Question 1

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) $0.35 = DM1
B) $3500 = DM1
C) $2.8571 = DM1
D) $0.28571 = DM1

Accepted Answer

The implied exchange rate is found by dividing the U.S. price by the German price (or vice versa), which gives $35 / 100 DM = $0.35 per DM.

Question 2

Suppose that country A pegs its currency to that of country B. Now suppose that there is an adverse demand shock in country A. Country B is more likely to cooperate and increase its money supply in response to country A's adverse demand shock when:
A) country B's output is below its preferred level.
B) country B is experiencing high rates of inflation.
C) country B wants country A to devalue its currency.
D) country A is experiencing high rates of inflation.

Accepted Answer

When country A pegs its currency to country B, country A gives up its ability to use monetary policy to respond to shocks. Therefore, if there is an adverse demand shock in country A, the burden of adjustment falls on country B. If country B's output is below its preferred level, it has a greater incentive to cooperate with country A and increase its money supply to help boost demand and output. However, if country B is experiencing high rates of inflation, it may be less willing to increase its money supply as it could exacerbate inflationary pressures. Option C is not a relevant factor in this scenario. Finally, if country A is experiencing high rates of inflation, it would be indicative of a different situation and may not affect the likelihood of country B cooperating.

Question 3

Suppose that the United States and the United Kingdom both use the gold standard. Their prices of gold are $35 = 1 ounce and £7 = 1 ounce, which yields an implied exchange rate of $5 = £1. Now suppose that the exchange rate temporarily rises to $5.50 = £1. What actions would you follow to take advantage of this temporary opportunity for arbitrage?
A) Sell gold for pounds in the United Kingdom, buy dollars with pounds in currency markets, and buy gold with dollars in the United States.
B) Sell gold for dollars in the United States, buy pounds with dollars in currency markets, and buy gold with pounds in the United Kingdom.
C) Sell gold for dollars in the United States, sell pounds for dollars in currency markets, and buy gold with dollars in the United Kingdom.
D) Sell gold for dollars in the United Kingdom, buy pounds with dollars in currency markets, and buy gold with pounds in the United States.

Accepted Answer

The answer of Suppose that the United States and the...

Question 4

Suppose that the United States and the United Kingdom both use the gold standard. Their prices of gold are $35 = 1 ounce and £7 = 1 ounce, which yields an implied exchange rate of $5 = £1. Now suppose that the exchange rate temporarily rises to $5.50 = £1. What will happen to the U.S. and U.K. money supplies as a result of arbitrage?
A) The U.S. money supply would rise and the U.K. money supply would fall.
B) Both the U.S. and the U.K. money supplies would rise.
C) The U.S. money supply would fall and the U.K. money supply would rise.
D) Both the U.S. and the U.K. money supplies would fall.

Accepted Answer

If the exchange rate rises from $5 = £1 to $5.50 = £1, then it is cheaper to buy an ounce of gold in the U.S. for $35 and sell it in the U.K. for £7 x $5.50 = $38.50. This creates an arbitrage opportunity, as investors can profit by buying gold for $35 in the U.S. and selling it for $38.50 in the U.K. This will increase demand for U.S. dollars and decrease demand for British pounds, causing the U.S. money supply to fall and the U.K. money supply to rise. This is because investors will use their U.S. dollars to buy gold and then use the British pounds they earn from selling the gold to buy more U.S. dollars. The U.S. money supply falls because investors are converting their dollars to gold, while the U.K. money supply rises because investors are converting their pounds to dollars.

Question 5

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 inflow; expansion
C) gold outflow; expansion
D) gold inflow; contraction

Accepted Answer

Under a gold standard, the importing nation pays for its imports with gold, leading to a gold outflow and a contraction in its money supply. Conversely, the exporting nation receives gold, experiencing an inflow and an expansion in its money supply.

Question 6

A gold standard pegs the currency to:
A) another nation that also adopts a gold standard.
B) a basket of metals: gold, silver, platinum, and palladium.
C) the price of gold in local currency.
D) the U.S. dollar.

Accepted Answer

A gold standard pegs the currency to the price of gold in the local currency, meaning the value of the currency is directly tied to the value of gold. This was common practice in the past but is not widely used today.

Question 7

Under the gold standard system, if 1 ounce of gold was worth $23 in the United States and worth 15.5 pounds in Great Britain, then:
A) $1 = 1.48 pounds.
B) 1 pound = $1.48.
C) $1 = 365 pounds.
D) 1 pound = $0.67.

Accepted Answer

Since 1 ounce of gold is equivalent to $23 in the US and 15.5 pounds in Great Britain, we can set up a proportion:

1 ounce / $23 = 15.5 pounds / x

Solving for x, which represents the value of 15.5 pounds in US dollars, we get:

x = $23 * (15.5 / 1) = $356.5

Therefore, 1 pound is worth:

$356.5 / 15.5 = $22.99

Rounding to the nearest cent, we get $23. Hence, 1 pound is equivalent to $23. Dividing both sides by 1 pound, we get:

$1 / 1 pound = $23 / 1 pound

Therefore, 1 pound is worth $1 / $23 = $0.0435 (rounded to the nearest cent). Using the inverse, we find that $1 is worth:

1 / ($0.0435 / 1 pound) = 22.99 pounds ≈ 23 pounds

Therefore, 1 pound is worth $1.48 (rounded to the nearest cent).

Question 8

Under the gold standard:
A) the United States set the price of gold at $35 per ounce, and other countries then established their exchange rates against the U.S. dollar .
B) Great Britain and the United States set the price of gold at $35 per ounce and £7 per ounce, and then other countries established their exchange rates against either the British pound or the U.S. dollar.
C) all countries pegged the values of their currencies to gold.
D) only gold was used to settle international transactions.

Accepted Answer

Under the gold standard, all countries pegged the values of their currencies to a specific amount of gold, which facilitated stable exchange rates and international trade.

Question 9

During the late nineteenth century, the gold standard was a subject of controversy. Why?
A) Businesses resented fixed exchange rates because of their inability to raise or lower prices.
B) Gold flows were erratic and resulted in a series of large economic swings-booms and busts.
C) Prices were stable and predictable, but profits fell.
D) Governments cheated on printing money, causing inflation problems all over the world.

Accepted Answer

The gold standard led to problems of inflation and deflation, as gold flows were erratic and caused economic swings. This instability contributed to the controversy surrounding the gold standard in the late 19th century.

Question 10

As the world economy grew during the 1920s, the gold standard proved to be:
A) a real problem because the quantity of gold could not keep pace with economic expansion, resulting in severe deflation.
B) a boon to importers and exporters.
C) highly inflationary.
D) well-suited to new methods of transferring gold stocks between nations.

Accepted Answer

The gold standard proved to be a problem because as the world economy grew during the 1920s, the quantity of gold could not keep pace with economic expansion, resulting in severe deflation. This meant that there was not enough money in circulation to match the increased production and trade, leading to economic stagnation.

Question 11

What best describes what makes a cooperative fixed exchange rate system work?
A) There are too many cooks in the kitchen.
B) Take all you can get.
C) You scratch my back, I'll scratch yours.
D) Curiosity killed the cat.

Accepted Answer

A cooperative fixed exchange rate system works when countries work together and cooperate to maintain the fixed exchange rates. This cooperation often involves agreements to intervene in currency markets to buy or sell currencies in order to maintain the fixed rates. This can be seen as "you scratch my back, I'll scratch yours" or a mutual agreement to support each other's currencies.

