Question 1

International macroeconomic policy coordination has become more useful and essential in recent decades because:
A)the interdependence among countries has increased
B)the volume of trade has grown more rapidly than GNP
C)of the large increase in international capital flows
D)all of the above

Accepted Answer

The interdependence among countries has increased due to globalization, which has increased the volume of trade and the large increase in international capital flows. Therefore, international macroeconomic policy coordination has become more useful and essential to address these interdependencies and manage economic issues such as global financial crises, exchange rates, and economic growth.

Question 2

Price discipline is:
A)greater under a fixed than under a flexible exchange rate system
B)greater under a flexible than under a fixed exchange rate system
C)about the same under a fixed as under a flexible exchange rate system
D)is unrelated to the type of exchange rate system

Accepted Answer

Price discipline is generally greater under a fixed exchange rate system because the government needs to maintain the fixed rate, often requiring it to follow more disciplined monetary and fiscal policies to avoid devaluation.

Question 3

The formation of an optimum currency area is more likely to be beneficial:
A)the smaller is the mobility of resource among the various nations of the optimum currency area
B)the smaller are the structural similarities of member nations
C)the more willing are member nations to closely coordinate their fiscal,monetary, and other policies
D)all of the above

Accepted Answer

The more willing member nations are to closely coordinate their fiscal, monetary, and other policies, the more likely it is that an optimum currency area will be beneficial. This coordination can help mitigate any structural differences or mobility of resources among the member nations. Therefore, option C is the best choice.

Question 4

Which of the following statements is correct with respect to flexible exchange rates?
A)they insulate the domestic economy from external shocks much more than fixed exchange rates
B)they are particularly attractive to nations subject to large external shocks
C)they provide less stability to an open economy subject to large internal shocks
D)all of the above

Accepted Answer

Flexible exchange rates can insulate an economy from external shocks by allowing currency values to adjust, making them attractive for nations facing large external shocks. They also provide more stability compared to fixed rates in the face of internal shocks, as they allow for automatic adjustments in the balance of payments.

Question 5

Flexible exchange rates:
A)enhance the effectiveness of fiscal policy
B)reduce the effectiveness of fiscal policy
C)enhance the effectiveness of monetary policy
D)reduce the effectiveness of monetary policy

Accepted Answer

Flexible exchange rates allow monetary policy to be more effective because central banks can adjust interest rates without worrying about maintaining a fixed exchange rate, allowing them to focus on domestic economic conditions.

Question 6

The European Monetary System is or resembles a:
A)fixed exchange rate system
B)a managed exchange rate system
C)a crawling peg system
D)a freely flexible exchange rate system

Accepted Answer

The European Monetary System (EMS) was a fixed exchange rate system established in 1979 among European Union member states. The currencies of these countries were tied to one another, with a small fluctuation margin allowed. This system was designed to promote economic stability and limit currency fluctuations within the EU.

Question 7

A fixed exchange rate system without a band of allowed fluctuation would require the nation's monetary authorities to intervene in the foreign exchange market:
A)never
B)seldom
C)constantly
D)we cannot say

Accepted Answer

Without a band of allowed fluctuation, the fixed exchange rate system would require the monetary authorities to constantly intervene in the foreign exchange market to maintain the fixed rate. Otherwise, any deviation from the fixed rate would harm the economy's stability and credibility.

Question 8

Under a flexible as compared to a fixed exchange rate system:
A)a nation can more easily achieve its desired inflation-unemployment tradeoff
B)it is more difficult for a nation to achieve its desired inflation-unemployment tradeoff
C)it is more difficult for a nation to achieve internal balance
D)it is more difficult for a nation to achieve external balance

Accepted Answer

Under a flexible exchange rate system, a nation can adjust its exchange rates to achieve its desired inflation-unemployment tradeoff. With a fixed exchange rate system, a nation's ability to adjust its exchange rates is limited, making it more difficult to achieve its desired inflation-unemployment tradeoff.

Question 9

The policy of intervention in the foreign exchange market to smooth out short-run fluctuations in exchange rates is called:
A)crawling peg
B)adjustable peg
C)leaning against the wind
D)managed float

Accepted Answer

The policy of intervention in the foreign exchange market to smooth out short-run fluctuations in exchange rates is called "leaning against the wind." This involves buying or selling currencies in the foreign exchange market in order to counteract short-term market movements. This approach is often used by central banks to stabilize their currency's value and maintain macroeconomic stability.

Question 10

Most economists believe that under "normal conditions" speculation:
A)is stabilizing
B)is destabilizing
C)is neither stabilizing nor destabilizing
D)seldom occurs

Accepted Answer

Most economists argue that speculation can be stabilizing under normal conditions because speculators buy when prices are low and sell when prices are high, which can help to moderate price fluctuations.

Question 11

The European Monetary Union:
A)has a common currency
B)has a single central bank
C)conducts a common monetary policy
D)all of the above

Accepted Answer

The European Monetary Union has all three characteristics listed: a common currency (the euro), a single central bank (the European Central Bank), and a common monetary policy.

Question 12

Everything else being the same,the volume of trade is likely to be:
A)larger under a flexible than under a fixed exchange rate system
B)larger under a fixed than under a flexible exchange rate system
C)equal under a flexible and fixed exchange rate system
D)any of the above

Accepted Answer

Under a fixed exchange rate system, the predictability and stability in exchange rates reduce the risk associated with international transactions, encouraging more trade. In contrast, a flexible exchange rate system introduces exchange rate volatility, which can deter trade due to uncertainty in costs and revenues.

Question 13

An alleged advantage of flexible over fixed exchange rates is:
A)market efficiency
B)stabilizing speculation
C)price discipline
D)all of the above

Accepted Answer

The answer of An alleged advantage of flexible over fixed...

Question 14

The policy of changing par values by small preannounced amounts at frequent intervals until the equilibrium exchange rate is reached is called:
A)crawling peg
B)adjustable peg
C)managed float
D)dirty float

Accepted Answer

The policy of changing par values by small preannounced amounts at frequent intervals until the equilibrium exchange rate is reached is called crawling peg. Option A represents such a policy, whereas options B, C and D represent different exchange rate regimes. Adjustable peg refers to a fixed exchange rate system where the central bank periodically adjusts the par value of its currency to align with changing market conditions. Managed float refers to a floating exchange rate system where the central bank intervenes in the foreign exchange market to influence the exchange rate. Dirty float refers to a floating exchange rate system where the central bank intervenes in the foreign exchange market to maintain a desired exchange rate level without committing to a specific target or band.

Question 15

If the band of allowed fluctuation under a fixed exchange rate system is made very wide,the system will resemble:
A)a flexible exchange rate system
B)the gold standard
C)an adjustable peg
D)a crawling peg

Accepted Answer

A wide band of allowed fluctuation means that the exchange rate is free to move within a large range, which is a characteristic of a flexible exchange rate system where the exchange rate is determined by market forces. The other options involve some form of fixed exchange rate system, with varying degrees of flexibility and intervention by the central bank.

Quiz 20: Flexible Versus Fixed Exchange Rates, the European Monetary System, and Macroeconomic Policy Coordination

International macroeconomic policy coordination has become more useful and essential in recent decades because:

Price discipline is:

The formation of an optimum currency area is more likely to be beneficial:

Which of the following statements is correct with respect to flexible exchange rates?

Flexible exchange rates:

The European Monetary System is or resembles a:

A fixed exchange rate system without a band of allowed fluctuation would require the nation's monetary authorities to intervene in the foreign exchange market:

Under a flexible as compared to a fixed exchange rate system:

The policy of intervention in the foreign exchange market to smooth out short-run fluctuations in exchange rates is called:

Most economists believe that under "normal conditions" speculation:

The European Monetary Union:

Everything else being the same,the volume of trade is likely to be:

An alleged advantage of flexible over fixed exchange rates is:

The policy of changing par values by small preannounced amounts at frequent intervals until the equilibrium exchange rate is reached is called:

If the band of allowed fluctuation under a fixed exchange rate system is made very wide,the system will resemble: