries agreed to try to maintain the value of their currencies within 10 percent of the par value by buying or selling currencies as needed.
D. Devaluation of up to 10 percent would be allowed without any formal approval by the IMF.

60. The aim of the Bretton Woods agreement, of which the ____ was the main custodian, was to try to avoid a repetition of the financial chaos of the previous years through a combination of discipline and flexibility.
A. World Bank
B. WTO
C. IMF
D. GATT

61. Which of the following is a way in which a fixed exchange rate regime imposes discipline?
A. The need to maintain a fixed rate puts a brake on competitive devaluations.
B. It imposes fiscal discipline on countries, thereby reducing market activity.
C. It increases demand for products and services thereby increasing productivity.
D. It imposes monetary discipline by making governments set exchange rates.

62. The architects of the Bretton Woods agreement wanted to avoid high unemployment, so they built limited flexibility into the system. Which of the following was a major feature of the IMF Articles of Agreement that fostered this flexibility?
A. Balance-of-trade equilibrium
B. Adjustable parities
C. Free trade
D. Interest rate adjustment

63. Which of the following is true of IMF lending facilities?
A. IMF supervision of a countrys macroeconomic policies was not envisaged whatever be the extent of drawings.
B. Most IMF loans were for periods of 10-15 years to help members tide over balance-of-payments deficits.
C. Member countries were not allowed to borrow any amount from the IMF without adhering to any specific agreements.
D. IMF funds were meant to buy time for countries to bring down their inflation rates and reduce their balance-of-payments deficits.

64. The system of adjustable parities allowed for the devaluation of a countrys currency by more than _____ percent if the IMF agreed that a countrys balance of payments was in fundamental disequilibrium.
A. 2
B. 10
C. 5
D. 1

65. Which term was intended to apply to countries that had suffered permanent adverse shifts in the demand for their products?
A. Competitive disadvantage
B. Capital flight
C. Fundamental disequilibrium
D. Noncompeting

66. What is the official name for the World Bank?
A. International Bank for Reconstruction and Development (IBRD)
B. International Development Association (IDA)
C. International Monetary Agency (IMA)
D. Bank for International Settlements (BIS)

67. What was the initial mission of the World Bank?
A. Maintain order in the international monetary system
B. Promote general economic development in Third World nations
C. Provide loans to the International Monetary Fund
D. Help finance the building of Europes economy through low-interest loans

68. Which of the following was responsible for shifting the focus of the World Bank from Europe to Third World nations?
A. Truman doctrine
B. Berlin blockade
C. Korean war
D. Marshall Plan

69. Which of the following is true of the IBRD scheme of the World Bank?
A. Resources to fund IBRD loans are raised through subscriptions from wealthy members.
B. IBRD loans go only to the poorest countries.
C. Borrowers pay the banks cost of funds plus a margin for expenses.
D. Borrowers have 50 years to repay at an interest rate of 1 percent a year.

70. Which of the following observations about the International Development Association (IDA) scheme of the World Bank is true?
A. Money is raised through bond sales in the international capital market.
B. Borrowers have 50 years to repay at an interest rate of 1 percent a year.
C. Borrowers pay rates slightly lower than commercial banks market rate.
D. Loans are offered to governments of all underdeveloped nations.

71. Which of the following is being practiced after the collapse of the system of fixed exchange rates established at Bretton Woods?
A. Clean float system
B. Managed-float system
C. Currency board system
D. Gold standard

72. Most economists trace the breakup of the fixed exchange rate system to the:
A. U.S. macroeconomic policy package of 1965-1968.
B. Formation of the European Community in the late 1950s.
C. Marshall Plan, under which the United States lent money heavily to European nations.
D. Failure of the International Monetary Fund to impose monetary discipline.

73. Between 1965 and 1968, President Lyndon Johnson backed an increase in U.S. government spending that was financed by:
A. sales of gold reserves.
B. IMF loans.
C. an increase in the money supply.
D. an increase in taxes.

74. In 1971, U.S. trade figures showed that for the first time since 1945, the United States was importing more than it was exporting. This set off massive purchases of:
A. U.S. dollars.
B. German deutsche marks.
C. British pounds.
D. Japanese yen.

75. In August 1971, U.S. President Nixon made the following two announcements: (1) a new 10 percent tax on imports would remain in effect until the trading partners of the U.S. agreed to revalue their currency against the dollar and (2) the:
A. U.S. planned to call for a second Bretton Woods conference.
B. U.S. would no longer support the World Bank.
C. U.S. planned to devalue its currency by 20 percent.
D. dollar was no longer convertible into gold.

