Question 1

The Bretton Woods system of 1944-1973 was a flexible exchange rate system in which member countries allowed their currencies to float within wide bands.

Accepted Answer

The Bretton Woods system was a fixed exchange rate system in which member countries tied their currencies to the US dollar, and the US dollar was tied to gold at a fixed rate.

Question 2

When pursued over the long run, a policy of increasing the domestic money supply to offset an appreciation of the home country's currency results in inflation and a decrease in home-country competitiveness in key industries.

Accepted Answer

Increasing the domestic money supply leads to inflation which reduces the home country's competitiveness in key industries over the long run.

Question 3

In recent years, the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade.The United States has argued that the central bank of China has sold yuan and bought dollars, thus depreciating the yuan against the dollar

Accepted Answer

The statement accurately reflects the accusation and argument made by the United States regarding China's manipulation of the yuan's value.

Question 4

If Ecuador adopts the U.S.dollar as its official currency, the country loses its seigniorage.

Accepted Answer

Seigniorage is the profit made by a government by issuing currency. If Ecuador adopts the U.S. dollar as its official currency, it will no longer have the ability to issue its own currency and therefore will lose its seigniorage.

Question 5

What is an SDR?

Accepted Answer

The answer of What is an SDR?...

Question 6

The revenue that a government received by issuing money is called a fiscal dividend.

Accepted Answer

The revenue that a government received by issuing money is not called a fiscal dividend. It is called seigniorage.

Question 7

An argument can be made for controls on the inflow of capital for developing countries because capital inflows can lead to a lending boom, speculation, and excessive risk taking.

Accepted Answer

Capital inflows can lead to instability in developing countries and can increase the risk of financial crises. Controls on capital inflows can help prevent excessive speculation, lending booms, and risky behavior by investors.

Question 8

A "dirty float" occurs when a nation uses central bank intervention in the foreign exchange market to promote a depreciation of its currency's exchange value, thus gaining a competitive advantage compared to its trading partners.

Accepted Answer

A dirty float involves central bank intervention to intentionally weaken a nation's currency in order to gain an advantage in international trade.

Question 9

By maintaining a strong commitment to fixed exchange rates, a currency board hopes that domestic inflation will slow down and the possibility of a speculative attack against its currency will be reduced.

Accepted Answer

A currency board's commitment to fixed exchange rates can help slow down domestic inflation and reduce the likelihood of a speculative attack against its currency.

Question 10

A currency board is a type of a floating exchange rate system in which the commitment to the floating exchange rate is very strong.

Accepted Answer

A currency board is a type of fixed exchange rate system, not a floating exchange rate system. It involves a strong commitment to pegging the exchange rate of a country's currency to another currency, typically a major international currency like the US dollar or euro, and maintaining that peg through strict monetary policy and currency reserves.

Question 11

Although controls on the outflow of capital for developing countries may be appealing, they tend to suffer from people finding ways to evade the controls and move funds out of the country.

Accepted Answer

Controls on the outflow of capital tend to suffer from people finding ways to evade the controls and move funds out of the country, so they are often ineffective in the long run.

Question 12

Why can't a nation adopt free capital flows, a fixed exchange rate, and an independent monetary policy at the same time?

Accepted Answer

The answer of Why can't a nation adopt free capital...

Question 13

The exchange rate system established by the Bretton Woods Agreement of 1944-1973 was an adjustable pegged system.

Accepted Answer

The Bretton Woods Agreement established a system of fixed exchange rates, with each country's currency pegged to the US dollar, which in turn was backed by gold reserves. However, countries were allowed to adjust the value of their currencies within a certain margin to respond to economic changes. This is why it is known as an adjustable pegged system.

Question 14

If Argentina adopts the U.S.dollar as its official currency, it seeks to eliminate the possibility of a speculative attack against its currency.

Accepted Answer

If Argentina adopts the U.S. dollar, it eliminates the possibility of a speculative attack against its currency because it no longer has its own currency to defend. However, this decision may have other economic implications for Argentina.

Question 15

Sources of a currency crisis often include weak financial systems and budget deficits financed by inflation.

Accepted Answer

Weak financial systems and budget deficits financed by inflation are common sources of currency crises.

Question 16

To offset an appreciation in the dollar's exchange value, the Federal Reserve can nudge interest rates down in the United States, which results in net investment outflows.

Accepted Answer

By lowering interest rates, the Federal Reserve makes U.S. assets less attractive to foreign investors, who may then choose to invest elsewhere, resulting in net investment outflows. This can help offset an appreciation in the dollar's exchange value.

Question 17

Under managed floating exchange rates, central bank intervention is used to offset temporary fluctuations in exchange rates that contribute to uncertainty in carrying out transactions in international trade and finance.

Accepted Answer

Managed floating exchange rates allow for some flexibility in exchange rates, but central bank intervention can be used to mitigate short-term fluctuations that can create uncertainty in international transactions.

Question 18

An argument can be made for controls on the outflow of capital for developing countries because capital outflows force a country to revalue its currency.

Accepted Answer

Capital outflows do not necessarily force a country to revalue its currency. They can lead to a depreciation of the currency due to reduced demand for it. Controls on capital outflows are often considered to prevent financial instability or protect the currency's value, not specifically to force a revaluation.

Question 19

If the Federal Reserve wants to see the dollar's exchange value depreciate, it could pursue a contractionary monetary policy.

Accepted Answer

If the Federal Reserve wants to see the dollar's exchange value depreciate, it would pursue an expansionary monetary policy, which involves increasing the money supply and decreasing interest rates. Contractionary monetary policy would have the opposite effect, appreciating the exchange value of the dollar.

Question 20

Under managed floating exchange rates, market forces are allowed to determine exchange rates in the short run while central bank intervention is used to stabilize exchange rates in the long run.

Accepted Answer

Under managed floating exchange rates, central banks intervene to stabilize or influence exchange rates in the short run, not just the long run, while allowing market forces to play a role.

Quiz 14: Exchange Rate Adjustments and the Balance of Payments