Monetary Policy in a Globalized Financial System1
CHAPTER 28
Monetary Policyin a Globalized Financial System
1. occurs under a flexible exchange rate system, when the value of a currency rises in terms of another currency.
a.Appreciation
b.Depreciation
c.Devaluation
d.Revaluation
ANSWER:a
2. occurs under a flexible exchange rate system, when the value of a currency falls in terms of another currency.
a.Appreciation
b.Depreciation
c.Devaluation
d.Revaluation
ANSWER:b
3. occurs under fixed exchange rates, when the monetary authorities reduce the value of their currency in relation to the official reserve asset.
a.Appreciation
b.Depreciation
c.Devaluation
d.Revaluation
ANSWER:c
4. occurs under fixed exchange rates, when the monetary authorities increase the value of their currency in relation to the official reserve asset.
a.Appreciation
b.Depreciation
c.Devaluation
d.Revaluation
ANSWER:d
5.The established a fixed exchange rate system among the major world economies in 1944.
a.Eurosystem
b.Currency Board
c.European Union (EU)
d.Bretton Woods Accord
ANSWER:d
6.The includes the European Central Bank and the central banks of the 12 countries that participate in the euro.
a.Seigniorage
b.Eurosystem
c.European Union (EU)
d.Bretton Woods Accord
ANSWER:b
- Which of the following are tools of the Eurosystem?
- a. open market operations
- b. a lending facility called the standing facility
- c. setting reserve requirements
- d. All of the above
ANSWER:d
8.The of 1944 established a fixed exchange rate system among the major industrialized countries with the U.S. dollar serving as the official reserve asset.
a.Currency Board
b.Eurosystem
c.European Union (EU)
d.Bretton Woods Accord
ANSWER:d
- 9. Which of the following is true?
- a. Although 12 countries in Europe have adopted a single currency called the euro, each country still retains control over its own monetary policy.
- b. The Eurosystem implements and carries out monetary policy for the eurozone.
- c. If countries have divergent policies, then a fixed exchange rate system is preferable over a flexible exchange rate system.
- d. Under a flexible exchange rate system, capital flows free countries to have absolute control over their own monetary policies and exchange rate risk is reduced.
ANSWER:b
10.Sterilization is
a.the process whereby the full amount of the foreign exchange transaction by the central bank is offset by an open market operation so that the monetary base is increased.
b.the process whereby the full amount of the foreign exchange transaction by the central bank is offset by an open market operation so that the monetary base is unaffected.
c.the process whereby the full amount of the foreign exchange transaction by the central bank is offset by an open market operation so that the monetary base is decreased.
d.the process whereby the full amount of the foreign exchange transaction by the central bank is offset by an open market operation so that the fed funds rate target increases to counteract it.
ANSWER:b
11.Which of the following is not an advantage of a fixed exchange rate system?
a.Inflation is somewhat self-correcting.
b.Central banks can more easily engage in expansionary policy.
c.Unemployment is somewhat self-correcting.
d.Exchange rate risk is reduced.
ANSWER:b
12.Under the Bretton Woods Accord, if a country other than the U.S. ran a trade deficit or experienced a capital outflow, there was
a.upward pressure on the exchange rate and the foreign central bank had to purchase its own currency with dollars.
b.upward pressure on the exchange rate and the foreign central bank had to purchase dollars with its own currency.
c.downward pressure on the exchange rate and the foreign central bank had to purchase dollars with its own currency.
d.downward pressure on the exchange rate and the foreign central bank had to purchase its own currency with dollars.
ANSWER:d
13.If a country under a fixed exchange rate regime wanted to pursue contractionary policies, ceteris paribus,
a.net exports would rise and capital inflows would fall, putting offsetting pressure on the exchange rate.
b.net exports would fall and capital inflows would rise, putting offsetting pressure on the exchange rate.
c.net exports and capital inflows would rise, and upward pressure would be placed on the exchange rate.
d.net exports and capital inflows would fall, and downward pressure would be placed on the exchange rate.