76. What was considered an Achilles heel of the Bretton Woods system?
A. It could be wrecked by heavy borrowings from the World Bank and IMF.
B. It could not work if the U.S. dollar was under speculative attack.
C. It could not help countries in a situation of fundamental disequilibrium.
D. It forced monetary discipline on participating nations.

77. The Jamaica meeting in January 1976 revised the IMFs Articles of Agreement to reflect the new reality of:
A. fixed exchange rates.
B. gold standard.
C. the dollar peg.
D. floating exchange rates.

78. Which of the following was abandoned as a reserve asset according to the Jamaica agreement?
A. Silver
B. U.S. dollar
C. Gold
D. A basket of vehicle currencies

79. Which of the following was a main element of the Jamaica agreement of 1976?
A. The International Monetary Fund was established.
B. Floating rates were declared acceptable.
C. Total annual IMF quotas were decreased.
D. The U.S. dollar became the new reserve asset.

80. In 1997, the currencies of South Korea, Indonesia, Malaysia, and Thailand _____ of their value against the U.S. dollar in a few months.
A. gained between 50 percent and 80 percent
B. lost between 50 percent and 80 percent
C. gained between 10 percent and 20 percent
D. lost between 10 percent and 20 percent

81. Which of the following partly helps explain the rise in the value of the dollar between 1980 and 1985 despite a large trade deficit?
A. Political stability and peace in all other parts of the world
B. Heavy capital outflows from the United States
C. Low real interest rates in the United States
D. Slow economic growth in the developed countries of Europe

82. The fall in the value of the U.S. dollar between 1985 and 1988 was caused by a combination of:
A. government intervention and market forces.
B. high inflation and high real interest rates in the United States.
C. a trade surplus in the previous years and high consumer debt.
D. deregulation and high interest rates.

83. During which meeting in 1985 did the Group of Five major industrial countries announce that it would be desirable for most major currencies to appreciate vis--vis the U.S. dollar?
A. Doha Accord
B. Bretton Woods Accord
C. Plaza Accord
D. Louvre Accord

84. The Plaza Accord of 1985 concluded that it would be desirable if:
A. the countries moved back to a system of fixed exchange rates.
B. the participating members reverted to the gold standard.
C. full convertibility was limited to the U.S. dollar.
D. most major currencies appreciated vis--vis the U.S. dollar.

85. According to the Plaza Accord of 1985, the Group of Five major industrial countries pledged to:
A. intervene in the foreign exchange markets to sell dollars.
B. let their currencies depreciate against the U.S. dollar.
C. revert to a system of fixed exchange rates.
D. donate more funds to the IDA scheme of the World Bank.

86. According to the _____ of 1987, the governments of the Group of Five major industrial nations agreed that exchange rates had been realigned sufficiently and pledged to support the stability of exchange rates around their current levels by intervening in the foreign exchange markets when necessary to buy and sell currency.
A. Doha Accord
B. Bretton Woods Accord
C. Plaza Accord
D. Louvre Accord

87. Which of the following helps explain the rise of the dollar against most major currencies in the late 1990s, even though the United States was still running a significant balance-of-payments deficit?
A. Increased government intervention in the foreign exchange market
B. Increased foreign investments in U.S. financial assets
C. Low real interest rates in the U.S. compared to the rest of the world
D. The fall of the Soviet Union and the communist bloc

88. In the early 1970s, the ______ became the currency for oil trades.
A. British pound
B. German mark
C. U.S. dollar
D. Saudi riyal

89. From mid-2008 through early 2009 the dollar staged a moderate rally against major currencies, despite the fact that the American economy was suffering from a serious financial crisis. Which of the following was seen to be a reason behind this rally?
A. High real interest rates in the United States compared to any other developed region in the world sparked an inflow of funds into the country.
B. U.S. assets were characterized by a high-risk, high-return payoff which prompted foreign investors to park their funds.
C. Foreign investors were excited at the possibility of high returns following the government bail-out of financial institutions.
D. Foreign investors saw the dollar has a safe haven and put their money in low-risk U.S. assets.

90. The frequency of government intervention in the foreign exchange market explains why the current system is sometimes thought of as a(n):
A. adjustable exchange rate system.
B. managed-float system.
C. clean float system.
D. pegged exchange rate system.

91. Why is the current foreign exchange system thought of as a dirty-float system?
A. Because of the frequency of government intervention in the foreign exchange market
B. Because of the extreme volatility in the foreign exchange market
C. Because it is essentially a system of fixed foreign exchange rates
D. Because of absolute government control of exchange rates

92. The case for floating exchange rates has two main elements. These are:
A. monetary policy autonomy and automatic trade balance adjustments.
B. sporadic trade balance adjustments and high growth rates.
C. the merits of the gold standard and fiscal policy autonomy.
D. monetary policy control and fiscal policy autonomy.

