Question 1

Under the international monetary system as it actually operated between 1947 and 1971, the emergence of seemingly chronic deficits and surpluses in various countries' balance- of- payments positions (i.e., deficits and surpluses which did not seem to get eliminated) was called

Accepted Answer

The emergence of seemingly chronic deficits and surpluses in various countries' balance-of-payments positions was called the "adjustment problem." This referred to the difficulty in adjusting and correcting imbalances in the international monetary system, which ultimately led to the collapse of the Bretton Woods system in 1971.

Question 2

In the current exchange rate arrangements of IMF members,

Accepted Answer

According to the IMF, as of 2021, only about 40% of its member countries have fully floating exchange rates. The remaining countries have some form of managed or fixed exchange rate regime.

Question 3

Proposals to alter the international monetary system have included (1) a return to the international gold standard, and (2) establishing a single world currency under the control of an international central bank. How would the adoption of each of these plans affect the ability of any given country to carry out independent monetary and fiscal policy? Explain.

Accepted Answer

The adoption of a return to the international gold standard would significantly limit the ability of any given country to carry out independent monetary and fiscal policy. Under the gold standard, the value of a country's currency is directly linked to the amount of gold it holds. This means that a country's ability to expand its money supply or implement monetary policy is constrained by its gold reserves. Additionally, the gold standard limits a country's ability to use fiscal policy, as it restricts the government's ability to issue debt and finance spending through borrowing.

On the other hand, establishing a single world currency under the control of an international central bank would also limit the ability of any given country to carry out independent monetary and fiscal policy. With a single world currency, individual countries would lose control over their own monetary policy, as it would be determined by the policies of the international central bank. Similarly, fiscal policy would also be constrained, as countries would have limited ability to issue their own currency or control interest rates.

In both scenarios, the ability of any given country to carry out independent monetary and fiscal policy would be significantly reduced, as their policies would be subject to the constraints and decisions of the international monetary system.

Question 4

In the economic and monetary union in Europe (EMU), the member countries

Accepted Answer

In the economic and monetary union in Europe (EMU), the member countries use a common currency (the euro).

Question 5

Some economists doubt whether the Bretton Woods system could have survived the OPEC and primary product price "shocks" of the mid-1970s and the subsequent stagflation period. What reasons could be used to support this position? Would a gold standard have performed 'better" or "worse" than the Bretton Woods system during this time? Explain.

Accepted Answer

The answer of Some economists doubt whether the Bretton Woods...

Question 6

The post-Bretton Woods international monetary system is generally thought to have been characterized by all except one of the following features. Which one does NOT seem to have been a characteristic of the system?

Accepted Answer

Real exchange rates have not been relatively constant during the period, but have fluctuated significantly due to changes in inflation rates and other economic factors. The existence of the post-Bretton Woods system has had significant real economic effects on countries and their trade balances.

Question 7

The event that essentially led to the end of the Bretton Woods system was

Accepted Answer

The U.S. government's declaration in 1971 that it would no longer buy and sell gold from or to foreign central banks in exchange for dollars essentially ended the Bretton Woods system. The system was based on a fixed exchange rate system with the U.S. dollar tied to gold at a fixed rate, but the U.S. government's decision to abandon this link effectively ended the system.

Question 8

At the present time in the international monetary system,

Accepted Answer

Option D is correct as currency board is a monetary system that has similarities with the old gold standard in terms of fixed exchange rate, strict control over money issuance and a commitment to convert domestic currency into a foreign reserve currency, usually the US dollar or euro. Options A, B, and C are incorrect as gold is not the largest component of international reserves held by central banks, many countries have flexible exchange rates, and some countries use other currencies as part or all of their money (e.g. some countries use the US dollar or euro as their official currency).

Question 9

Because different inflation/unemployment trade-offs can make it very difficult for a fixed-rate system to be maintained, how could the creators of the Bretton Woods system have thought that that system would provide for some autonomy in domestic macroeconomic policy? Explain.

Accepted Answer

The answer of Because different inflation/unemployment trade-offs can make it...

