Q&A Hero

Q: The activities of the International Monetary Fund have declined after the collapse of the Bretton Woods system in 1973.

Q: Under a currency board system, the government has the absolute authority to set interest rates.

Q: A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.

Q: It can be very difficult for a small country to maintain a peg against another currency if capital is flowing out of the country and foreign exchange traders are speculating against the currency.

Q: The disadvantage of a pegged exchange rate regime is that it aggravates inflationary pressures in a country.

Q: Under a pegged exchange rate regime, a country will peg the value of its currency to that of a major currency, so that if the reference currency rises in value, its own currency rises too.

Q: Under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade, it would require the International Monetary Fund to agree to a currency devaluation.

Q: Under a floating exchange rate system, a countrys ability to expand or contract its money supply as it sees fit is limited by the need to maintain exchange rate parity.

Q: Under a floating exchange rate regime, market forces have produced a volatile dollar exchange rate.

Q: Since March 1973, currency exchange rates have become less volatile and more predictable than they were between 1945 and 1973.

Q: 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.

Q: Under the fixed exchange rate system, the dollar could be devalued only if all countries agreed to simultaneously revalue against the dollar.

Q: As the only currency that could be converted into gold, the British pound occupied a central place in the fixed exchange rate system.

Q: Under the International Bank for Reconstruction and Development scheme, the World Bank offers low-interest loans to risky customers whose credit rating is often poor.

Q: When the Bretton Woods participants established the World Bank, the need to lend money to third world nations was foremost in their minds.

Q: The architects of the Bretton Woods agreement wanted to avoid high unemployment, so they built the fixed exchange rate system to be highly inflexible.

Q: According to the Bretton Woods agreement, if a currency became too weak to defend, a devaluation of up to 10 percent would be allowed without any formal approval by the International Monetary Fund.

Q: The major problem with the gold standard was that no multinational institution could stop countries from engaging in competitive devaluations.

Q: If more dollars are needed to buy an ounce of gold than before, the implication is that the dollar is worth more.

Q: Under the gold standard, a country in balance-of-trade equilibrium will experience a net flow of gold from other countries.

Q: A country is said to be in balance-of-trade equilibrium when the income its residents earn from exports is greater than the money its residents pay to other countries for imports.

Q: Given a common gold standard, the value of any currency in units of any other currency (the exchange rate) was easy to determine.

Q: As the volume of international trade expanded in the wake of the Industrial Revolution, shipping large quantities of gold around the world to finance international trade became impractical.

Q: In a fixed exchange rate system, 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.

Q: A pegged exchange rate means the value of the currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

Q: When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a pegged exchange rate regime.

Q: The international monetary system refers to a system to regulate fixed exchange rates before the introduction of the euro.

Q: Which of the following is true regarding the implications for international businesses in the present monetary system? A. In the long run, the monetary policies imposed by the International Monetary Fund on borrowing countries hampers economic growth. B. In the short run, the anti-inflationary monetary policies of the International Monetary Fund result in contraction of demand. C. Businesses should not use their influence to alter an international monetary system to promote international trade and investment. D. Exchange rate volatility such as the world experienced during the 1980s and 1990s creates an environment more conducive to international trade and investment. E. It is in the interests of international business to promote an international monetary system that maximizes volatile exchange rate movements.

Q: It is most appropriate for a firm to contract out manufacturing when: A. individual manufacturers have few firm-specific skills that contribute to the value of their product. B. the value of the host country currency is expected to appreciate. C. supplier switching costs are correspondingly high. D. firm-specific technology and expertise add significant value to the product. E. the currency used for pricing a product is anticipated to stay weak in the long run.

Q: Vornoda Inc., a multinational clothing and accessory brand, has been facing huge economic losses due to unpredictable exchange rate movements. In order to gain considerable immunity against such currency fluctuations, Vornoda Inc. should: A. pursue strategies that increase its economic exposure. B. avoid using instruments like forward market and swaps. C. disperse production to different locations around the globe. D. not contract out manufacturing. E. restrict its low-value-added manufacturing to one location.

Q: Which of the following is a feature of the current monetary system? A. It is free from government intervention. B. It is free from volatile movements in exchange rates. C. It has increased foreign exchange risk for businesses. D. It has made it easier to get insurance coverage against exchange rate changes. E. Instruments like forward market and swaps have lost their importance in the present system.

Q: Which of the following statements is true about the current monetary system? A. Use of instruments such as the forward market and swaps has decreased since the breakdown of the Bretton Woods system. B. The present monetary system lacks the volatile movements in exchange rates that existed in a fixed exchange rate system. C. The current foreign exchange market works exactly as depicted in the purchasing power parity theory. D. Instruments such as the forward market and swaps increase the foreign exchange risk a company faces. E. A combination of government intervention and speculative activity drives the current foreign exchange market.