93. It is argued that under a fixed exchange rate system, a countrys ability to expand or contract its money supply as it sees fit is:
A. unlimited.
B. limited by the interdependence on interest rates.
C. limited by the need to maintain exchange rate parity.
D. limited only by government commitment.

94. Which of the following is associated with monetary contraction in a system of fixed exchange rates?
A. It requires lowering of interest rates.
B. It will increase the demand for money.
C. It will put downward pressure on a fixed exchange rate.
D. It will lead to an inflow of money from abroad.

95. Under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, this would require the:
A. country to import more than it exports.
B. World Bank to provide soft loans to the country.
C. IMF to agree to a currency devaluation.
D. country to let its currency appreciate.

96. Which of the following is a position taken by advocates of a floating exchange rate system?
A. Each country should be allowed to choose its own inflation rate.
B. Speculation can cause unnecessary fluctuations in exchange rates.
C. Unpredictability of exchange rate movements has made business planning difficult.
D. Removal of the obligation to maintain exchange rate parity would destroy a governments monetary control.

97. Which of the following is a position taken by advocates of a fixed exchange rate system?
A. Removal of the obligation to maintain exchange rate parity would restore monetary control to a government.
B. Destabilizing speculation tends to accentuate the fluctuations around the exchange rates long-run value.
C. Speculation has negligible impact on foreign exchange rates.
D. The forward exchange market insures against the risks associated with exchange rate fluctuations.

98. A criticism of the floating rate system is that the unpredictability of exchange rate movements has made business planning difficult. Advocates of a floating system reply that:
A. the forward exchange market insures against the risks associated with exchange rate fluctuations.
B. companies should invest more in efforts to forecast exchange rate movements.
C. this difficulty is faced by every organization operating in a dynamic business environment.
D. this uncertainty actually aids the growth of international trade and investment and provides new investment opportunities.

99. Critics of floating exchange rates question the closeness of the link between the exchange rate and the trade balance. They claim trade deficits are determined by the:
A. balance between savings and investment in a country.
B. external value of the currency of a country.
C. expansionist monetary policies adopted by a country.
D. extent of government control of industries in a country.

100. What percentage of IMF member nations practice the free float system?
A. 28 percent
B. 26 percent
C. 8 percent
D. 14 percent

101. Which of the following countries has no separate legal tender of its own?
A. Great Britain
B. France
C. Japan
D. Australia

102. Which of the following is an exchange rate system under which a countrys exchange rate is allowed to fluctuate against other currencies within a target zone?
A. Free float
B. Fixed peg
C. Adjustable peg
D. Currency board

103. Which of the following exchange rate regimes is least practiced by IMF member nations?
A. No separate tender
B. Fixed peg
C. Managed float
D. Currency board

104. Under a pegged exchange rate regime, a country will peg the value of its currency to:
A. an index of world currencies maintained by the World Bank.
B. that of a major currency.
C. an index of peer nation currencies.
D. an index of its historic currency rates.

105. Which of the following observations is true of a pegged exchange rate system?
A. It moderates inflationary pressures in a country.
B. It reduces monetary discipline in a country.
C. It usually leads to high levels of inflation.
D. It is popular among many of the worlds developed nations.

106. According to the IMF study cited in the text, countries with _____ had lower average annual inflation rates.
A. free float exchange rates
B. pegged exchange rates
C. managed-float exchange rates
D. dirty float systems

107. A country that introduces a _____ commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.
A. free float system
B. fixed peg system
C. managed-float system
D. currency board

108. How does a country that introduces a currency board make its commitment to converting its domestic currency on demand into another currency at a fixed exchange rate credible?
A. By taking opposing positions in the forward foreign exchange market to maintain a zero exposure stance at all points in time
B. By allowing its exchange rate to fluctuate against other currencies within a target zone
C. By holding foreign currency reserves equal at the fixed exchange rate to at least 100 percent of the domestic currency issued
D. By having no separate legal tender of its own

109. Which of the following would happen to interest rates under a strict currency board system?
A. They adjust automatically.
B. They will be controlled by the government.
C. They will usually remain high.
D. They will usually remain low.

110. Which countrys economic collapse and the subsequent decision to abandon its currency board dampened much of the enthusiasm for the mechanism of managing exchange rates?
A. Hong Kong
B. Thailand
C. Greece
D. Argentina

111. Which of the following is a drawback of the currency board system?
A. The ease with which governments can set and manipulate interest rates acts as a dampener.
B. Higher domestic inflation rates compared to the inflation rate in the country to which the currency is pegged can make the currency uncompetitive.
C. The currency board can issue additional domestic notes and coins only when there are foreign exchange reserves to back it, thus arresting liquidity.
D. It has all the disadvantages of a floating exchange rate regime.

112. Which countrys positive experience with the currency board during the 1997 Asian currency crisis added a new dimension to the debate over how to manage a pegged exchange rate?
A. Japan
B. Taiwan
C. Hong Kong
D. Indonesia

113. Since the early 1970s, developed countries such as Great Britain and the United States have financed their deficits by:
A. borrowing from the World Bank.
B. borrowing private money.
C. selling their gold reserves.
D. drawing on IMF funds.

114. Which of the following was a major factor that led countries such as Great Britain and the United States to finance their deficits by borrowing private money, as opposed to drawing on IMF funds since the early 1970s?
A. The rapid development of global capital markets
B. Shortage of IMF funds available for disbursal
C. High interest rate charged by the IMF
D. Abandoning of the floating exchange rate system

115. Which of the following observations about the IMF is true?
A. The collapse of the Bretton Woods system sounded the death knell of the IMF.
B. The IMF has been criticized for not asking the governments that borrowed from it to enact the required macroeconomic policies.
C. The IMF has repeatedly refused to lend money to nations experiencing financial crises.
D. The IMFs activities have expanded because periodic financial crises have continued to hit many economies in the post-Bretton Woods era.

116. A _____ occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate.
A. fiscal disruption
B. solvency crisis
C. banking crisis
D. currency crisis

117. A _____ crisis refers to a situation in which a loss of confidence in the banking system leads to a run on banks, as individuals and companies withdraw their deposits.
A. banking
B. currency
C. reserve
D. fiscal

118. A _____ occurs when a country cannot service its foreign debt obligations.
A. banking crisis
B. foreign currency reserve crisis
C. fiscal crisis
D. foreign debt crisis

119. Which of the following is a common underlying macroeconomic cause behind financial crises?
A. Low relative price inflation rates
B. A narrowing current account deficit
C. Asset price inflation
D. Depressed domestic borrowing situation

120. Which of the following actions by the Mexican government in December 1994, exacerbated the sale of the peso and contributed to the rapid 40 percent drop in its value?
A. Increase in interest rates
B. Currency devaluation
C. Tax on imports
D. Shift to a currency board regime

121. The financial crisis that erupted across _____ during the fall of 1997 emerged as the biggest challenge to date for the IMF.
A. Eastern Europe
B. Central America
C. Southeast Asia
D. South America

122. Identify the countries worst affected by the Southeast Asian crisis of 1997.
A. Indonesia, Thailand, and South Korea
B. Malaysia, Singapore, and the Philippines
C. Japan, Indonesia, and Vietnam
D. Singapore, Vietnam, and Malaysia

123. All of the following contributed to the Asian crisis of 1997 except:
A. the investment boom in commercial and residential property and infrastructure.
B. the debt bomb.
C. excess capacity that led to plunging output prices.
D. production driven by domestic demand.

124. South Koreas giant diversified conglomerates are referred to as:
A. guanxi.
B. chaebol.
C. amae.
D. kaizen.

125. What was the name conferred on the system of state support to a network of an estimated 300 businesses owned by Indonesian President Suhartos family and friends?
A. Mr. Ten percent
B. Governance of nepotism
C. Too big to fail league
D. Crony capitalism

126. Which of the following factors complicated the debt situation in the run up to the Asian crisis in 1997?
A. Borrowing in dollars
B. Adoption of the currency board system
C. Steep decline in imports
D. Reduction of domestic interest rates

127. Which of the following is true of the exchange rate system followed in countries that were part of the Southeast Asian crisis of 1997?
A. They followed a currency board system.
B. They followed a clean float system.
C. They had their currencies pegged to the dollar.
D. They had no separate legal tender.

128. The Asian meltdown began in mid-1997 in _____ when it became clear that several key financial institutions were on the verge of default.
A. Indonesia
B. China
C. Thailand
D. Malaysia

129. Which of the following economies in Southeast Asia was considered relatively more stable during the crisis on 1997?
A. Thailand
B. Vietnam
C. Indonesia
D. Singapore

130. Which of the following was a condition imposed on Indonesia by the IMF in return for the $37 billion rescue deal in 1997?
A. Opening of banks that were shut down
B. Removing government subsidies on basic foodstuffs and energy
C. Increasing government spending
D. Lowering the interest rates

131. Which of the following was a key feature of the South Korean agreement with the IMF following the rescue deal in 1997?
A. Opening up of the Korean economy and banking system to foreign investors
B. Give more autonomy to the chaebol by increasing their share of bank financing
C. Lowering of interest rates to near-zero levels to spur investment
D. Introduction of trade-related subsidies and stringent import licensing norms

132. Critics of IMF argue that the tight macroeconomic policies imposed by the IMF on the Asian nations are suited to countries that are suffering from:
A. excessive government spending.
B. high levels of inflation.
C. declining domestic demand and excessive export growth.
D. a private-sector debt crisis with deflationary undertones.