Question 10

Under the Bretton Woods system set up at the end of World War II, exchange rates were

Accepted Answer

Under the Bretton Woods system, exchange rates were fixed but allowed to fluctuate within a narrow band of 1 percent above or below the established parity.

Question 11

In a target zone system in which the money supply is to be varied in response to exchange rate variations as the exchange rate hits the ceiling or floor, if a country's exchange rate (units of home currency per unit of foreign currency) hits the ceiling, the monetary authorities would be required to __________ the money supply; this change in the money supply would be carried out in order to __________ the value of the home currency.

Accepted Answer

If the exchange rate hits the ceiling, it means that the home currency has appreciated too much, making the country's exports more expensive and less competitive. To counteract this, the monetary authorities would need to decrease the money supply, which would cause the home currency to depreciate and become more competitive in international markets.

Question 12

Compare and contrast the "target zone system" and the "world central bank" system for organizing exchange rates and the international monetary system. Which of the two systems would you prefer and why?

Accepted Answer

The answer of Compare and contrast the "target zone system"...

Question 13

Why did the Bretton Woods system break down? Do you think that that breakdown and the subsequent adoption of much greater flexibility in the value of the dollar have been "good" from the standpoint of the United States? Why or why not?

Accepted Answer

The answer of Why did the Bretton Woods system break...

Question 14

In order for monetary union to occur, why are "convergence criteria" desirable?

Accepted Answer

The answer of In order for monetary union to occur,...

Question 15

When a country joins the International Monetary Fund, the country is assigned a quota, or Subscription fee. At the present time, this quota is paid

Accepted Answer

According to the IMF's official website, "Quotas are determined broadly on the basis of each member country's relative position in the world economy. Quotas are the primary source of the IMF's financial resources, and they determine a member's voting power in IMF decisions. Quotas are paid in quotas currencies, comprising SDRs and internationally accepted currencies." Therefore, 25% is paid in internationally acceptable currencies and 75% in the country's own currency.

Question 16

In the Williamson "target zone" plan, the major industrialized countries would negotiate mutually consistent __________ target exchange rates, and there would be __________ deviation permitted from these target rates.

Accepted Answer

The Williamson "target zone" plan involves negotiating mutually consistent real effective target exchange rates among major industrialized countries, with some permitted deviation from these target rates to allow for flexibility.

Question 17

Do you think that "conditionality" on IMF loans to developing country is desirable or undesirable? Why? From what standpoint should "conditionality" be assessed - the IMF's or the developing countries'?

Accepted Answer

The answer of Do you think that "conditionality" on IMF...

Question 18

In its lending to member countries, the International Monetary Fund (IMF)

Accepted Answer

The IMF may increase the difficulty of obtaining loans and may insist on internal policy changes by borrowing countries as the borrowers ask for additional loans. This is due to the IMF's mandate to ensure the stability of the international financial system and the sustainability of member countries' economic policies. The IMF does not lend to member countries at zero interest rates, and the maximum lending amount is not tied to the country's quota in the IMF. The IMF also engages in short-term balance-of-payments loans in addition to long-term development loans.

Question 19

SDRs were first introduced as a means of strengthening the Bretton Woods system. If the Bretton Woods system had not collapsed soon after the introduction of SDRs, how (if at all) could SDRs have potentially contributed to alleviating the liquidity problem? The confidence problem? The adjustment problem? Why do you suppose that, since their introduction, SDRs have remained such a small fraction of international reserves? Explain.

Accepted Answer

The answer of SDRs were first introduced as a means...

Question 20

Two of the "convergence criteria" pertaining to initial membership in the EMU were that a country's ratio of government debt to GDP must be __________ and that a country's ratio of government budget deficit to GDP must __________.

Accepted Answer

The convergence criteria for joining the European Monetary Union (EMU) required that a country's government debt to GDP ratio be 60 percent or less, and its government budget deficit to GDP ratio be 3 percent or less.

Quiz 29: The International Monetary System: Past, Present, and Future