Q: Which of the following poses a problem for international businesses in the long run? A. Using exchange rate instruments like the forward market and swaps B. Volatility of global exchange rate regime C. Anti-inflationary monetary policies D. Maintaining strategic flexibility by dispersing production to different locations E. A policy of reduction in government spending

Q: Which of the following observations about the International Monetary Fund (IMF) is true? A. The IMF can force countries to adopt the policies required to correct economic mismanagement. B. Internal political problems can affect a government's commitment to taking corrective action in return for an IMF loan. C. In recent years, the IMF has begun to make its policies more tight and inflexible. D. In response to the global financial crisis of 20082009, the IMF began to adopt a one-size-fits-all approach to macroeconomic policy. E. In recent years, the IMF has begun to urge countries to oppose fiscal stimulus and monetary easing.

Q: In response to the global financial crisis of 20082009, the International Monetary Fund began to: A. exercise tight controls on fiscal policy of the borrowing countries. B. encourage activities that resulted in high inflation rates. C. display inflexibility in policy responses. D. urge countries to adopt policies that included fiscal stimulus and monetary easing. E. adopt a one-size-fits-all approach to macroeconomic policy.

Q: The International Monetary Fund programs have been counterproductive, or only had limited success in _____. A. Turkey B. Iceland C. Greece D. Ireland E. Latvia

Q: According to the noted economist Jeffrey Sachs, the International Monetary Fund should: A. not be accountable to anyone as it is a powerful institution. B. bail out the banks that have rash lending policies. C. have a one-size-fits-all approach to macroeconomic policy. D. keep its operations open to greater outside scrutiny. E. lend only to countries with safe credit ratings.

Q: According to the critics of the International Monetary Fund (IMF), how should the problem of moral hazard exhibited by banks be resolved? A. The IMF should use a one-size-fits-all approach to macroeconomic policy. B. The IMF should establish a mechanism for accountability. C. The IMF should free all banks from the obligation of financial reporting. D. The banks should be forced to pay the price for their rash lending policies. E. The IMF should bail out the banks whose loans gave rise to financial crises.

Q: The International Monetary Fund been criticized for: A. its lack of one-size-fits-all approach to macroeconomic policy. B. encouraging moral hazard among banks. C. its lack of power and authority. D. using external experts to gain knowledge about a country. E. keeping its operations open to outside scrutiny.

Q: Jade, a working professional, began driving rashly ever since she got her car insured against damage. She believed that the insurance claim would cover her in case of any accidents. Jades behavior is due to a situation known as _____. A. cognitive dissonance B. conflict of interest C. systemic risk D. moral hazard E. tragedy of the commons

Q: _____ arises when people behave recklessly because they know they will be saved if things go wrong. A. Systemic risk B. Moral hazard C. Ethical dilemma D. Tragedy of the commons E. Risk compensation

Q: In the context of the 1997 Asian crisis, how did the International Monetary Fund's one-size-fits-all approach to macroeconomic policy affect South Korea? A. It led to a decrease in the interest rates of short-term loans. B. It made it difficult for companies to service their excessive short-term debt obligations. C. It decreased the probability of widespread corporate defaults. D. South Korea failed to recover from its financial crises. E. South Korea was forced to increase restrictions on foreign direct investment.

Q: All International Monetary Fund (IMF) loan packages come with conditions attached. Which of the following is prevented due to these policies of the IMF? A. Trade liberalization B. Elimination of restrictive import licensing C. Excessive government spending and debt D. Privatization of state-owned assets E. Deregulation of the economy to increase competition

Q: According to the agreement reached between the International Monetary Fund and the South Korean government in 1997, in return for funding, the South Koreans were required to: A. adopt communist ideologies. B. reduce their imports by enforcing restrictive import licensing. C. open their economy to greater foreign competition. D. oppose the ideologies of the World Trade Organization. E. engage in competitive currency devaluation.

Q: Most of the International Monetary Funds loan activities since the mid-1970s have been targeted toward developing nations typically because: A. developed nations are not willing to enact certain macroeconomic policies in return for money. B. developing nations are more than twice as likely to experience financial crises as developed nations. C. it does not have enough funds to lend to large and developed countries. D. only developing nations are allowed to be its beneficiaries. E. of relatively slow economic growth in the developed countries of Europe.

Q: Which of the following is a common underlying macroeconomic cause of financial crises? A. Low relative price inflation rates B. Narrowing current account deficit C. Increases in stock and property prices D. Decline in domestic borrowing E. Increases in the value of domestic currency

Q: Which of the following statements is true about financial crises? A. The elements of currency, banking, and debt crises do not present themselves simultaneously. B. A currency crisis forces authorities to hold large volumes of international currency reserves. C. A foreign debt crisis occurs when a country's foreign debt obligations in private-sector government debt cannot be serviced. D. A banking crisis occurs when individuals and companies increase their deposits due to increasing interest rates. E. The International Monetary Fund does not grant loans to countries that face the risks of financial crises.