133. ______ arises when people behave recklessly because they know they will be saved if things go wrong.
A. The lemon problem
B. Moral hazard
C. Insurance paradigm
D. Banking paradox

134. A big bank follows rash lending policies for short-term gains because it knows that it will be bailed out because it is too big to fail. This behavior illustrates:
A. the lemon problem.
B. information asymmetry.
C. a moral hazard.
D. the banking paradox.

135. Which of the following is a way of building strategic flexibility and reducing economic exposure?
A. Taking loans in foreign currency
B. Taking speculative positions in the foreign exchange market
C. Concentrating production in one location
D. Contracting out manufacturing

Essay Questions

136. Differentiate between a floating exchange rate and a pegged exchange rate.

137. Describe why and when the gold standard was implemented. What were the strengths of the gold standard? Why and when was it abandoned?

138. Describe what happened at the 1944 Bretton Woods conference. Are the monetary principles established by the Bretton Woods conference still in effect today?

139. Describe the role of the World Bank in the international community. How does the World Bank contribute to the overall stability of the global monetary system?

140. When was the Jamaica Agreement established and for what reason? How did it affect the foreign exchange rate system, and what were its main elements?

141. The rise in the value of the dollar between 1980 and 1985 occurred when the United States was running a large and growing trade deficit. Explain the factors that led to this rise.

142. Discuss the factors responsible for the slide of the dollar in the early part of the 21st century.

143. Describe the difference between fixed and floating exchange rates. Which between the two is better? Explain your answer.

144. What is a pegged exchange rate? How does it work? What is the advantage of a pegged exchange rate regime?

145. Explain the concept of a currency board. How successful is this system?

146. Describe the three broad types of financial crises that have occurred over the past 30 years and have required IMF involvement.

147. Write a short note on the Mexican currency crisis of 1995.

148. How was the debt bomb partly responsible for the Asian crisis of 1997?

149. What is a moral hazard? Why is IMF criticized of exacerbating this problem?

150. How do businesses influence government policy toward international trade?

Chapter 10 The International Monetary System Answer Key

True / False Questions

1. (p. 345) A floating exchange rate is a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand.
TRUE
When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a floating exchange rate regime. A floating exchange rate is a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

2. (p. 345) The exchange rates for almost all currencies are determined by the free play of market forces.
FALSE
The exchange rates of many currencies are not determined by the free play of market forces; other institutional arrangements are adopted.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

3. (p. 345) Many of the worlds most developed nations peg their currencies, primarily to the dollar or the euro.
FALSE
Many of the worlds developing nations peg their currencies, primarily to the dollar or the euro.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

4. (p. 345) A dirty float is called so because the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency.
TRUE
A dirty float (as opposed to a clean float) is called so because the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

5. (p. 346) Since the Bretton Woods system of floating exchange rates collapsed in 1973, the world has operated with a fixed exchange rate system.
FALSE
The Bretton Woods system of fixed exchange rates collapsed in 1973. Since then, the world has operated with a mixed system in which some currencies are allowed to float freely, but many are either managed by government intervention or pegged to another currency.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

6. (p. 347) The amount of a currency needed to purchase one ounce of gold was referred to as the gold monetary value.
FALSE
The amount of a currency needed to purchase one ounce of gold was referred to as the gold par value.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: The Gold Standard

7. (p. 347) The gold standard worked well from the 1870s until the start of World War II in 1939, when it was abandoned.
FALSE
The gold standard worked reasonably well from the 1870s until the start of World War I in 1914, when it was abandoned.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: The Gold Standard

8. (p. 348) Under the Bretton Woods agreement, all countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold.
TRUE
Under the Bretton Woods agreement, all countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-02
Topic: The Bretton Woods System

9. (p. 349) The Bretton Woods agreement legalized the use of devaluation as a tool of competitive trade policy.
FALSE
An aspect of the Bretton Woods agreement was a commitment not to use devaluation as a weapon of competitive trade policy.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-02
Topic: The Bretton Woods System

10. (p. 349) A fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation.
TRUE
A fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-02
Topic: The Bretton Woods System

11. (p. 350) During the Bretton Woods era, countries were not allowed to borrow any funds from the IMF without adhering to specific agreements.
FALSE
Countries were to be allowed to borrow a limited amount from the IMF without adhering to any specific agreements. However, extensive drawings from IMF funds would require a country to agree to increasingly stringent IMF supervision of its macroeconomic policies.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-02
Topic: The Bretton Woods System

