QnA International Monetary System

International Monetary System 1. The international monetary system can be defined as the institutional framework within which A) international payments are made. B) movement of capital is accommodated. C) exchange rates among currencies are determined. D) all of the options 2. Corporations today are operating in an environment in which exchange rate changes may adversely affect their competitive positions in the marketplace. This situation, in turn, makes it necessary for many firms to A) carefully manage their exchange risk exposure. B) carefully measure their exchange risk exposure. C) carefully manage and measure their exchange risk exposure. D) none of the options 3. Under the Bretton Woods system A) there was an explicit set of rules about the conduct of international monetary policies. B) each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary. C) the U.S. dollar was the only currency that was fully convertible to gold. D) All the choices are correct. 4. 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) $1 per ounce. B) $35 per ounce. C) $350 per ounce. D) $900 per ounce. 5. Since the end of the fixed exchange rate system of the Smithsonian agreement (The Smithsonian Agreement became necessary when then-U.S. President Richard Nixon stopped allowing foreign central banks to exchange U.S. dollars for gold) A) exchange rates were revalued in the Bretton Woods agreement. B) exchange rates have been allowed to float. C) the United States returned to a gold standard. D) the zone of monetary stability has been limited to the U.S., Canada, and Mexico. 1 6. Under a flexible exchange rate regime, governments can retain monetary policy independence because the external balance will be achieved by A) the exchange rate adjustments. B) the price-specie flow mechanism. C) all of the above D) none of the options 7. Under a purely flexible exchange rate system A) supply and demand set the exchange rates. B) governments can set the exchange rate by buying or selling reserves. C) governments can set exchange rates with fiscal policy. D) governments can set the exchange rate by buying or selling reserves and with fiscal policy. 8. With regard to the current exchange rate arrangement between the U.S. and the U.K., it is best characterized as A) independent floating (market determined). B) managed float. C) currency board. D) pegged exchange rate within a horizontal band. 9. With regard to the current exchange rate arrangement between Italy and Germany, it is best characterized as?? A) independent floating (market determined). B) managed float. C) an exchange arrangement with no separate legal tender. D) pegged exchange rate within a horizontal band. 10. On January 1, 1999, an epochal event took place in the arena of international finance 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.(Greece was last) 11. The advent of the euro marks the first time that sovereign countries have voluntarily given up their A) national borders to foster economic integration. B) monetary independence to foster economic integration. C) fiscal policy independence to foster economic integration. D) national debt to foster economic integration. 2 12. To pave the way for the European Monetary Union, the member countries of the European Monetary System agreed to achieve a convergence of their economies. Which of the following is not a condition of convergence: A) keep the ratio of government budget deficits to GDP below 3 percent. B) keep gross public debts below 60 percent of GDP. C) achieve a high degree of price stability. D) maintain its currency at a fixed exchange rate to the ERM. 13. The Maastricht Treaty A) irrevocably fixed exchange rates among the member currencies. B) commits the members of the European Union to political union as well as monetary union. C) was signed and subsequently ratified by the 12 member states. D) all of the options 14. The single European currency, the euro, was adopted by 11 member nations on January 1 of what year? A) 1984 B) 1991 C) 1999 D) 2001 15. Benefits from adopting a common European currency include A) reduced transaction costs. B) elimination of exchange rate risk. C) increased price transparency, which promotes Europe-wide competition. D) all of the options 16. Monetary policy for the countries using the euro as a currency is now conducted by A) the Federal Reserve. B) the Bundesbank. C) European Central Bank. D) none of the options 17. The main cost of European monetary union is A) the loss of national monetary and exchange rate policy independence. B) increased exchange rate uncertainty. C) lessened political integration. D) none of the options 18. Which country is not using the euro? A) Greece B) Italy C) Sweden D) Portugal 3 19. Once the changeover to the euro was completed by July 1, 2002, the legal-tender status of national currencies in the euro zone A) was canceled, leaving the euro as the sole legal tender in the euro zone countries. B) was affirmed at the fixed exchange rate. C) was tied to gold. D) none of the options 20. In the EU, there is a A) low degree of fiscal integration among EU countries. B) high degree of fiscal integration among EU countries. 21. When money can move freely across borders, policy makers must choose between A) exchange-rate stability and an economic growth. B) exchange-rate stability and inflation. C) exchange-rate stability and an independent monetary policy. D) exchange-rate stability and capital controls. 22. A booming economy with a fixed or stable nominal exchange rate A) inevitably brings about an appreciation of the real exchange rate. B) inevitably brings about a depreciation of the real exchange rate. C) inevitably brings about a stabilization of the real exchange rate. D) inevitably brings about increased volatility of the real exchange rate. 23. Advantages of a flexible exchange rate include which of the following? A) National policy autonomy. B) Easier external adjustments. C) The government can use monetary and fiscal policies to pursue whatever economic goals it chooses. D) all of the options 24. Advantages of a fixed exchange rate include A) reduction in exchange rate risk for businesses. B) reduction in transactions costs. C) reduction in trading frictions. D) all of the options 4