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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 a floating exchange rate system, a country's 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 inflow 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:
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:
How has the volatility of the current global exchange rate regime affected international businesses? How can the problem be tackled?
Q:
What changes have occurred in the International Monetary Fund in recent years?
Q:
Elaborate on the main criticisms of the International Monetary Fund's approach to financial crises.
Q:
All International Monetary Fund loan packages come with conditions attached. Elaborate.
Q:
Describe the three broad types of financial crises that have occurred in the post-Bretton Woods era.
Q:
Explain the concept of a currency board.
Q:
Briefly describe the pegged exchange rate regime.
Q:
In terms of speculation, describe the arguments for a fixed exchange rate system.
Q:
In terms of monetary policy autonomy, how does a floating exchange rate system differ from a fixed system?
Q:
The rise in the value of the dollar between 1980 and 1985 occurred when the United States was running a large and growing trade deficit. Explain the factors that led to this rise.
Q:
Describe the Jamaica agreement of 1976. What were the main elements of this agreement?
Q:
What was the drawback of the Bretton Woods system?
Q:
Briefly describe the Bretton Woods agreement of 1944.
Q:
Describe the gold standard and a balance-of-trade equilibrium.
Q:
Differentiate between a floating exchange rate and a pegged exchange rate.
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 the 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 2008-2009, 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 2008-2009, the International Monetary Fund began to:
A.exercise tight controls on fiscal policy of the borrowing countries.
B.encourage activities that prevent 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:
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 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 has been criticized for:
A.its lack of a "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. What does Jade's behavior display?
A.Cognitive dissonance
B.Conflict of interest
C.Systemic risk
D.Moral hazard
E.Tragedy of the commons
Q:
Which of the following 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 Fund's 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 is true of a banking crisis?
A.It leads to individuals and companies withdrawing 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.It results in low government deficits.
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 is not 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 faces sharp decreases in stock and property prices.
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.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:
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:
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 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:
What can a country introduce if it wants to commit itself to converting its domestic currency on demand into another currency at a fixed exchange rate?
A.A free-float exchange rate system
B.A clean-float exchange rate system
C.A pure-float exchange rate system
D.A currency board
E.A gold standard
Q:
Adopting which kind of an 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 world's 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:
Which one of the following 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:
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:
Briefly describe the tactics and strategies that organizations should use to minimize foreign exchange exposure.
Q:
Differentiate between a lead strategy and a lag strategy.
Q:
Explain the concept of economic exposure. How is it different from transaction exposure?
Q:
Explain the concepts of transaction exposure and translation exposure.
Q:
Describe the difference between fundamental analysis and technical analysis in forecasting exchange rate movements.
Q:
Briefly describe the schools of thought regarding exchange rate forecasting.
Q:
Explain how investor psychology and bandwagon effects impact the movement in exchange rates.
Q:
What is the Fisher effect?
Q:
Describe the factors that explain the failure of the purchasing power parity theory to predict exchange rates accurately.
Q:
How does an increase in money supply in an economy lead to inflation?
Q:
What is meant by a currency swap?