12. (p. 350) If the IMF agreed that the countrys balance of payments was in fundamental disequilibrium, the system of adjustable parities allowed for the devaluation of a countrys currency by more than 10 percent.
TRUE
The system of adjustable parities allowed for the devaluation of a countrys currency by more than 10 percent if the IMF agreed that a countrys balance of payments was in fundamental disequilibrium.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-02
Topic: The Bretton Woods System

13. (p. 350) Under the International Development Association (IDA) scheme, the World Bank raises money through bond sales in the international capital market.
FALSE
Resources to fund IDA loans are raised through subscriptions from wealthy members such as the United States, Japan, and Germany.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-02
Topic: The Bretton Woods System

14. (p. 352) The Bretton Woods system could work only as long as the U.S. inflation rate remained low and the United States did not run a balance-of-payments deficit.
TRUE
The Bretton Woods system had an Achilles heel: The system could not work if its key currency, the U.S. dollar, was under speculative attack. The Bretton Woods system could work only as long as the U.S. inflation rate remained low and the United States did not run a balance-of-payments deficit.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-01
Topic: The Collapse of the Fixed Exchange Rate System

15. (p. 352) The Jamaica meeting in 1976 revised the IMFs Articles of Agreement to reflect the new reality of floating exchange rates.
TRUE
According to the Jamaica agreement, floating rates were declared acceptable.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: The Floating Exchange Rate Regime

16. (p. 352) Since March 1973, exchange rates have become much more stable and predictable than they were between 1945 and 1973.
FALSE
Since March 1973, exchange rates have become much more volatile and less predictable than they were between 1945 and 1973.

AACSB: Analytic
Blooms: Understand
Difficulty: Medium
Learning Objective: 10-01
Topic: The Floating Exchange Rate Regime

17. (p. 353) The dollar fell in value between 1980 and 1985 as the United States was running a large and growing trade deficit, importing substantially more than it exported.
FALSE
The rise in the value of the dollar between 1980 and 1985 occurred when the United States was running a large and growing trade deficit, importing substantially more than it exported.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-01
Topic: The Floating Exchange Rate Regime

18. (p. 356) From mid-2008 through early 2009 the U.S. dollar staged a moderate rally against major currencies, as foreign investors were excited at the possibility of unusually high returns from low-risk U.S. assets.
FALSE
From mid-2008 through early 2009 the dollar staged a moderate rally against major currencies, despite the fact that the American economy was suffering from a serious financial crisis. The reason seems to be that despite Americas problems, things were even worse in many other countries, and foreign investors saw the dollar has a safe haven and put their money in low-risk U.S. assets, particularly low-yielding U.S. government bonds.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-01
Topic: The Floating Exchange Rate Regime

19. (p. 356) In a fixed exchange rate scenario, monetary expansion can lead to inflation, which puts downward pressure on a fixed exchange rate.
TRUE
Under a fixed system, monetary expansion can lead to inflation, which puts downward pressure on a fixed exchange rate (as predicted by the PPP theory).

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-03
Topic: Fixed versus Floating Exchange Rates

20. (p. 357) Advocates of fixed exchange rates argue that each country should be allowed to choose its own inflation rate.
FALSE
While advocates of floating rates argue that each country should be allowed to choose its own inflation rate (the monetary autonomy argument), advocates of fixed rates argue that governments all too often give in to political pressures and expand the monetary supply far too rapidly, causing unacceptably high price inflation.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-03
Topic: Fixed versus Floating Exchange Rates

21. (p. 358) Approximately 14 percent of the IMFs members allow their currency to float freely.
TRUE
Some 14 percent of the IMFs members allow their currency to float freely.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-04
Topic: Exchange Rate Regimes in Practice

22. (p. 359) Pegged exchange rates are popular among many of the worlds smaller nations.
TRUE
Pegged exchange rates are popular among many of the worlds smaller nations.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-04
Topic: Exchange Rate Regimes in Practice

23. (p. 360) Under the arrangement that exists in countries like Hong Kong, the currency board can issue additional domestic notes and coins even if there are no foreign exchange reserves to back it.
FALSE
Under the arrangement that exists in countries like Hong Kong, the currency board can issue additional domestic notes and coins only when there are foreign exchange reserves to back it.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-04
Topic: Exchange Rate Regimes in Practice

24. (p. 361) Since the early 1970s, developed countries such as Great Britain and the United States, have financed their deficits by borrowing private money, as opposed to drawing on IMF funds.
TRUE
Since the early 1970s, the rapid development of global capital markets has allowed developed countries such as Great Britain and the United States to finance their deficits by borrowing private money, as opposed to drawing on IMF funds.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-05
Topic: Crisis Management by the IMF

25. (p. 362) Financial crises tend to have common underlying macroeconomic causes: low relative price inflation rates, a narrowing current account deficit, and an excessive expansion of domestic borrowing.
FALSE
Financial crises tend to have common underlying macroeconomic causes: high relative price inflation rates, a widening current account deficit, excessive expansion of domestic borrowing, and asset price inflation (such as sharp increases in stock and property prices).

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-05
Topic: Crisis Management by the IMF

26. (p. 363) In a break from its practices of the past, the IMF waived away the requirement for tight monetary policies and cuts in public spending, when it helped bail Mexico out of the currency crisis in 1995.
FALSE
As is normal in such cases, the IMF insisted on tight monetary policies and further cuts in public spending, both of which helped push Mexico into a deep recession.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-05
Topic: Crisis Management by the IMF

27. (p. 363) Before the Asian crisis of 1997, the nature of exports from Southeast Asian countries had shifted from semiconductors and consumer electronics to basic materials and products such as textiles.
FALSE
The nature of exports had shifted in recent years from basic materials and products such as textiles to complex and increasingly high-technology products, such as automobiles, semiconductors, and consumer electronics.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-05
Topic: Crisis Management by the IMF

28. (p. 365) A complicating factor of the Asian crisis was that by the mid-1990s, although exports were still expanding across the region, imports declined steadily.
FALSE
A complicating factor was that by the mid-1990s, although exports were still expanding across Southeast Asia, imports were too.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-05
Topic: Crisis Management by the IMF

29. (p. 367) One criticism of the IMF is that its traditional policy prescriptions represent one-size-fits-all approach to macroeconomic policy that is inappropriate for many countries.
TRUE
One criticism of the IMF is that its traditional policy prescriptions represent one-size-fits-all approach to macroeconomic policy that is inappropriate for many countries.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-05
Topic: Crisis Management by the IMF

30. (p. 369) The IMF has become a powerful institution with sufficient checks and balances to ensure accountability.
FALSE
One of the criticisms of the IMF is that it has become too powerful for an institution that lacks any real mechanism for accountability.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-05
Topic: Crisis Management by the IMF

31. (p. 369) In response to the global financial crisis of 2008-2009, the IMF began to urge countries to adopt policies that included fiscal stimulus and monetary easing.
TRUE
In response to the global financial crisis of 2008-2009 the IMF began to urge countries to adopt policies that included fiscal stimulus and monetary easingthe direct opposite of what the fund traditionally advocated.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-05
Topic: Crisis Management by the IMF

32. (p. 371) The current foreign exchange system is a mixed system in which a combination of government intervention and speculative activity can drive the foreign exchange market.
TRUE
The current system is a mixed system in which a combination of government intervention and speculative activity can drive the foreign exchange market.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-06
Topic: Focus on Managerial Implications

33. (p. 372) The forward market offers coverage for exchange rate changes for a few years.
FALSE
The forward market tends to offer coverage for exchange rate changes a few monthsnot yearsahead.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-06
Topic: Focus on Managerial Implications

34. (p. 373) One of the ways of building strategic flexibility and reducing economic exposure involves contracting out manufacturing. This kind of strategy may be suited for low-value-added manufacturing than high-value-added manufacturing.
TRUE
One way of building strategic flexibility and reducing economic exposure involves contracting out manufacturing. However, this kind of strategy may work only for low-value-added manufacturing (e.g., textiles), in which the individual manufacturers have few if any firm-specific skills that contribute to the value of the product. It may be less appropriate for high-value-added manufacturing.

AACSB: Analytic
Blooms: Understand
Difficulty: Medium
Learning Objective: 10-06
Topic: Focus on Managerial Implications

35. (p. 374) Exchange rate volatility such as the world experienced during the 1980s and 1990s creates an environment less conducive to international trade and investment than one with more stable exchange rates.
TRUE
Exchange rate volatility such as the world experienced during the 1980s and 1990s creates an environment less conducive to international trade and investment than one with more stable exchange rates.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-06
Topic: Focus on Managerial Implications

Multiple Choice Questions

36. (p. 344) Which of the following refers to the institutional arrangements countries adopt to govern exchange rates?
A. International Monetary Fund
B. Global agreement on exchange rates
C. International monetary system
D. Bretton Woods Agreement
The international monetary system refers to the institutional arrangements that govern exchange rates.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

37. (p. 345) When the foreign exchange market determines the relative value of a currency, the country is said to adhere to a _____ exchange rate regime.
A. fixed
B. floating
C. dirty float
D. pegged
When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a floating exchange rate regime.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