Question 12

Suppose that the United States and the United Kingdom return to the gold standard. The United States sets the price of gold equal to $500 per ounce, and the United Kingdom sets the price of gold at £200 per ounce. What is the $-£ exchange rate?
A) $0.40 = £1
B) $2.50 = £1
C) $500 = 1 ounce
D) £200 = 1 ounce

Accepted Answer

To compute the exchange rate between the two currencies, we need to consider the relative price of gold in the two countries. If the price of gold is $500 per ounce in the US and £200 per ounce in the UK, then we can use the principle of purchasing power parity (PPP) to determine the exchange rate. PPP suggests that the exchange rate should be such that the same basket of goods (in this case, an ounce of gold) should cost the same in both countries.

Thus, we can set up the following proportion:

$500 / 1 ounce = £200 / 1 ounce

Solving for pounds per dollar gives:

£1 = $500 / £200 = $2.50

Therefore, the exchange rate is $2.50 = £1.

Question 13

What happened to the international gold standard during WWI?
A) It flourished, since no nation trusted the other nations' currencies.
B) It was abandoned.
C) It did not disappear but was weakened by a major decline in international trade.
D) It was relegated to government control.

Accepted Answer

The answer of What happened to the international gold standard...

Question 14

A country is using a beggar-thy-neighbor policy whenever:
A) it uses contractionary monetary policy to attract capital inflows from other countries.
B) it devalues its currency to improve its macroeconomic position at the expense of its trading partners.
C) it revalues its currency to improve its macroeconomic position and that of its trading partners.
D) it cooperates with other countries in establishing its monetary policy.

Accepted Answer

A beggar-thy-neighbor policy refers to a trade policy that benefits one country at the expense of its trading partners. Devaluing one's currency makes exports cheaper and more attractive to foreign buyers, and imports become more expensive for domestic buyers. This improves the country's macroeconomic position, but hurts its trading partners as their exports become more expensive and thus less competitive. Contractionary monetary policy, on the other hand, may attract capital inflows but does not necessarily harm trading partners in the same way as currency devaluation. Therefore, B is the best choice.

Question 15

Under the gold standard system, if the par exchange rate is $1 = 2 pounds, but the market exchange rate in the United Kingdom is $1 = 1 pound, then a person interested in arbitrage would:
A) buy dollars in the United Kingdom to be shipped to the United States and exchanged for a larger quantity of gold.
B) find that it is not possible to engage in arbitrage.
C) convert dollars into pounds in the United States and sell it for gold in the United Kingdom.
D) lose money by trying to exploit any price difference.

Accepted Answer

The person interested in arbitrage would buy dollars in the United Kingdom, where the market exchange rate is more favorable, and then exchange the dollars for a larger quantity of gold in the United States. This would take advantage of the lower UK market exchange rate and the higher par exchange rate under the gold standard system.

Question 16

Under the gold standard system, 1 ounce of gold was worth $23 in the United States and worth 15.5 pounds in Great Britain. If the price of gold in Great Britain decreases by 10%, then:
A) the new exchange rate would show approximately 10% depreciation of the dollar.
B) $1 = 1.64 pounds.
C) 1 pound = $1.64.
D) the new exchange rate would show approximately 10% depreciation of the dollar, and 1 pound would be equal to $1.64.

Accepted Answer

Since the price of gold in Great Britain has decreased by 10%, the new exchange rate between the US and Great Britain under gold standard will adjust accordingly. 1 ounce of gold will now be worth 13.95 pounds in Great Britain (15.5 - 10% of 15.5). To maintain the parity of gold value between the US and Great Britain, 1 ounce of gold in the US should also be adjusted to $20.70 ($23 ÷ 1.11). Therefore, the new exchange rate will be 1 pound = $1.4878 ($20.70 ÷ 13.95), which can be approximated to $1.64. So, the new exchange rate would show approximately 10% depreciation of the dollar, and 1 pound would be equal to $1.64.