ANSWER:c
14.Which of the following contributed to the demise of the Bretton Woods Accord fixed exchange rate system?
a.A refusal by countries to make necessary changes in their exchange rates
b.Similar monetary and fiscal policies among countries that participated in the Accord
c.Similar rates of growth and inflation among countries that participated in the Accord
d.All of the above
ANSWER:a
15.With the enactment of a flexible exchange rate system in late 1974,
a.countries gained greater independence in establishing their own monetary policies.
b.exchange rate risk was sharply curtailed.
c.Bretton Woods achieved its greatest influence.
d.foreign exchange forward and futures contracts no longer were needed.
ANSWER:a
16.During recent years, financial markets have
a.stabilized since the advent of the SEC.
b.developed rigidity to protect against the globalized environment.
c.been driven by technological improvements in telecommunications and increased globalization.
d.experienced little change.
ANSWER:c
17.Under a flexible exchange rate system, if a country wished to pursue contractionary policies relative to the rest of the world,
a.decreases in interest rates would lead to a capital outflow, partially offsetting the desired expansionary effect.
b.increases in interest rates would lead to a capital inflow, partially offsetting the desired contractionary effect.
c.decreases in interest rates would lead to a capital inflow, partially offsetting the desired contractionary effect.
d.increases in interest rates would lead to a capital outflow, partially offsetting the desired expansionary effect.
ANSWER:b
18.Expansionary fiscal or monetary policy could cause a country to
a.grow slower than other countries.
b.grow faster than other countries.
c.increase exports faster than imports.
d.experience deflation.
ANSWER:b
19.Under a fixed exchange rate system, imbalances in the current and capital accounts would persist if countries had different
a.growth rates.
b.inflation rates.
c.interest rate structures.
d.All of the above
ANSWER:d
20.Which of the following is not a result of the flexible exchange rate system put in place in the early 1970s?
a.Domestic and foreign income affects exchange rates.
b.Interest rates affect exchange rates.
c.Changing market conditions and market expectations affect exchange rates.
d.Greater dependence on the monetary policies of other countries has now slowed international trade.
ANSWER:d
21.Which of the following factors would most likely lead to an increase in the demand for dollars in international financial markets?
a.U.S. prices increase relative to foreign prices.
b.Foreign incomes increase relative to domestic incomes.
c.Foreign interest rates rise relative to U.S. interest rates.
d.U.S. incomes rise relative to domestic incomes.
ANSWER:b
22.Which of the following factors would most likely lead to an increase in the supply of dollars in international financial markets?
a.A rise in U.S. incomes relative to foreign incomes
b.A rise in foreign inflation relative to U.S. inflation
c.An increase in foreign incomes relative to domestic incomes
d.An increase in U.S. interest rates relative to foreign interest rates
ANSWER:a
23.Which of the following results from a flexible exchange rate system?
a.A country is more restricted in its own monetary policy.
b.Inflation is more likely to be self-correcting as compared to a fixed exchange rate system.
c.There is a greater risk in international trade because changes in the exchange rate can adversely affect profit.
d.Unemployment is more likely to be self-correcting as compared to a fixed exchange rate system.
ANSWER:c
24.The volume of trade has changed dramatically between 1960 and 2000. Which empirical statement best describes this transformation?
a.U.S. exports have increased from 4.8 to 10.8 percent of GDP, while U.S. imports have risen from 4.3 to 14.5 percent of GDP.
b.U.S. exports have increased from 4.8 to 51.5 percent of GDP, while U.S. imports have risen from 4.3 to 52.9 percent of GDP.
c.U.S. exports have increased from 4.8 to 41.5 percent of GDP, while U.S. imports have risen from 4.3 to 42.9 percent of GDP.
d.U.S. exports have decreased from 61.5 to 4.8 percent of GDP, while U.S. imports have fallen from 32.9 to 4.3 percent of GDP.
ANSWER:a
25.Because of the greater exchange rate risk with flexible exchange rates,
a.U.S. exporters can use foreign exchange forward and futures agreements to lock in today the amount of dollars to be received at the date the transaction is completed.
b.futures markets are made illegal in international trade.
c.contracts have to be written at a "reasonable" size to eliminate the paperwork with smaller contracts.
d.futures markets increase the negative impact of flexible exchange rates on trade.
