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Chapter 21: The International Financial System
Multiple Choice Quiz
Multiple Choice Quiz
This activity contains 15 questions.
Under a managed float regime:
the central bank buys and sells currencies so that the exchange rate will not change.
exchange rates are free of government intervention.
the central bank attempts to influence the exchange rate.
the central bank lets exchange rates freely adjust to supply and demand forces.
A central bank purchase of domestic currency by the sale of foreign assets in the foreign exchange market will:
generate an increase in international reserves.
decrease the monetary base.
increase the monetary base.
create an increase in the money supply.
An unsterilized exchange intervention is one in which:
the money supply is constant.
the monetary base changes.
currency in circulation is constant.
the monetary base is constant.
To offset the monetary base effects of a domestic currency purchase, the Fed could:
use contractionary open market operations.
use expansionary open market operations.
increase the discount rate.
increase reserve requirements.
Capitol controls are used
To create an increase in international reserves.
To control corruption by government officials.
As an effective tool to restrict capital mobility.
To treat a symptom of currency crises
Advantages of exchange rate targeting include:
Strong links to the anchor country
It provides an early warning signal of monetary policy
Effective control of inflation
Decreased susceptibility to speculative attacks
The trade balance shows:
the difference between merchandise exports and imports.
the level of merchandise exports.
the balance of payments.
the level of merchandise imports.
A speculative attack on a country's currency
Will lead to a sell-off of the currency by investors.
Will lead to a devaluation of the currency without central bank intervention.
Can cause a balance of payments crisis.
All of the above.
Under a gold standard:
gold discoveries create deflation.
domestic money supply changes are independent of gold flows.
dollars are directly exchangeable for gold at a preset price.
exchange rates between countries are free to change with supply and demand.
The Bretton Woods agreement:
created a system of floating exchange rates.
created the International Monetary Fund.
eliminated the U.S. dollar as a reserve currency.
replaced the International Monetary Fund with the World Bank.
In balance of payments accounting, the change in official reserve assets equals:
merchandise exports minus merchandise imports.
capital inflows plus merchandise exports.
the current account plus the capital account.
capital outflows minus capital inflows.
Under a fixed exchange rate regime, if the exchange rate is overvalued the central bank must ________ domestic currency to ________ the expected return on domestic deposits.
Which of the following supports the argument that the world would be better off without an international lender of last resort?
Because they lack inflation-fighting credibility central banks in emerging market countries are unlikely to be able to operate successfully as lenders of last resort.
An international lender of last resort may be able to prevent a successful speculative attack against one emerging market currency from spawning similar attacks on other currencies.
An international lender of last resort may lead to excessive risk taking and moral hazard in emerging market countries and make financial crises more likely.
An international lender of last resort can impose restrictions on governments of emerging market countries to reduce incentives for excessive risk taking.
Prevents large fluctuations in exchange rates, making it easier to plan for the future.
Is not used under a flexible exchange rate system.
Prevents appreciation or depreciation of a currency.
Prevents depreciation of the domestic currency.
Special Drawing Rights
Are used whenever the market price of gold deviates from the fixed value set by the IMF.
Involve shipments of gold from one country to another.
Are paper substitutes for gold issued by the IMF.
Are created by the Federal Reserve Bank of New York.
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