INT ECON - Fixed vs floating exchange rate systems

The gold standard system was

 a) only used by the United States.

 b) a floating exchange rate system.

 c) a fixed exchange rate system, in which the country's currency was fixed relative to an ounce of gold.

 d) a fixed exchange rate system, in which the country's currency was fixed relative to a pound of gold.

 c) a fixed exchange rate system, in which the country's currency was fixed relative to an ounce of gold.

The gold standard dominated exchange rate systems during what period?

 a) from 1870 to 1913

 b) from 1836 to 1849

 c) from 1776 to 1816

 d) from 1945 to 1965

 a) from 1870 to 1913

As economic similarity rises, the stability costs of a common currency decrease because there are

 a) more asymmetric shocks.

 b) fewer asymmetric shocks.

 c) no symmetric shocks.

 d) no asymmetric shocks.

 b) fewer asymmetric shocks.

All else being equal, an increase in the base country's interest rate should _________ the interest rate of a country that fixes its exchange rate to the base country.

 a) have zero impact on

 b) cause an increase in

 c) depress

 d) have a negligible effect on

 b) cause an increase in

Suppose that Mexico and Canada both peg their currencies to the U.S. dollar. The relationship between the Mexican peso and the Canadian dollar is best described as a(n)

 a) currency union.

 b) free-trade area.

 c) fixed exchange rate system.

 d) indirect peg.

 d) indirect peg.

The symmetry-integration diagram shows a set of situations under which a nation should fix or float. There is a set of combinations of integration and symmetry beyond which the benefits of fixing outweigh the costs. This is shown as

 a) a curved line that follows a random path through the space, coming close to but never touching either axis.

 b) a negatively sloped line, above which a nation should fix and below which a nation should float.

 c) a curved line, the slope of which is at first negative, then increases at an increasing rate as the benefits of fixing increase exponentially.

 d) a positively sloped line from the origin, equidistant from both axes.

 b) a negatively sloped line, above which a nation should fix and below which a nation should float.

Economic similarity can be described as

 a) the degree to which export goods are comparable.

 b) the degree to which nations are comparatively developed.

 c) the compatibility of economic policy.

 d) the degree to which shocks are symmetric.

d) the degree to which shocks are symmetric.

When exchange rates are volatile

 a) international economic activity is increased.

 b) firms engage in more trade.

c) trade and cross-border financial and labor flows are reduced as uncertainty and transaction costs take their toll.

 d) firms are assured that they will be able to earn profits from currency swings.

c) trade and cross-border financial and labor flows are reduced as uncertainty and transaction costs take their toll.

When exchange rates are fixed and the foreign nation's interest rate increases, what happens next?

 a) The home nation's IS curve shifts out because of a depreciation and an increase in the trade balance.

 b) Fixed exchange rates force the home nation to raise its interest rates.

 c) The home nation and the foreign nation are always in equilibrium, so no changes occur.

 d) The home nation's LM curve shifts right, and its interest rate falls.

 b) Fixed exchange rates force the home nation to raise its interest rates.

Suppose that Canada decides to peg its dollar (C$, or the loonie) to the U.S. dollar at an exchange rate of C$1 = US$1. Will there be pressure for the Canadian dollar to change in value against the U.S. dollar as a result of the leftward shift of the U.S. IS curve?

 a) Yes, the value will appreciate.

 b) No, the value will not change in value.

 c) Yes, the value will depreciate.

 d) Yes, but that pressure will be offset.

 a) Yes, the value will appreciate.

Suppose that the United States and the United Kingdom return to the gold standard. The United States sets the price of gold equal to $550 per ounce, and the United Kingdom sets the price of gold at £275 per ounce. What is the $–£ exchange rate?

 a) $0.50 = £1

 b) $550 = 1 ounce

 c) $2.00 = £1

 d) $275 = 1 ounce

 c) $2.00 = £1

A country is using a beggar-thy-neighbor policy whenever

 a) it devalues its currency to improve its macroeconomic position at the expense of its trading partners.

 b) it uses contractionary monetary policy to attract capital inflows from other countries.

 c) it cooperates with other countries in establishing its monetary policy.

 d) it revalues its currency to improve its macroeconomic position and that of its trading partners.

 a) it devalues its currency to improve its macroeconomic position at the expense of its trading partners.

Suppose that the U.S. price of gold is $35 per ounce and the German price of gold is 100 Deutsche Marks (DMs) per ounce. What is the implied exchange rate between the dollar and the DM?

 a) $3,500 = DM1

 b) $0.28571 = DM1

 c) $2.8571 = DM1

 d) $0.35 = DM1

 d) $0.35 = DM1

Under a gold standard, as trade takes place, the importing nation experiences a ________ and a(n) _________ in its money supply, while the exporting nation experiences the opposite.

 a) gold outflow; contraction

 b) gold outflow; expansion

 c) gold inflow; contraction

 d) gold inflow; expansion

 a) gold outflow; contraction

In practice, cooperative agreements are

 a) easy to maintain because they have little impact on the nations.

 b) often contentious because nations favor their own situations over those of their trading partners.

 c) the largest single exchange rate format.

 d) impossible to maintain because nations have widely differing systems and values.

 b) often contentious because nations favor their own situations over those of their trading partners.

A pegged rate system that includes policy cooperation is usually

 a) not a good bet for nations that are large trading partners.

 b) difficult to maintain.

 c) administered by large private banks.

 d) a good compromise for nations that want exchange rate stability, stable output, and some flexibility.

 d) a good compromise for nations that want exchange rate stability, stable output, and some flexibility.

If the center nation operates under a cooperative peg agreement, how does the cooperation work?

 a) The home nation will accept all changes coming from the center without discussion.

 b) The center nation will make policy concessions to other nations in its cooperative currency agreement.

 c) Cooperation usually does not work well.

 d) The home nation will try to resist any changes coming from the center.

 b) The center nation will make policy concessions to other nations in its cooperative currency agreement.

In a fixed exchange rate system, countries that have pegged the value of their currencies to the center country will

 a) easily implement monetary and fiscal policy to suit their economies.

 b) find it easy to conduct autonomous fiscal policy.

 c) defer to advice from other countries in conducting their domestic policy.

 d) find it difficult to conduct autonomous monetary policy.

 d) find it difficult to conduct autonomous monetary policy.

What is the most powerful argument against a fixed exchange rate?

 a) The nation has to have a large store of gold on hand to exchange at fixed rates.

 b) The nation must administer the rates at all currency exchange venues, and it is expensive to do.

 c) The nation usually gets opposition from other trading partners who are excluded.

 d) The nation gives up its ability to control its money supply and affect its own interest rates.

 d) The nation gives up its ability to control its money supply and affect its own interest rates.

All else being equal, an increase in the base country's interest rate should _________ the interest rate of a country that fixes its exchange rate to the base country.

 a) depress

 b) have zero impact on

 c) cause an increase in

 d) have a negligible effect on

 c) cause an increase in

Based on economic criteria, a nation should choose a fixed exchange rate if

 a) the net benefits of fixing versus floating are negative.

 b) there is a liberal political agenda that restricts government authority over capital flows.

 c) the monetary authorities are capable of handling shocks.

 d) the net benefits of fixing versus floating are positive.

 d) the net benefits of fixing versus floating are positive.

Why do symmetric shocks not disturb fixed exchange rate systems?

 a) A demand shock can easily be dealt with using domestic policies that do not involve other nations.

 b) Symmetric shocks require the same medicine in both economies, so monetary policy will be in a direction to help both situations.

 c) Symmetric shocks imply differences in rates of interest, which are irrelevant to fixed exchange rate systems.

 d) Symmetric shocks happen only once and cause a one-time shift in interest rates.

 b) Symmetric shocks require the same medicine in both economies, so monetary policy will be in a direction to help both situations.

A country is more likely to pursue a fixed exchange rate regime with a trading partner country if

 a) it is economically integrated with that country and the two countries generally experience asymmetric shocks.

 b) its growth prospects are heavily dependent on exports to that country.

 c) its income per capita is at or close to par with that country.

 d) it is economically integrated with that country and the two countries generally experience symmetric shocks.

 d) it is economically integrated with that country and the two countries generally experience symmetric shocks.

When exchange rates are fixed and the foreign nation's interest rate increases, what happens next?

 a) Fixed exchange rates force the home nation to raise its interest rates.

 b) The home nation's IS curve shifts out because of a depreciation and an increase in the trade balance.

 c) The home nation's LM curve shifts right, and its interest rate falls.

 d) The home nation and the foreign nation are always in equilibrium, so no changes occur.

 a) Fixed exchange rates force the home nation to raise its interest rates.

Limiting net external wealth effects could be accomplished by limiting movements in the exchange rate. What measure might address this situation?

 a) pegging the exchange rate to the currency of the largest creditor nation

 b) devaluing the currency

 c) borrowing only in U.S. dollars

 d) keeping nominal interest rates exactly 1% higher than those of one's trading partners

 a) pegging the exchange rate to the currency of the largest creditor nation

After a depreciation of the home currency, what is the situation with a nation's external wealth?

 a) It will rise if external liabilities exceed external assets.

 b) It will fall if domestic liabilities exceed domestic assets.

 c) It will rise if domestic liabilities exceed domestic assets.

 d) It will fall if external liabilities exceed external assets.

 d) It will fall if external liabilities exceed external assets.

An advantage to a developing nation of fixed exchange rates is that it's

 a) harder for the government to raise taxes.

 b) easier for the central bank to print money to finance its deficit.

 c) easier to conduct fiscal policy.

 d) harder for the central bank to print money to finance its deficit.

 d) harder for the central bank to print money to finance its deficit.

The effect of an exchange rate system on the price level between countries is that

 a) all member nations of the ERM see a divergence in prices.

 b) a fixed exchange rate results in price divergence

 c) exchange rate volatility causes the prices to converge between countries.

 d) a fixed exchange rate results in price convergence.

 d) a fixed exchange rate results in price convergence.

What is the most powerful argument against a fixed exchange rate?

 a) The nation usually gets opposition from other trading partners who are excluded.

 b) The nation has to have a large store of gold on hand to exchange at fixed rates.

 c) The nation gives up its ability to control its money supply and affect its own interest rates.

 d) The nation must administer the rates at all currency exchange venues, and it is expensive to do.

 c) The nation gives up its ability to control its money supply and affect its own interest rates.

A nation that finds difficulty in pursuing independent monetary policy is more likely to maintain ______________.

 a) fixed exchange rates

 b) floating exchange rates

 c) a policy of restricting capital inflows

 d) a policy of export promotion

 a) fixed exchange rates

A country that adopts a fixed exchange rate with a base currency nation should see its goods prices ___________ the base currency nation’s goods prices

 a) diverge rapidly from

 b) converge more rapidly to

 c) not change at all compared to

 d) converge more slowly to

 b) converge more rapidly to

In nations that cannot borrow in their own currencies, which exchange rate system is more destabilizing and less useful in terms of stabilizing GDP?

 a) banded exchange rates

 b) fixed exchange rates

 c) open pegs

 d) floating exchange rates

 d) floating exchange rates

Suppose China has domestic assets of 50 billion yuan, domestic liabilities of 100 billion yuan, foreign assets worth $50 billion, and foreign liabilities in the amount of $25 billion. If there is a 10% depreciation of the Chinese yuan, China’s overall wealth will

 a) fall by $2.5 billion.

 b) fall by 2.5 billion yuan.

 c) rise by $2.5 billion.

 d) rise by 2.5 billion yuan.

 c) rise by $2.5 billion.