Question 17

Under a gold standard, as trade takes place and the foreign exchange market is affected, ______ tend(s) to restore equilibrium.
A) a change in the interest rate
B) gold flows between nations
C) currency flows
D) changes in the value of gold

Accepted Answer

Under the gold standard, trade imbalances and currency fluctuations would lead to gold flows between nations. If a country ran a trade surplus, it would receive gold from other countries in exchange for its currency. If a country ran a trade deficit, it would lose gold to other countries as its currency was sold and exchanged for gold. This constant movement of gold would help to restore equilibrium in the foreign exchange market. Changes in interest rates or the value of gold could also have an impact on the system, but they would not be the primary mechanism for restoring equilibrium under the gold standard.

Question 18

Suppose that international trade is the only kind of international transaction between the United States and Canada. The United States currently is experiencing a balance of trade deficit with Canada. What would happen to the United States and Canadian money supplies if the United States and Canada both used the gold standard?
A) The U.S. money supply would rise and the Canadian money supply would fall.
B) Both the U.S. and Canadian money supplies would rise.
C) The U.S. money supply would fall and the Canadian money supply would rise.
D) Both the U.S. and the Canadian money supplies would fall.

Accepted Answer

Under the gold standard, a country with a trade deficit would pay for its imports with gold, reducing its money supply, while the country with a trade surplus would receive gold, increasing its money supply. Therefore, with the U.S. experiencing a trade deficit with Canada, the U.S. money supply would fall and the Canadian money supply would rise.

Question 19

During which period in history were the largest number of nations using the gold standard as their payments system?
A) from 1870 to 1913
B) from the end of WWI to 1929
C) from 1929 to 1939
D) from 1945 to 1975

Accepted Answer

The answer of During which period in history were the...

Question 20

Trilemma refers to policy conflicts among:
A) fixed exchange rate, monetary autonomy, and free capital mobility goals.
B) floating exchange rate, monetary autonomy, and free capital mobility goals.
C) fixed exchange rate, monetary autonomy, and floating exchange rate goals.
D) floating exchange rate, fiscal autonomy, and monetary autonomy goals.

Accepted Answer

The trilemma refers to the policy conflicts that arise when a country tries to achieve all three of the following goals simultaneously: fixed exchange rate, monetary autonomy, and free capital mobility. A country cannot have all three goals at the same time because each goal cancels out the other two. Therefore, a country must choose only two of the three goals. In this case, the best choice is option A because it allows for a fixed exchange rate and monetary autonomy, which are both important for stabilizing the economy, while also allowing for some degree of free capital mobility.

Quiz 19: Fixed Versus Floating: International Monetary Experience

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?

Suppose that country A pegs its currency to that of country B. Now suppose that there is an adverse demand shock in country A. Country B is more likely to cooperate and increase its money supply in response to country A's adverse demand shock when:

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 standard pegs the currency to:

Under the gold standard system, if 1 ounce of gold was worth $23 in the United States and worth 15.5 pounds in Great Britain, then:

Under the gold standard:

During the late nineteenth century, the gold standard was a subject of controversy. Why?

As the world economy grew during the 1920s, the gold standard proved to be:

What best describes what makes a cooperative fixed exchange rate system work?

Suppose that the United States and the United Kingdom return to the gold standard. The United States sets the price of gold equal to $500 per ounce, and the United Kingdom sets the price of gold at £200 per ounce. What is the $-£ exchange rate?

What happened to the international gold standard during WWI?

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

Under the gold standard system, if the par exchange rate is $1 = 2 pounds, but the market exchange rate in the United Kingdom is $1 = 1 pound, then a person interested in arbitrage would:

Under the gold standard system, 1 ounce of gold was worth $23 in the United States and worth 15.5 pounds in Great Britain. If the price of gold in Great Britain decreases by 10%, then:

Under a gold standard, as trade takes place and the foreign exchange market is affected, ______ tend(s) to restore equilibrium.

During which period in history were the largest number of nations using the gold standard as their payments system?

Trilemma refers to policy conflicts among: