Exercises
1.Single-choice questions
(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 above.
(2)The international monetary system went through several distinct stages of evolution.
These stages are summarized, in alphabetic order, as follows
(i)—Bimetallism
(ii)—Bretton Woods system
(iii)—Classical gold standard
(iv)—Flexible exchange rate regime
(v)—Interwar period
The chronological order that they actually occurred is____________.
a.(iii), (i), (iv), (ii), and (v) b.(i), (iii), (v), (ii), and (iv)
c.(vi), (i), (iii), (ii), and (v) d.(v), (ii), (i), (iii), and (iv)
(3)Gresham’s Law states that____________.
a.bad money drives good money out of circulation
b.good money drives bad money out of circulation
c.if a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate
d.None of the above.
(4)Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce.This implies an exchange rate of $1.75 per pound.If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment.
a.Start with $350.Buy 10 ounces of gold with dollars at $35 per ounce.Convert the gold to £200 at £20 per ounce.Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360.
b.Start with $350.Exchange the dollars for pounds at the current rate of $1.80 per pound.Buy gold with pounds at £20 per ounce.Convert the gold to dollars at $35 per ounce.
c.a and b both work.
d.None of the above.
(5)Under the gold standard, international imbalances of payment will be corrected automatically under the____________.
a.Gresham Exchange Rate regime b.European Monetary System
c.Price-specie-flow mechanism d.Bretton Woods Accord
(6)During the period between World War I and World War II, many central banks followed a policy of sterilization of gold____________.
a.this restricted the rate of growth in the supply of gold
b.by matching inflows and outflows of gold respectively with reductions and increases in domestic money and credit
c.by matching inflows and outflows of gold respectively with increases and reductions in domestic money and credit
d.None of the above.
(7)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 US dollar was the only currency that was fully convertible to gold
d.All of the above.
(8)Under the Bretton Woods system____________.
a.each country established a par value for its currency in relation to the dollar
b.the US dollar was pegged to gold at $35 per ounce
c.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
d.All of the above.
(9)Since the SDR is a “portfolio” of currencies,____________.
a.its value tends to be more stable than the value of any of the individual currencies included in the SDR
b.its value tends to be less stable than the value of any of the individual currencies included in the SDR
c.its value tends to be as stable as the average of the individual currencies included in the SDR
d.None of the above.
(10)Special Drawing Rights (SDR)are____________.
a.an artificial international reserve allotted to the members of the International Monetary Fund (IMF), who can then use it for transactions among themselves or with the IMF
b.a “portfolio” of currencies, and its value tends to be more stable than the currencies that it is comprised of
c.used in addition to gold and foreign exchanges, to make international payments
d.All of the above.
(11)Gold was officially abandoned as an international reserve asset____________.
a.in the January 1976 Jamaica Agreement
b.in the 1971 Smithsonian Agreement
c.in the 1944 Bretton Woods Agreement
d.None of the above.
(12)Following the demise of the Bretton Woods system, the IMF____________.
a.created a new role for itself, providing loans to countries facing balance-of-payments and exchange rate difficulties
b.ceased to exists since the era of fixed exchange rates had ended
c.became the sole agent responsible for maintaining fixed exchange rates
d.became the central bank of the United Nations
(13)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.b and c are correct
(14)A currency board arrangement is____________.
a.when the currency of another country circulates as the sole legal tender
b.when the country belongs to a monetary or currency union in which the same legal tender is shared by the members of the union
c.a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation
d.where the country pegs its currency at a fixed rate to a major currency where the exchange rate fluctuates within a narrow margin of less than one percent
(15)Ecuador does not have its own national currency, circulating the US dollar instead.About how many countries do not have their own national currency?
a.10 b.20 c.30 d.40
(16)With regard to the current exchange rate arrangement between the US and the UK, it is best characterized as____________.
a.independent floating (market determined)
b.managed float
c.currency board
d.pegged exchange rate within a horizontal band
(17)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
2.Essay questions
(1)What is the history of the International Monetary System?
(2)What’s the Bretton Woods system?
(3)Please expound the IMF’s Exchange Rate Regime Classifications.
(4)What are the key issues in the international monetary system?
(5)Suppose that the British pound is pegged to gold at £6 per ounce, whereas one ounce of gold is worth €12.Under the gold standard, any misalignment of the exchange rate will be automatically corrected by cross border flows of gold.Calculate the possible savings for buying €1,000, if the British pound becomes undervalued and trades for €1.80.(Assume zero shipping costs)
(Hint: Gold is first purchased using the devalued British pound from the Bank of England, then shipped to France and sold for €1,000 to the Bank of France.)