Ch19 Complete Test Bank Exchange Rate Policy And The Central

Student name:__________

1) While it is true that central banks of many countries intervene in the foreign exchange market, why wouldn't it be correct to say that central banks of these countries fix the exchange rates?

2) Imagine the exchange rate between the British pound (£) and the U.S. dollar ($) is fixed at $1.40/£ and capital flows freely between Great Britain and the U.S. Explain what the price of shares of stock in XYZ Inc. would be selling for in London if they are $80 per share in the United States and why.

3) Suppose that the current peso/dollar exchange rate is 100 pesos per dollar and the current inflation rates in Mexico and the U.S. are 3 percent in each country. Assuming purchasing power parity, what will the exchange rate be if the inflation rate increases to 5 percent in Mexico and falls to 2 percent in the United States?

4) Assuming the free flow of capital, explain why the central bank of a country that has fixed its exchange rate would not find discussions of inflation on the agenda of its policy meetings.

5) Capital flows freely between two countries and the countries have fixed exchange rates. The treasury bonds of each country have similar maturities but different expected returns. What can you deduce from this information?

6) Suppose the exchange rate between the Canadian dollar and the American dollar was fixed at 1.30 Canadian dollars per U.S. dollar and investors perceived Canadian bonds to be equal in value and risk to U.S. bonds. If the U.S. bonds are selling for $1,000 and have a 5 percent interest rate, assuming capital flows freely between the two countries what will be the price and the interest rate of the Canadian bonds?

7) Could a country be open to international capital flows, control its domestic interest rate, and fix its exchange rate? Explain.

8) What are the cost and benefits to a country instituting capital controls?

9) Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would be the impact on the money supply in the United States if the euro started to decline in value and why?

10) Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would be the impact on the interest rate in the United States if the euro started to appreciate in value and why?

11) Using demand and supply analysis, explain why the euro/dollar exchange rate rises (the dollar appreciates) if the Fed intervenes in the foreign exchange market and sells euros.

12) You have invested in bonds in a developing economy, and you have heard rumors of an impending speculative attack. You decide to sell the bonds and convert the currency into U.S. dollars. Use the demand and supply model for U.S. dollars to illustrate what happens in the foreign exchange market and write a brief explanation.

13) Are foreign exchange market interventions the only tool available to a central bank to change the exchange rate? Explain.

14) How would the impact on the exchange rate differ if the Fed were to sell U.S. Treasury securities instead of selling an equal amount (in $ terms) of euros?

15) What should be the impact on the U.S. interest rates if the Fed undertakes a sterilized foreign exchange intervention? Be sure to explain your answer.

16) What separates a sterilized foreign exchange market intervention from an unsterilized intervention?

17) A sterilized intervention is actually a combination of two transactions. What are they and what is the effect on the monetary base?

18) You are an American resident but have invested in a German bond (paying face value) that matures in two years, pays a 5 percent interest rate, and is denominated in euros. What could cause your rate of return to fall below 5 percent even though the bond pays off at maturity?

19) What are the risks to a country of fixing its exchange rate to that of another country?

20) Describe the automatic stabilizers that are lost to a country that fixes its exchange rate to another currency.

21) What makes countries with fixed exchange rates prone to speculative attacks? Why don't the central banks of these countries stop these attacks?

22) What causes a speculative attack on a country’s currency?

23) How can irresponsible fiscal policy contribute to a speculative attack on a country's currency that is fixed in value to another currency?

24) What are the general conditions under which a fixed exchange rate makes sense for a country?

25) How did the gold standard contribute to the spreading of the Great Depression of the 1930s?

26) What were the reasons for selecting the U.S. dollar as the currency to which the other 43 countries agreed to peg their currencies as part of the Bretton Woods System?

27) What are the pros and cons of a currency board?

28) What are the main costs to a country that adopts dollarization?

29) Is the European Monetary Union a form of dollarization? Explain.

30) What is the relationship between a nation’s monetary and fiscal policy and its exchange rate?

31) If a country has a flexible exchange rate, will high rates of inflation, though generally harmful, price this country's goods off world markets? Explain.

32) You live in a small country that suffers constantly from high and variable rates of inflation. You are quite sure it has something to do with the fact that the head of the central bank is the President's brother. A rival presidential candidate is advocating fixing the exchange rate between your country's currency and the dollar. What are the advantages to this proposal and how do you think the current head of the central bank will respond?

33) Completely flexible exchange rates are fairly self-explanatory, and hard pegs include dollarization and currency boards. These seem to be the extremes. Assuming free flow of capital, why do you think soft pegs are never used?

34) What were the contributing factors that led to Argentina's initial adoption of a currency board and then its subsequent failure?

35) What is a “sudden stop” and how is related to the Balance of Payments? Are these occurrences frequent?

36) Compare the monetary policy of the 50 states that make up the United States to the exchange rate regime of dollarization.

37) Within the United States, every city has

A) a fixed exchange rate with every other city.
B) a floating exchange rate with every other city.
C) their own currency board.
D) an independent monetary policy.

38) If capital flows freely between countries and a country has a fixed exchange rate, one thing you know is that the country

A) exports more than it imports.
B) must have ample gold reserves.
C) cannot have a discretionary monetary policy.
D) must be running large trade deficits.

39) Purchasing power parity implies

A) a basket of goods should sell for the same price in all countries, even if trade barriers exist.
B) a basket of goods cannot sell for the same price in different countries due to the different wage rates.
C) as long as all goods and services are traded freely across international boundaries, one unit of domestic currency should buy the same basket of goods anywhere in the world.
D) a basket of goods will sell for the same price in all countries as long as there are no trade barriers is a free flow of capital across borders.

40) If inflation in country A exceeds inflation in country B, purchasing power parity implies that the

A) currency of country B should depreciate relative to the currency of country A.
B) inflation rate in country B will rise to match the inflation rate in country A.
C) currency of country A will depreciate relative to the currency of country B.
D) inflation rate in country A will fall to match the inflation rate in country B.

41) If inflation in country A exceeds inflation in country B, we can express the percentage change in the units of currency of country A per unit of currency of country B as the

A) inflation rate in country B—the inflation rate in country A.
B) inflation rate in country A—the inflation rate in country B.
C) inflation rate in country A times the inflation rate in country B.
D) inflation rate in country A divided by the inflation rate in country B.

42) If the inflation rate in country A is 3.5 percent and the inflation rate in country B is 3.0 percent, we should expect the percentage change in the number of units of country A's currency per unit of country B's currency to be

A) +0.5 percent.
B) −0.5 percent.
C) +16.7 percent.
D) +6.5 percent.

43) If a U.S. dollar currently purchases 1.3 Canadian dollars and the inflation rate in Canada over the next year is 5 percent while it is 2 percent in the United States, we should expect a U.S. dollar to purchase

A) 1.365 Canadian dollars.
B) 1.262 Canadian dollars.
C) 1.300 Canadian dollars.
D) 1.339 Canadian dollars.

44) Assuming the free flow of capital across borders, if country A wants to fix its exchange rate with country B, then

A) country A's inflation rate will have to exceed country B's.
B) country A's monetary policy must be conducted so the inflation rate in country A matches the inflation rate in country B.
C) country A's monetary policy will be updated frequently to address domestic issues.
D) the difference between country A's inflation rate and country B's inflation rate must be equal to the policy objective for stable prices.

45) Assuming the free flow of capital across borders, a central bank

A) can have an independent inflation policy and an exchange rate that doesn’t fluctuate.
B) cannot have both a fixed exchange rate and an independent inflation policy.
C) in most industrialized countries favors fixing exchange rates because their primary concern is on domestic inflation.
D) in most industrialized countries focuses on fixed exchange rates.

46) Purchasing power parity is a good theory of explaining exchange rate behavior over

A) very short periods.
B) periods lasting six to twelve months.
C) both long and short periods.
D) very long periods, such as decades.

47) In the short run, a country's exchange rate is determined by

A) monetary policy.
B) purchasing power parity.
C) the domestic inflation rate.
D) supply and demand.

48) International capital mobility

A) contributes to the rigidity of exchange rates.
B) contributes to the equalization of expected returns across countries.
C) eliminates arbitrage opportunities.
D) makes interest rates equal across countries.

49) If the bonds of two different countries are identical, their expected returns will be equal

A) if capital flows freely internationally.
B) only if the exchange rate between the two countries is fixed.
C) always.
D) only if the inflation rate is the same in each country.

50) When arbitrage occurs across countries with a flexible exchange rate and when the bonds in each country are identical and there are no barriers to capital flows, then the

A) interest rates on the bonds will be identical.
B) expected returns on the bonds will be identical.
C) inflation rates in each country will be identical.
D) prices of the bonds will be identical.

51) Let i_f be the interest rate being paid on a foreign bond, and let i be the interest rate being paid for a domestic bond; let P be the price of the domestic bond and let P_f be the price of the foreign bond. If exchange rates are fixed and the bonds are equal in terms of risk, then

A) i_f >i.
B) P>[P_f × units of domestic currency/unit of foreign currency].
C) the expected return from the foreign bond = the expected return from the domestic bond.
D) the exchange rate is equal to (1 +i_f) .

52) In the long run, a country's exchange rate is determined by

A) domestic monetary policy.
B) purchasing power parity.
C) the domestic inflation rate.
D) output market price controls.

53) Policymakers in open economies face a “trilemma” of three conditions that cannot all be realized at the same time. Which one of the following is not part of this “trilemma” of open-economy macroeconomics?

A) Fix its exchange rate.
B) Implement capital controls.
C) Be open to international flows.
D) Control its domestic interest rate.

54) Consider the following: an investor in the United States is pondering a one-year investment. She can purchase a domestic bond for $1,000 that has an interest rate of i or she can purchase a bond in England for 1,500 British pounds (£) that pays an interest rate of i_f. The current exchange rate is $1.50/£1. She considers the bonds to be of equal risk. If i = i_f, the expected returns are not equal. What do you know?

A) The exchange rate is fixed between the United States and Britain.
B) The bonds initially sold for different prices.
C) Arbitrage doesn't work.
D) The exchange rate must be flexible.

55) Which one of the following statements is not correct?

A) A country cannot be open to international capital flows, control its domestic interest rate, and fix its exchange rate.
B) A country can be open to international capital flows and control its own domestic interest rate, but it can't fix its exchange rate.
C) A country can be open to international capital flows, control its domestic interest rate, and fix its exchange rate.
D) A country can be open to international capital flows and fix its exchange rate but could not also control its own domestic interest rate.

56) The United States would be characterized as having

A) a controlled domestic interest rate, a closed capital market, and a flexible exchange rate.
B) no control over the domestic interest rate, an open capital market, and a flexible exchange rate.
C) a controlled domestic interest rate, an open capital market, and a flexible exchange rate.
D) a controlled domestic interest rate, an open capital market, and a fixed exchange rate.

57) Most economists view capital controls

A) unfavorably.
B) as a framework for allocating capital to its most efficient uses.
C) as useful for developing countries to exploit their comparative advantages.
D) as a method for quickly transmitting information to markets and institutions in other countries.

58) Capital controls

A) are controls only on capital inflows.
B) are controls only on capital outflows.
C) can be controls on capital inflows or outflows.
D) must be controls on both capital inflows and outflows in order to be effective.

59) What situation occurs when everyone loses confidence in a country at the same time?

A) sudden stop
B) capital inflows
C) currency appreciation
D) flexible exchange rates

60) During the 1990s, the country of Chile required foreigners wishing to invest in the country to make a one-year, zero-interest deposit in the Chilean central bank equal to at least 20 percent of the investment. This is an example of

A) a capital outflow control.
B) an exchange rate mechanism.
C) a capital inflow control.
D) a currency board.

61) Which one of the following would be an example of a capital outflow control?

A) Mexico limiting the number of U.S. dollars an American can bring into the country
B) Mexico excluding foreigners from purchasing short-term debt
C) Mexico limiting the number of pesos its citizens can take out of the country
D) Mexico placing a tax on nonresident purchases of domestic securities

62) China has long operated with which type of capital controls?

A) capital inflow controls
B) capital outflow controls
C) capital controls in both directions
D) no capital controls in either direction

63) If domestic residents are restricted in their ability to purchase foreign assets, then their government is imposing

A) controls on capital inflows.
B) controls on capital outflows.
C) controls on both capital inflows and outflows.
D) fixed exchange rates.

64) If foreigners are restricted in their ability to sell investments in a country, then that country’s government is imposing

A) controls on capital inflows.
B) controls on capital outflows.
C) controls on both capital inflows and outflows.
D) fixed exchange rates.

65) If foreigners are restricted in their ability to buy investments in a country, then that country’s government is imposing

A) controls on capital inflows.
B) controls on capital outflows.
C) controls on both capital inflows and outflows.
D) fixed exchange rates.

66) A country announces capital outflow controls that will take effect in three months. This announcement will likely

A) lead to more market competition.
B) stabilize the country's exchange rate.
C) attract significant amounts of foreign investors.
D) result in a significant depreciation in the country's currency.

67) A country that frequently uses capital controls

A) will attract more investment.
B) increases the risk for foreign investors.
C) typically has high levels of economic freedom.
D) should see lower interest rates on its domestic bonds and lower prices.

68) If the Fed desired to fix the euro/dollar exchange rate, they would have to

A) get the European Central Bank to also agree to fixed exchange rates.
B) maintain ample reserves of dollars.
C) be willing to exchange dollars for euros whenever anyone asked.
D) impose capital controls.

69) An open-market purchase of foreign bonds to increase a central bank’s international reserves

A) increases the central bank's liabilities and assets.
B) decreases the central bank's assets and liabilities.
C) increases the central bank's assets and decreases its liabilities.
D) increases the central bank's liabilities and decreases its assets.

70) If the Fed decides to maintain a fixed euro/dollar exchange rate, when they purchase euros

A) they decrease the number of dollars.
B) upward pressure is put on domestic interest rates.
C) the domestic money supply increases.
D) domestic commercial bank reserves fall.

71) If the Fed decides to maintain a fixed euro/dollar exchange rate when they sell euros,

A) there will be upward pressure on domestic interest rates.
B) the domestic money supply will increase.
C) this will increase banking system reserves.
D) they will also have to impose capital controls.

72) If the Fed decides to control the euro/dollar exchange rate,

A) they will also have to control the domestic interest rate.
B) they will have to control the amount of banking system reserves.
C) the market will determine the interest rate.
D) they will have to control the domestic rate of inflation or it won't work.

73) Reserves in the banking system will increase if the Fed

A) buys euros or sells dollars.
B) sells euros or buys dollars.
C) sells euro-dominated bonds and exchanges the euros for dollars.
D) sells euro-dominated bonds and keeps the euros from the sale.

74) The Fed holds its euro reserves primarily in the form of

A) euro currency.
B) a weighted portfolio of European government bonds.
C) German government bonds.
D) international mutual funds.

75) If reserves are scarce, when the Fed enters the foreign exchange market and purchases euros in an unsterilized intervention, the impact on domestic banking reserves would be

A) the same pattern as with capital controls.
B) that domestic banking reserves would decrease.
C) the same as it would be with an open market purchase.
D) uncertain.

76) In a world where reserves are scarce, the impact on the foreign exchange market for dollars resulting from the Fed selling euros in an unsterilized intervention will be

A) a depreciation of the dollar.
B) an increase in the supply of dollars.
C) an increase in the demand for dollars.
D) a decrease in the interest rate in the United States.

77) If reserves are scarce and interest rates in the United States increase relative to interest rates in Europe, then the

A) demand for dollars on the foreign exchange market would increase.
B) supply of dollars on the foreign exchange market would increase.
C) dollar depreciates against the euro.
D) number of euros offered per dollar in the foreign exchange market falls.

78) In a world where reserves are scarce, a foreign exchange intervention by a central bank affects the value of a country's currency if it

A) alters banking system reserves.
B) leaves foreign asset holdings unchanged.
C) results in a fixed exchange rate.
D) changes domestic interest rates.

79) Any central bank policy that influences the domestic interest rate will

A) have no effect on the exchange rate if exchange rates are flexible.
B) have an effect on the exchange rate.
C) not impact the supply of and demand for the domestic currency if exchange rates are flexible.
D) be compatible with fixed exchange rates.

80) Assume that the Fed performs an unsterilized foreign exchange intervention in which it buys German government bonds in a world in which reserves are scarce. One result of this will be that

A) the dollar appreciates.
B) the euro appreciates.
C) both the dollar and the euro depreciate.
D) the dollar appreciates and the euro depreciates.

81) Assume that the Fed performs a sterilized foreign exchange intervention in which it buys German government bonds in a world in which reserves are abundant. One result of this will be that

A) the dollar appreciates.
B) the monetary base does not change.
C) both the dollar and the euro depreciate.
D) the dollar appreciates and the euro depreciates.

82) Which one of the following statements is not correct?

A) A foreign exchange intervention affects the value of a country's currency by changing domestic interest rates.
B) Any central bank policy that influences the domestic interest rate will affect the exchange rate.
C) Higher U.S. interest rates relative to those of other countries would likely result in an appreciation of the U.S. dollar.
D) Sterilized changes in foreign exchange reserves alter a country’s monetary base.

