Chapter 3, The International Monetary System
CHAPTER 3
The International Monetary System
3.1 The ________ is an exchange rate system that is free from central bank and other
government-type interventions.
a) managed float
b) clean float
c) dirty float
d) target-zone arrangement
Ans: b
Section: Free float
Level: Easy
3.2 What is the name for the exchange rate system where market participants will adjust
their current and expected future currency needs as price levels change, interest
differentials appear, and economic growth occurs?
a) free float
b) clean float
c) managed float
d) dirty float
Ans: a
Section: Free Float
Level: Easy
3.3 When governments attempt to reduce the uncertainty caused by short and medium
term exchange rate changes, it is referred to as _________.
a) smoothing out daily fluctuations
b) leaning against the wind
c) unofficial pegging
d) a dirty float
Ans: b
Section: Managed float
Level: Easy
3.4 Under a _________, countries adjust their national economic policies to maintain
their exchange rates within a specific margin around agreed-upon, fixed central
exchange rates.
a) managed float
b) ‘beggar-thy-neighbor” devaluation
c) dirty float
d) target-zone arrangement
Chapter 3, The International Monetary System
Ans: d
Section: Target-zone arrangement
Level: Easy
3.5 What is the name of the policy aimed to lessen the need to monetize a government’s
budget deficit by reducing expenditures often with the unintended outcome of increased
unemployment?
a) fixed-rate system
b) managed float
c) target-zone arrangement
d) austerity
Ans: d
Section: Fixed-rate system
Level: Easy
3.6 ________ is nonconvertible paper money backed only by faith in the monetary
authorities.
a) Specie
b) Fiat money
c) Seignorage
d) Par value
Ans: b
Section: The classical gold standard
Level: Easy
3.7 Under the classic gold standard, if prices began rising in the U.S.
a) the dollar value of the pound would rise
b) the dollar value of the pound would fall
c) the U.S. would begin running a balance of trade surplus
d) gold would flow out of the U.S. and the U.S. money supply would drop
Ans: d
Section: The classical gold standard
Level: Easy
3.8 The Bretton Woods system
a) ended in 1971
b) ended in 1939 when World War II began
c) is currently the basis for the international monetary system
d) is currently in use only by the major industrial nations
Ans: a
Section: Introduction
Level: Easy
Chapter 3, The International Monetary System
3.9 The current exchange rate system can best be characterized as a ___ system.
a) free float
b) managed float
c) fixed-rate
d) hybrid
Ans: d
Section: Alternative exchange rate systems
Level: Easy
3.10 Managed floats do NOT fall into which of the following categories of central bank
intervention?
a) smoothing out daily fluctuations
b) leaning against the wind
c) unofficial pegging
d) letting market forces set exchange rates
Ans: d
Section: Managed float
Level: Easy
3.11 The European Monetary System is best described as a
a) clean float
b) target-zone arrangement
c) dirty float
d) managed float
Ans: b
Section: Lessons from the european monetary system
Level: Easy
3.12 Which of the following produced a valuable lesson about exchange-rate stability
and target-zone arrangements?