ANSWER:a
26.Under flexible exchange rates,
a.the value of the dollar is determined by supply and demand.
b.the demand for dollars is determined by foreign demand for U.S. goods, services, and securities.
c.ceteris paribus, the quantity demanded of dollars is inversely related to the exchange rate.
d.All of the above
ANSWER:d
27.Which of the following is a major change since the Bretton Woods agreement broke down?
a.A retreat to isolationism reduced trade and capital flows.
b.Nations of the world have grown more interdependent because of the growth of world trade.
c.Nations of the world have become more independent and exchange rate risks have been reduced.
d.Exchanges rates have become more stable.
ANSWER:b
28.Which of the following is false?
a.One reason why central banks may intervene in financial marks to resolve a severe but temporary liquidity crisis and to stabilize international financial markets.
b.One reason why central bankers may intervene in forecign exchange markets is they believe exchange rates are deviating significantly from fundamental underlying values (that is, the dollar is overvalued or undervalued because of speculation in the market).
c.In late 2000, central banks of major industrialized countries carried out a coordinated intervention to boost the value of the sagging euro.
d.Central bank intervention has proven successful in that the goals of the intervention have always been met.
ANSWER:d
29.Which of the following is true?
a.When the Fed participates in an intervention, it does so by purchasing or selling dollars for other foreign currencies.
b.Reserves are augmented when the Fed sells foreign currencies in exchange for dollars.
c.Reserves are decreased when the Fed sells dollars in exchange for foreign currencies that it has previously accumulated.
d.Sterilization will insure that a foreign exchange operation affects the monetary base.
ANSWER:a
- 30. In order to limit the effect on reserves of a foreign exchange intervention, the Fed engages in ______.
- a. seigniorage
- b. sterilization
- c. dollarization
- d. revaluation
ANSWER:b
31.In addition to the growth in trade, which of the following has also occurred in recent decades?
a.More restrictions have been placed on capital flows.
b.The dismantling of barriers to capital flows were almost completed in the 1980s.
c.Electronic transfer of funds has many problems with technological breakdowns.
d.The world has become more rigid in its trade pattern.
ANSWER: b
32.In terms of volume of trading, the largest market in the world is which of the following?
a.the automobile market in the United States if you include imports
b.the world gold market
c.the U.S. stock market
d.the foreign exchange market
ANSWER:d
33.International capital flows may work against the intended effects of monetary policy domestically. Which of the following does not support this statement?
a.Contractionary monetary policy may cause capital inflows from abroad.
b.Lower interest rates may cause capital outflows.
c.International transfer payments of money for war or earthquake recovery are spent internally by the receiving country.
d.Telecommunications advances may cause a quicker response of worldwide capital flows to changes in United States policy.
ANSWER:c
34.When an increase in domestic interest rates causes the dollar to appreciate, which of the following is false?
a.The dollar price of foreign goods falls.
b.Net exports will fall.
c.The increase in domestic interest rates could cause a reduction in domestic demand.
d.The reduction in aggregate demand increases the demand for imports.
ANSWER:d
35.Contractionary monetary policy that increases the value of the dollar will
a.increase net exports.
b.decrease net exports.
c.increase aggregate demand.
d.increase aggregate supply.
ANSWER:b
36.Which of the following is true?
a.One disadvantage of the Bretton Woods Accord was the resulting increase in exchange rate risk.
b.One advantage of a fixed exchange rate system was that the act of having to buy back one’s own currency to maintain fixed exchange rates enhanced the ability of foreign countries to pursue their own monetary policies.
c.Under fixed exchange rates, a country pursuing contractionary monetary policy would be expected to experience decreased net exports and capital outflows.
d.Under the Bretton Woods Accord, as long as foreign central banks were accumulating dollars to serve as international reserves, the U.S. could pursue expansionary domestic policies that resulted in deficits on current and capital accounts without worrying about exchange rate pressures on the dollar or other foreign currencies.
