Question 1

What is the name of the account in which many central banks require their banks to hold a percentage of the deposits as reserves at the central bank?

Accepted Answer

The name of the account in which many central banks require their banks to hold a percentage of the deposits as reserves at the central bank is called "required reserves". Retained earnings are profits that a company keeps after paying dividends to shareholders. Excess reserves are reserves held by banks above and beyond required reserves. A margin account is a brokerage account in which the broker lends the customer cash to purchase securities.

Question 2

Which account should NOT be included in the asset section of a central bank balance sheet?

Accepted Answer

Currency in circulation should not be included in the asset section of a central bank balance sheet because it represents a liability of the central bank, not an asset. The central bank issues currency, which is a claim on the central bank by the holder.

Question 3

When the central bank attempts to influence the supply of money in a country by the sale or purchase of government bonds,the practice is known as ________.

Accepted Answer

Open market operations refer to the buying and selling of government bonds by the central bank in order to influence the supply of money in the economy. This is a common tool used by central banks for monetary policy. Option B refers to a situation where a central bank intervenes in the foreign exchange market to balance out its domestic currency holdings, while option C refers to a situation where the central bank allows its currency to fluctuate in the foreign exchange market without intervention. Option D refers to a change in the percentage of deposits that banks are required to hold in reserve, which is another tool used by central banks for monetary policy.

Question 4

The phenomenon of foreign currency driving out local currencies as a means of payment and a savings vehicle is known as ________.

Accepted Answer

Dollarization refers to the use of a foreign currency, particularly the US dollar, as a legal tender in a country. This can occur when a country's local currency loses value or becomes unstable, leading people to prefer to hold or transact in a more stable foreign currency. Seigniorage refers to the profit a government or central bank earns by printing money, while sterilization and devaluation are not directly related to the phenomenon of dollarization.

Question 5

The exchange rate system in which a country allows the value of the currency to be determined by the market forces of supply and demand is known as a

Accepted Answer

A floating exchange rate system is one in which the value of the currency is determined by the market forces of supply and demand, without any fixed or predetermined value set by the government or central bank. This system allows for greater flexibility and responsiveness to changes in the global economy, but can also lead to greater volatility and fluctuations in exchange rates. Currency boards and pegged exchange rate systems involve some degree of government intervention or control over the value of the currency, while target zones involve a range of acceptable exchange rates within which the government seeks to maintain the value of the currency.

Question 6

What is the name of the exchange rate system in which countries allow the value of their currency to be determined freely in the foreign exchange markets around the world without any government restrictions?

Accepted Answer

The description matches that of a floating exchange rate system, where the value of a currency is determined by supply and demand in the open market and not by government intervention. Option A refers to the currency used by European Union members, B refers to a fixed exchange rate system, and D refers to a system where exchange rates are allowed to fluctuate but with occasional government intervention.

Question 7

What is the name of the unit of account created by the IMF which is sometimes 	used to denominate contracts?

Accepted Answer

The unit of account created by the IMF which is sometimes used to denominate contracts is called special drawing right (SDR). It is a basket of currencies including the US dollar, euro, Japanese yen, Chinese yuan, and British pound. It is used by central banks and international organizations as a reserve asset and can also be used as a unit of account for transactions between countries.

Question 8

Official international reserves consist of three major components EXCEPT:

Accepted Answer

Deposits of private financial institutions are not considered as official international reserves. The three major components of official international reserves are gold reserves, foreign exchange reserves, and IMF-related reserves assets.

Question 9

In fixed exchange rate systems,the tendency is for the domestic currency to be ________.

Accepted Answer

In fixed exchange rate systems, the government or central bank sets a specific exchange rate for the currency, which means that the currency is pegged to another currency or a basket of currencies. If the exchange rate is set too high (overvalued), it can create a situation where the domestic currency is more expensive than its actual value, which can lead to an adverse effect on exports and economic growth. On the other hand, if the exchange rate is set too low (undervalued), it can create a situation where the domestic currency is less expensive than its actual value, which can lead to a loss of foreign exchange reserves and rising inflation. Therefore, in fixed exchange rate systems, the tendency is for the domestic currency to be overvalued.

Question 10

In the ________ exchange rate system,the currency has limited flexibility and the rate is kept within a fixed band.

Accepted Answer

In a target zone exchange rate system, the currency's value is allowed to fluctuate within a predetermined range or band. This system combines elements of fixed and floating exchange rates, providing limited flexibility while maintaining some control over the currency's value.

Question 11

What is the name for the set of regulations pertaining to flows of capital into and out of a country?

Accepted Answer

Capital controls refer to a set of regulations that a country imposes to regulate the movement of capital in and out of the country. These controls are implemented to stabilize the domestic currency, prevent capital flight, and maintain the domestic economy's stability.

Question 12

What is the name of the exchange rate system where the governments attempt to make sure the values of their currencies trade at particular values in the foreign exchange market,relative to another currency or a "basket" of currencies?

Accepted Answer

The name of the exchange rate system where the governments attempt to make sure the values of their currencies trade at particular values in the foreign exchange market, relative to another currency or a "basket" of currencies is called fixed currencies. In such a system, the central bank intervenes in the market by buying or selling its own currency to maintain the fixed exchange rate. This is in contrast to floating currencies, where the exchange rate is determined by market forces of supply and demand, and dirty float currency, where the exchange rate is allowed to float but with occasional intervention by the central bank. The European currency unit was an artificial currency used by the European Union and has been replaced by the euro.

Question 13

What is the negative side effect on the money supply of a non-sterilized foreign exchange intervention?

Accepted Answer

In a non-sterilized foreign exchange intervention, the central bank purchases or sells foreign currency in the exchange market, which affects the domestic money supply. If the central bank buys foreign currency, it pays for it with domestic currency, which increases the money supply. Conversely, if the central bank sells foreign currency, it receives domestic currency, which decreases the money supply. A higher money supply eventually leads to higher inflation because there is more money chasing the same amount of goods and services. Therefore, the foreign exchange objective of the central bank's policy may conflict with its domestic goal of price stability.

Question 14

What are the three major components of the official reserves account?

Accepted Answer

The three major components of the official reserves account are foreign exchange reserves, gold, and IMF-related reserve assets. Foreign government bonds and government-owned land are not typically included in official reserves, so options B and D can be eliminated. Option C is partially correct but does not include gold as one of the major components.

Question 15

Which one of the following is not one of the three main currency systems in practice today?

Accepted Answer

The answer of Which one of the following is not...

Question 16

What is the name for the composite currency that consists of various units of other currencies?

Accepted Answer

A composite currency that consists of various units of other currencies is known as a basket of currency.

Question 17

The special drawing rights of the IMF and the European currency unit are two examples of ________.

Accepted Answer

Special drawing rights of the IMF and the European currency unit are baskets of currencies, which are a composite currency made up of several different currencies. Currency boards, floating exchange rates, and target zones refer to other types of exchange rate arrangements.

Question 18

When a central bank buys foreign currency,its international reserves ________.

Accepted Answer

When a central bank buys foreign currency, it is increasing its stock of foreign currency reserves, which means that international reserves are increasing.

Question 19

Which of the following would NOT be a major component of a country's official reserves?

Accepted Answer

Government bonds are not typically considered a major component of a country's official reserves, which generally consist of foreign exchange, IMF-related reserve assets, and gold. While government bonds may be held by central banks for various purposes, they are not typically classified as official reserves.

Question 20

What is the name of the value of the real resources that the central bank obtains through the creation of base money?

Accepted Answer

Seigniorage is the name of the value of the real resources that the central bank obtains through the creation of base money. It represents the profit earned by the central bank when the face value of currency is greater than its production cost.

Quiz 5: Exchange Rate Systems