Q: Which of the following is true of a banking crisis? A. Individuals and companies withdraw their deposits from banks. B. It results in a sharp appreciation in the value of the currency. C. It happens due to a decline in domestic borrowing. D. It occurs due to asset price deflation. E. Banks tend to decrease interest rates during a banking crisis.

Q: Which of the following is an implication of a currency crisis? A. It occurs due to a sharp appreciation in the value of a currency. B. It forces authorities to block large volumes of international currency reserves. C. A country in currency crisis will not be eligible for loans from the International Monetary Fund. D. It results in the government sharply increasing interest rates to defend the prevailing exchange rate. E. A country in currency crisis will face sharp decreases in stock and property prices.

Q: Which of the following observations about the International Monetary Fund (IMF) is true? A. With the collapse of the Bretton Woods system, the membership of the IMF has reduced. B. The IMF has been criticized for granting loans to the governments without enacting any macroeconomic policies. C. The IMF has refused to lend money to troubled economies experiencing financial crises. D. The IMF's activities have expanded because periodic financial crises have continued to hit many economies in the post-Bretton Woods era. E. Under the International Development Association scheme, the IMF offers long-term loans to governments of underdeveloped nations whose credit rating is poor.

Q: Which of the following is a reason why Great Britain and the United States could finance their deficits by borrowing private money since the early 1970s? A. The rapid development of global capital markets B. Shortage of International Monetary Fund grants available for disbursal C. High interest rate charged by the International Monetary Fund D. Establishment of currency boards in these countries E. Decline of the Bretton Woods system

Q: Since the early 1970s, developed countries such as Great Britain and the United States have financed their trade deficits by: A. borrowing from the World Bank. B. borrowing private money. C. selling their gold reserves. D. drawing on grants from the International Monetary Fund. E. increasing their imports.

Q: 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 limitation. 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 even when there are no foreign exchange reserves to back it. D. The system is a true fixed exchange rate regime, because the domestic currency is fixed against other currencies. E. The system lacks commitment to convert domestic currency on demand into another currency.

Q: During the 1997 Asian currency crisis, the currency board of _____ maintained the value of its currency against the U.S. dollar. A. Japan B. Taiwan C. Hong Kong D. Indonesia E. China

Q: Which of the following statements is true about a currency board system? A. Under a strict currency board system, interest rates adjust automatically based on the supply and demand of domestic currency. B. To convert domestic currency on demand into another currency, a currency board takes grants from the International Monetary Fund. C. This system is a true fixed exchange rate regime, because the domestic currency is fixed against other currencies. D. A currency board can issue additional domestic currency even when there are no foreign exchange reserves to back it. E. A currency board authorizes the government to print money and set interest rates.

Q: 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 borrowing funds from the International Monetary Fund and the World Bank B. By maintaining a trade surplus with the foreign countries C. By holding foreign currency reserves equal at the fixed exchange rate to at least 100 percent of the domestic currency issued D. By importing more goods from foreign countries than it exports E. By printing foreign currencies

Q: 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 exchange rate system B. clean float exchange rate system C. pure float exchange rate system D. currency board E. gold standard

Q: It has been shown that adopting a _____ exchange rate regime moderates inflationary pressures in a country. A. nominal B. pegged C. pure "free float" D. clean float E. real

Q: Which of the following holds true for a pegged exchange rate system? A. Adopting a pegged exchange rate regime increases inflationary pressures in a country. B. It is necessary for a country whose currency is chosen for the peg to pursue a sound monetary policy. C. Pegged exchange rates are popular among many of the worlds largest and developed nations. D. The value of a pegged currency falls when the reference currency rises in value. E. It is similar to a floating exchange rate system rather than a fixed system.

Q: An advantage of a pegged exchange rate system is that it imposes monetary discipline on a country and leads to low _____. A. monetary discipline B. price inflation C. exchange rate predictability D. trade surplus E. exports

Q: A(n) _____ system refers to an exchange rate system under which a country's exchange rate is allowed to fluctuate against other currencies within a target zone. A. free float B. fixed peg C. adjustable peg D. pure float E. capital float

Q: Which of the following has some aspects of the pre-1973 Bretton Woods exchange rate system? A. Pure free float exchange rate system B. Dirty float exchange rate system C. Nominal exchange rate system D. Pegged exchange rate system E. Real exchange rate system

Q: Critics of floating exchange rates claim that 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. exchange rates of other currencies. D. valuations made by International Monetary Fund and the World Bank. E. mechanism of competitive currency devaluation.