ANSWER:d
37.Which of the following is false?
a.One advantage of Bretton Woods was that unemployment and inflation were to some degree self-correcting.
b.An example of a devaluation of the British pound would be if the official rate changed from $1 per 4 pounds to $1 per 2 pounds.
c.Under fixed exchange rates, exchange rate risk is very low and related only to the possibility of devaluation or revaluation.
d.Currency appreciation and depreciation are important because they can influence the growth rate of income through net exports.
ANSWER:b
38.Predictions for the future relative to exchange rates appear to support
a.a picture that is, at best, controlled chaos.
b.a withdrawal into greater isolationism.
c.that there will be greater monetary policy coordination between nations.
d.that competition will be among the bankers of the world, not the producers.
ANSWER:c
39.Relative to the globalization of monetary policy, the text takes the position that
a.increased coordination will result regardless of the exchange rate system.
b.countries will return to some type of fixed rate system.
c.countries will remain on a flexible exchange rate system.
d.None of the above
ANSWER:a
40.A fixed rate system has several problems, an example of which is that
a.countries cannot maintain divergent economic goals indefinitely.
b.inflation can be handled easily.
c.unemployment problems are resolved among participating countries.
d.domestic problems can be ignored.
ANSWER:a
41.Which of the following is not considered a result of the flexible exchange rate system?
a.Future markets have been used to hedge exchange rate risk.
b.Competition tends to set the rates.
c.Exchange rates fluctuate on a daily basis.
d.The exchange rate has been slow to change.
ANSWER:d
42.Under flexible exchange rates,
a.capital flows allow countries to execute policies on their own with no domestic ramifications.
b.incentives are present that promote monetary policy coordination between countries because without coordination there can be changes in exchange rates and capital flows that feed back to the domestic economy.
c.there is presently no monetary policy coordination between developed countries.
d.monetary policy coordination is presently led by the World Bank.
ANSWER:b
43.Looking forward in the 21st Century, the changing operations of the Fed will, in all likelihood, place greater emphasis upon which of the following?
a.Greater freedom for small businesses
b.A convertible gold standard
c.Lower interest rates to stimulate welfare reform
d.International coordination of policies among central banks
ANSWER:d
44.Which of the following statements is false?
a.Policy coordination is not needed under a flexible exchange rate regime because exchange rates are free to fluctuate.
b.Openness of world trade and finance makes for greater interdependence among nations.
c.Capital mobility means that a change in the interest rate relative to rates in other countries can lead to changes in exchange rates and capital flows.
d.Monetary policy of the future will likely involve more global cooperation under either a fixed or flexible exchange rate system.
ANSWER:a
45.The purpose of foreign exchange futures agreements under flexible exchange rates is to
a.make more profits for international bankers.
b.prevent shipping costs.
c.effectively reduce or eliminate exchange rate risk.
d.force economics students to really understand hedging.
ANSWER:c
46.The demand for dollars is determined by
a.foreign demand for U.S. goods, services, and securities.
b.domestic demand for foreign goods, services, and securities.
c.domestic supply of U.S. goods, services, and securities.
d.foreign supply of foreign goods, services, and securities.
ANSWER:a
47.Under a fixed exchange rate system, which of the following terms describes increasing the value of a currency in relation to the official reserve currency?
a.Revalue
b.Devalue
c.Depreciate
d.Appreciate
ANSWER:a
48.Which of the following statements is false?
a.Under flexible exchange rates, the value of the dollar is determined by supply and demand.
b.The demand for dollars is determined by foreign demand for U.S. goods, services, and securities.
c.Ceteris paribus, the quantity demanded of dollars is directly related to the exchange rate.
d.Ceteris paribus, the quantity supplied of dollars is directly related to the exchange rate.
ANSWER:c
49.Which of the following statements is false?
a.International trade has increased because of the efforts of developed nations to reduce trade barriers since World War II.
b.Capital flows have increased since the 1970s because of the removal of barriers to capital flows.
c.Capital flows have increased in recent decades because of technological advances in the transfer of funds.
d.Under flexible exchange rates, a country cannot under any circumstances pursue monetary and fiscal policies different from other countries.
ANSWER:d
50.Which of the following is likely to occur if the United States enacts a contractionary monetary policy under flexible exchange rates?