a) European Monetary System
b) European Community
c) European Common Market
d) European Union
Ans: a
Section: Lessons from the european monetary system
Level: Easy
3.13 What is the name given to profits earned by a central bank from money creation?
a) seigniorage
b) interest arbitrage
Chapter 3, The International Monetary System
c) moral hazard
d) fiat money
Ans: a
Section: European monetary union
Level: Easy
3.14 Policy makers have proposed the following steps for solving the currency crises:
a) give new international agencies the power to guide global financial markets
b) increase the International Monetary Fund’s funding
c) Both a and b
d) Neither a nor b
Ans: c
Section: Emerging market currency crises
Level: Easy
3.15 The Bretton Woods system fell apart because
a) of the oil crisis
b) U.S. monetary policy was too expansionary
c) Japan ran a large trade surplus
d) the United States no longer supported a pegged gold standard
Ans: b
Section: The bretton woods system: 1946-1971
Level: Easy
3.16 The gold standard was dissolved in 1973 because
a) the U.S. printed too many dollars to maintain gold at $35/oz
b) exchange markets preferred a floating rate system
c) high interest rates raised the cost of holding gold
d) some countries preferred to hold gold instead of dollars
Ans: d
Section: The post-bretton woods system
Level: Easy
3.17 The rising dollar in the early 1980s can be attributed to
a) high real interest rates in the United States
b) improved investment prospects in the United States
c) the growing U.S. budget deficit
d) a and b only
Ans: d:
Section: The post-bretton woods system: 1971 to the present
Level: Easy
Chapter 3, The International Monetary System
3.18 The fall of the dollar beginning in 1985 can be attributed to
a) the growing U.S. budget deficit
b) the large U.S. trade deficit
c) rapid U.S. economic growth
d) the slowdown in U.S. economic growth relative to growth overseas
Ans: d
Section: The post-bretton woods system: 1971 to the present
Level: Easy
3.19 According to the Maastricht criteria, European nations must meet the following
standard:
a) the government budget deficit could exceed 3%of GDP
b) the inflation rate could be more than 1.5% points above the average rate of Europe’s
three-lowest inflation nations
c) government debt could not exceed 60%of GDP
d) none of the above
Ans: c
Section: European monetary union
Level: Medium
3.20 A gold standard ensures a long-run tendency toward price stability because
a) gold is desirable
b) gold is durable and storable
c) the cost of producing an ounce of gold stays relatively constant overtime
d) gold supply is directly related to consumer satisfaction
Ans: c
Section: A brief history of the International Monetary System
Level: Medium
3.21 Calls for a new gold standard reflect
a) fundamental distrust of government's willingness to maintain the integrity of fiat
money
b) a general willingness to accept fiat money
c) a short memory of what actually transpired under the gold standard
d) the durability and desirability of gold
Ans: a
Section: The classical gold standard
Level: Medium
3.22 Assume you are a critic of the World Bank. Which one of the following would
NOT be one of your criticisms?
Chapter 3, The International Monetary System
a) World Bank projects do not come under the scrutiny of the global financial markets.
b) The Bank should move its lending operations out of China.
c) The Bank is financing projects that encourage governments to enact changes that
make countries more attractive to private investors.
d) The Bank is funding projects to countries without giving them any incentive to
change inefficient operations in the economy.
Ans: c
Section: The gold exchange standard and its aftermath: 1925-1944
Level: Medium
3.23 Under the gold standard
a) price levels rose dramatically
b) price levels stayed constant over time
c) the long-run stability of the price level includes alternating periods of inflation and
deflation
d) fiat money is more valuable
Ans: c
Section: The classical gold standard
Level: Medium
3.24 A country that followed policies that would lead to a higher rate of inflation than
that experienced by its trading partners would
a) experience a balance-of-payments surplus as its goods became more expensive
b) see a decrease in the supply of its currency on the foreign exchange markets
c) find its currency subject to upward pressure
d) experience a balance-of-payments deficit as its goods became more expensive
Ans: d
Section: The bretton woods system: 1946-1971
Level: Medium
3.25 Under a fixed-rate system, a country that followed policies leading to a lower
inflation rate than that experienced by its trading partners would
a) come under pressure to expand its money supply
b) restrict the growth of its money supply
c) experience a balance-of-payments deficit
d) be forced to buy its currency in the foreign exchange market
Ans: a
Section: The bretton woods system: 1946-1971
Level: Medium
Chapter 3, The International Monetary System
3.26 Under which one of the following would a country that followed policies leading
to a lower inflation rate than that experienced by its trading partners would come under
pressure to expand its money supply?
a) fixed-rate currency system
b) freely-floating currency system
c) managed float
d) currency board
Ans: a
Section: The bretton woods system: 1946-1971
Level: Medium
3.27 Underlying the emerging markets currency crises, there is a fundamental conflict
among policy objectives that the target nations have failed to resolve. Which one of the
following is NOT in conflict?
a) IMF bailouts
b) fixed exchange rates
c) independent domestic monetary policy
d) free capital movement
Ans: a
Section: Emerging market currency crises
Level: Medium
3.28 In a fixed-rate system central banks would NOT maintain currency values by
a) increasing the money supplies of nations with overvalued currencies
b) boosting the money supplies of nations with undervalued currencies
c) buying up overvalued currencies in the foreign exchange market
d) selling undervalued currencies in the foreign exchange market
Ans: a
Section: Fixed-rate system
Level: Difficult
3.29 Governments intervene in the foreign exchange markets for all of the following
EXCEPT to
a) earn foreign exchange
b) reduce economic uncertainty
c) improve the nation's export competitiveness
d) reduce inflation
Ans: a
Section: Managed float
Level: Difficult
Chapter 3, The International Monetary System
3.30 Under a fixed-rate system, which of the following four alternatives to devaluation
is most likely to succeed?
a) foreign borrowing
b) austerity
c) wage and price controls
d) exchange controls
Ans: b
Section: Fixed-rate system
Level: Difficult
3.31 In order to boost the value of the DM relative to the dollar
a) the Fed should sell dollars for DM and the Bundesbank should buy DM with dollars
b) the Fed should sell dollars for DM and the Bundesbank should buy dollars with DM
c) the Fed should sell DM for dollars and the Bundesbank should sell dollars for DM
d) the Fed should sell DM for dollars and the Bundesbank should buy DM with dollars
Ans: a
Section: Managed float
Level: Difficult
3.32. In January 1948, France changed the French franc peg to 2.1439 FF for a US
dollar, whereas the U.S. dollars was worth $35 for one ounce of gold. What would an
ounce of gold be worth in French francs?
a) 214.39 FF
b) 75.04 FF
c) 16.32 FF
d) 35.00 FF
Ans: b
Section: The bretton woods system: 1946-1971
Level: Medium
3.33. What best characterizes the period of the classical gold standard (1821-1914).
a) there were no exchange rates
b) exchange rates were very volatile
c) exchange rates were stable
d) international trade was low
Ans: c
Section: How the classical gold standard worked in practice: 1821-1914
Level: Medium
3.34 The majority of countries abandoned the gold standard in 1914 when
a) World War I started.
b) The Great Depression started
Chapter 3, The International Monetary System
c) The United Kingdom and France lost their colonial empires.
d) The Vietnam war escalated and the Great Society program started.
Ans: a
Section: The classical gold standard
Level: Medium
3.35 Under the gold standard, changes in the price levels of one country are
automatically corrected through the:
a) Bretton Woods accord
b) The target-zone arrangement
c) The price-specie-flow mechanism.
d) The gold-flow-zone accords
Ans: c
Section: The classical gold standard
Level: Medium
3.36 Under the Bretton Woods system each country established a par value for its
currency in relation to the dollar. And the U.S. dollar was pegged to gold at
a) $35 per ounce.
b) $155 per ounce.
c) $355 per ounce.
d) $1550 per ounce.
Ans: a
Section: The bretton woods system: 1946-1971
Level: Medium
3.37 The G-7 is a group composed of which 7 countries:
a) Canada, France, Japan, West Germany, Italy, the U.K., and the United States.
b) France, Japan, Germany, Italy, Switzerland, the U.K., and the United States.
c) China, France, Germany, Russia, Switzerland, the U.K., and the United States.
d) China, Japan, Germany, Russia, South Korea, the U.K., and the United States.
Ans: a
Section: The Post Bretton Woods System: 1971 to the Present
Level: Medium
3.38 With a floating exchange rate regime, countries maintain their monetary policy
independence because the balance of capital flows will be achieved through
a) exchange rate adjustments.
b) the price-specie-flow mechanism.
c) the specie-exchange-flow mechanism.
d) the trilemma.
Ans: a
Chapter 3, The International Monetary System
Section: The Trilemma and Exchange Rate Regime Choice
Level: Medium
3.39 On January 1, 1999, the common European currency called the euro started when
a) all EU countries adopted a common currency called the euro.
b) eight of 15 EU countries adopted a common currency called the euro.
c) nine of 15 EU countries adopted a common currency called the euro.
d) eleven of 15 EU countries adopted a common currency called the euro.
Ans: d
Section: European monetary union
Level: Medium
3.40 Which country has negotiated an opt-out from the euro?
a) Germany
b) Malta
c) Denmark
d) Cyprus
Ans: c
Section: European monetary union
Level: Medium