Q: In comparison to a floating exchange rate regime, a fixed exchange rate system is characterized by: A. smoother trade balance adjustments. B. increased destabilizing effects of exchange rate speculation. C. greater autonomy in terms of monetary policy. D. higher monetary discipline. E. greater exchange rate uncertainty and volatility.

Q: Which of the following is an argument for a floating exchange rate system? A. Each country should be allowed to choose its own inflation rate. B. Speculation in exchange rates dampens the growth of international trade and investment. C. Unpredictability of exchange rate movements makes business planning difficult. D. Removal of the obligation to maintain exchange rate parity destroys a government's monetary control. E. Trade deficits can be determined by the balance between savings and investment in a country, not by the external value of its currency.

Q: 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. country to make its exports more expensive. C. International Monetary Fund to agree to a currency devaluation. D. government to expand monetary supply in the economy. E. government to involve in activities that led to exchange rate appreciation.

Q: Which of the following is true of monetary contraction in a fixed exchange rate system? A. It requires low interest rates. B. It increases the demand for money. C. It puts downward pressure on a fixed exchange rate. D. It leads to an inflow of money from abroad. E. It can lead to high price inflation.

Q: Which of the following is an argument for a fixed exchange rate system? A. Governments can contract their money supply without worrying about the need to maintain parity. B. Trade balance adjustments do not require the intervention of the International Monetary Fund. C. It ensures that governments do not expand the monetary supply too rapidly, thus causing high price inflation. D. Speculations in exchange rates boost exports and reduce imports. E. Each country should be allowed to choose its own inflation rate.

Q: Which of the following is a characteristic of the floating exchange rate regime? A. It allows for automatic trade balance adjustments. B. The use of monetary policy by the government is restricted. C. It allows for greater monetary discipline. D. It limits the destabilizing effects of exchange rate speculation. E. It eliminates volatility and uncertainty associated with exchange rates.

Q: A _____ refers to a system under which some currencies are allowed to float freely, but the majority are either managed by government intervention or pegged to another currency. A. managed-float system B. pegged exchange rate system C. fixed exchange rate system D. floating exchange rate system E. gold standard system

Q: The frequency of government intervention in the foreign exchange market explains why the current system is sometimes thought of as a(n) _____. A. fixed exchange rate system B. managed-float system C. gold standard system D. flexible exchange rate system E. pegged exchange rate system

Q: From mid-2008 through early 2009, the value of the dollar moderately increased against major currencies, despite the fact that the American economy was suffering from a serious financial crisis. Which of the following was a reason for this phenomenon? 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 put their money in low-risk U.S. assets such as low-yielding U.S. government bonds. E. Foreign investors saw opportunities in the United States as the level of indebtedness had begun to reduce.

Q: Which of the following explains 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. Reduced government intervention in the foreign exchange market B. Increased foreign investments in U.S. financial assets C. Low real interest rates in the United States compared to the rest of the world D. Increased exports as opposed to the imports E. Increased communism in the United States

Q: According to the _____ of 1987, 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. Uruguay round B. Bretton Woods system C. Marshall plan D. Louvre Accord E. Jamaica agreement

Q: Under the Plaza Accord of 1985, the Group of Five major industrial countries concluded that it would be desirable if: A. the countries returned to a system of fixed exchange rates. B. the participating members reverted to the gold standard. C. the United States adopted protectionism to improve its trade balance. D. most major currencies appreciated vis--vis the U.S. dollar. E. governments did not regulate the buying and selling of currency.

Q: The fall in the value of the U.S. dollar between 1985 and 1988 was caused by: A. the economic growth in the developed countries of Europe. B. a fall in prices of exported U.S. goods. C. a trade surplus in the U.S. during the previous years. D. a combination of government intervention and market forces. E. the protectionism measures adopted by the European countries.

Q: Which of the following is one of the reasons for the rapid rise in the value of the dollar between 1980 and 1985 despite a large trade deficit? A. Political stability 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 E. Increasing exports against decreasing imports in the United States

Q: Which of the following statements is true about the changes in the world monetary system since March 1973? A. The value of the U.S. dollar has never seen a fall ever since. B. Exchange rates have become much more volatile. C. Exchange rates have become more predictable. D. The fixed rate system was adopted to calculate exchange rates. E. The European monetary system as an institution has gained more prominence.

Q: Which of the following is a main element of the Jamaica agreement of 1976? A. The establishment of the International Monetary Fund B. The adoption of fixed exchange rates C. The increase in the total annual IMF quotas to $41 billion D. The declaration of gold as the reserve asset E. The decrease in the total membership of the International Monetary Fund

Q: Which of the following was abandoned as per the Jamaica agreement of 1976? A. Floating exchange rate system B. U.S. dollar as the reference currency C. Gold as a reserve asset D. Membership to the International Monetary Fund E. Granting International Monetary Fund loans to less developed countries