Suppose that Argentina's dollar-denominated external assets and liabilities are $10 billion and $100 billion, respectively, and its Argentine peso–denominated external assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes its exchange rate at P1 = US$1. What is the peso value of Argentina's total external wealth?

 a) –150 billion pesos

 b) 0

 c) –90 billion pesos

 d) –60 billion pesos

 c) –90 billion pesos

In economics, another term for seigniorage is

 a) government borrowing.

 b) royalty.

 c) high inflation.

 d) inflation tax.

 d) inflation tax.

Which of the following events is least likely to take place under a fixed exchange rate system?

 a) an increased volume of trade because of a decline in exchange rate volatility

 b) increased cross-border labor flows in integrated economies

 c) increase in cost of trade because of higher transaction costs

 d) increased cross-border capital flows

 c) increase in cost of trade because of higher transaction costs

More borrowing by firms in the domestic currency is one way to reduce currency mismatch. What would be the major issue if the government insured repayment of the loans at a low cost?

 a) There could be a moral hazard problem with excessive risk taking.

 b) It would be too expensive.

 c) It is likely that no new borrowing would take place—firms need the incentive of tax breaks.

 d) There would be lots of new borrowing, and the production sector might not be able to keep pace.

a) There could be a moral hazard problem with excessive risk taking.

The recognition that _____ plays a profound role in many developing nations has led to more attention to this factor when choosing an exchange rate regime.

 a) illiteracy

 b) government corruption

 c) currency mismatch due to liability dollarization

 d) poverty

 c) currency mismatch due to liability dollarization

When developing countries borrow in international credit markets, many find that they must borrow in currencies other than their own (such as dollars, yen, or euros). Why are international creditors willing to make loans in dollars, yen, or euros but not in the developing countries' currencies?

 a) Lenders are not well informed about developing countries' economic situations.

 b) Lenders believe that the currencies of developing countries will always appreciate.

 c) Lenders believe that developing countries have a history of weak macroeconomic management and imprudent monetary and fiscal policies.

 d) Lenders receive higher interest rates on loans in dollars, yen, or euros than on loans made in the currencies of developing countries.

 c) Lenders believe that developing countries have a history of weak macroeconomic management and imprudent monetary and fiscal policies.

With a flexible exchange rate system, to gain credibility with investors or savers, a nation will often

 a) limit the power of the central bank by having elected officials set monetary targets.

 b) give more power to the prime minister to stop inflation and lower unemployment.

 c) temporarily adopt a gold standard.

 d) adopt a nominal anchor to keep currency growth in line with a measurable indicator, such as exchange rates or inflation rates.

 d) adopt a nominal anchor to keep currency growth in line with a measurable indicator, such as exchange rates or inflation rates.

When a nation prints money (rather than taxing directly) to finance its government spending, inflation results and the purchasing power of the private sector falls. This is known as

 a) indirect taxation.

 b) seigniorage.

 c) creeping inflation.

 d) benchmarking.

 b) seigniorage.

In a reserve currency system (such as the Bretton Woods system), currencies peg to a reserve currency. As a result

 a) all countries have monetary autonomy.

 b) only the reserve currency country has monetary autonomy.

 c) all countries, other than the reserve currency country, have monetary autonomy.

 d) no country has monetary autonomy.

 b) only the reserve currency country has monetary autonomy.

Traders in nations abiding by the rules of Bretton Woods found ways to avert restrictions on _______ through offshore banking and improper accounting reporting.

 a) interest rate changes

 b) gold movements

 c) capital controls

 d) imports

 c) capital controls

Which of the following did not lead to the collapse of Bretton Woods?

 a) difficulty to peg to the U.S. dollar

 b) the Vietnam War

 c) ample supplies of gold

 d) collapse of capital controls

 c) ample supplies of gold