38. (p. 345) When the value of a currency is fixed relative to a reference currency, this is referred to as a.
A. variable exchange rate
B. pegged exchange rate
C. linked exchange rate
D. floating exchange rate
A pegged exchange rate means the value of the currency is fixed relative to a reference currency, such as the U.S. dollar, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

39. (p. 345) Many of the states around the Gulf of Arabia have long pegged their currencies to the:
A. dollar.
B. British pound.
C. euro.
D. Saudi riyal.
Many of the worlds developing nations peg their currencies, primarily to the dollar or the euro. Many of the states around the Gulf of Arabia have long pegged their currencies to the dollar.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

40. (p. 345) Some countries try to hold the value of their currency within some range against an important reference currency. This is referred to as a:
A. dirty float.
B. free float.
C. pegged float.
D. variable alternative.
Some countries, while not adopting a formal pegged rate, try to hold the value of their currency within some range against an important reference currency such as the U.S. dollar, or a basket of currencies. This is often referred to as a dirty float.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

41. (p. 345) Which of the following is a system under which a countrys currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value?
A. Fixed exchange rate
B. Free float
C. Pegged float
D. Dirty float
Dirty float is a system under which a countrys currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

42. (p. 345) Which of the following is the policy adopted by the Chinese since 2005?
A. Pegged exchange rate
B. Clean float
C. Dirty float
D. Fixed exchange rate
Dirty float has been the policy adopted by the Chinese since July 2005. The value of the Chinese currency, the yuan, has been linked to a basket of other currencies, including the dollar, yen, and euro, and it is allowed to vary in value against individual currencies, but only within tight limits.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

43. (p. 345) The ____ was a system to regulate fixed exchange rates before the introduction of the euro.
A. European Free Trade Association
B. European Monetary System
C. International monetary system
D. European Community
Before the introduction of the euro in 2000, several member states of the European Union operated with fixed exchange rates within the context of the European Monetary System (EMS).

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

44. (p. 345) The values of a set of currencies are set against each other at some mutually agreed on exchange rate in a:
A. permanent exchange rate system.
B. floating exchange rate system.
C. fixed exchange rate system.
D. dirty float system.
Fixed Exchange Rate is a system under which the exchange rate for converting one currency into another is fixed.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

45. (p. 345) The Bretton Woods conference of 1944 established the basic framework for the:
A. World Trade Organization.
B. post-World War II international monetary system.
C. General Agreement on Tariffs and Trade.
D. floating exchange rate system.
The 1944 Bretton Woods conference established the basic framework for the post-World War II international monetary system.

AACSB: Analytic
Blooms: Remember
Difficulty: Medium
Learning Objective: 10-01
Topic: Introduction

46. (p. 345) Which of the following was a major international institution created by the Bretton Woods conference?
A. General Agreement on Tariffs and Trade
B. European monetary system
C. World Trade Organization
D. World Bank
The Bretton Woods conference created two major international institutions that play a role in the international monetary systemthe International Monetary Fund (IMF) and the World Bank.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

47. (p. 345) Which of the following is associated with the Bretton Woods system?
A. Pegged exchange rates
B. Floating exchange rates
C. Fixed exchange rates
D. Dirty float
The Bretton Woods system called for fixed exchange rates against the U.S. dollar.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: Introduction

48. (p. 346) Which of the following is the most accurate description of the gold standard?
A. Pegging currencies to gold and guaranteeing convertibility
B. Conducting international trade by physically exchanging gold
C. The most valuable currency in the world at any given point in time
D. Trading gold for other valuable commodities
Gold standard is the practice of pegging currencies to gold and guaranteeing convertibility.

AACSB: Analytic
Blooms: Remember
Difficulty: Easy
Learning Objective: 10-01
Topic: The Gold Standard

49. (p. 346, 347) Assume that under gold standard, one unit of Currency A was defined as equivalent to 48 grains of fine gold while one unit of Currency B was defined as equivalent to 120 grains of fine gold. There are 480 grains in an ounce. Based on this information, one unit of Currency B is equal to:
A. 0.4 units of currency A.
B. 2.5 units of currency A.
C. 4 units of currency A.
D. 10 units of currency A.
One ounce of gold cost 10 units of Currency A (480/48). One ounce of gold cost 4 units of Currency B (480/120). From the gold par values of these currencies, we can calculate what the exchange rate converting Currency B into Currency A; one unit of Currency B = 2.5 units of Currency A (10units of A/4units of B).

AACSB: Reflective Thinking
Blooms: Apply
Difficulty: Hard
Learning Objective: 10-01
Topic: The Gold Standard

50. (p. 347) Under the gold standard, the amount of curr

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