83) A sterilized foreign exchange intervention would

A) alter the asset side of a central bank's balance sheet but leave the domestic monetary base unchanged.
B) alter the liability side of the central bank's balance sheet but leave the asset side unchanged.
C) leave the central bank's balance sheet unchanged.
D) not alter the central bank's holdings of international reserves.

84) If the Fed were to purchase euros for dollars and at the same time sell U.S. Treasury securities in the open market, this would be an example of

A) an unsterilized foreign exchange intervention.
B) the Fed not changing their balance sheet at all.
C) a sterilized foreign exchange intervention.
D) the Fed altering the domestic monetary base.

85) A foreign exchange intervention that alters the domestic monetary base is

A) sterilized.
B) impossible.
C) unsterilized.
D) not likely to change domestic interest rates.

86) A foreign exchange intervention that does not alter the domestic monetary base is

A) sterilized.
B) impossible.
C) unsterilized.
D) likely to change domestic interest rates.

87) A sterilized foreign exchange intervention will

A) alter domestic monetary policy.
B) change commercial bank reserves.
C) leave the central bank's holdings of foreign reserves unchanged.
D) change the composition of the asset side of the central bank’s balance sheet.

88) In September of 2000, the Federal Reserve Bank of New York sold dollars in exchange for euro. To keep the federal funds rate on target, the Open Market desk

A) sold U.S. Treasury bonds.
B) bought U.S. Treasury bonds.
C) bought dollars.
D) sold dollars.

89) Suppose that you purchase a Korean government bond and the number of won needed to purchase one dollar increases. Your return on the bond

A) decreases by the amount of the dollar's appreciation.
B) decreases by more than the amount of the dollar's appreciation.
C) decreases by less than the amount of the dollar's appreciation.
D) increases by the amount of the dollar's appreciation.

90) A U.S. resident purchases a bond issued by the Canadian government. If the Canadian dollar appreciates relative to the U.S. dollar over the term of the bond, the U.S. investor will

A) see a higher return on her investment as a result.
B) see a lower return on her investment as a result.
C) not see her return affected since exchange rates are flexible.
D) see a return, but the direction of change cannot be determined beforehand.

91) An advantage of a fixed exchange rate regime for a country that suffers from bouts of high inflation is that

A) it makes imports less expensive.
B) it establishes a credible low inflation policy.
C) it unties policymakers' hands so they can alter the reserves of the banking system as needed.
D) policymakers will have increased control over domestic interest rates.

92) A fixed exchange rate policy

A) decreases central bank policy accountability and transparency.
B) strengthens domestic interest rate policy.
C) will likely make domestic inflation more volatile.
D) imports monetary policy.

93) When Argentina fixed the exchange rate of their peso to the U.S. dollar, one outcome was that the Argentinian

A) central bankers regained control of their domestic interest rate.
B) central bankers were finally able to focus their attention on domestic monetary policy.
C) central bankers effectively gave control of their domestic interest rate to the FOMC.
D) citizens began using the U.S. dollar for all of their transactions.

94) Fixing an exchange rate between two countries makes the most sense when the countries’ macroeconomic fluctuations are

A) uncorrelated.
B) unsynchronized.
C) positively correlated.
D) negatively correlated.

95) All of the following are associated with a fixed exchange rate policy, except which one?

A) higher prices on exports
B) importing monetary policy
C) sacrificing control of the domestic inflation rate
D) the need to maintain ample international reserves

96) A country with a fixed exchange rate policy and free cross-border capital flows that is experiencing an economic slowdown will find

A) their central bank will reduce the domestic interest rate in order to fend off the slowdown.
B) their currency will depreciate to stimulate exports.
C) their corporate equities will become more attractive to foreign investors.
D) monetary policy in not available as an economic stabilization tool.

97) A speculative attack on a country with a fixed exchange rate often occurs when financial market participants believe the

A) currency is undervalued.
B) government will have to devalue its currency.
C) government has a large excess of international reserves.
D) government should convert its gold reserves into foreign exchange.

98) In 1997, there was a speculative attack on the Thai baht. This resulted from the belief by speculators that the

A) Thai central bank had an overabundance of U.S. dollar reserves.
B) Thai central bank didn't have sufficient U.S. dollar reserves to maintain the current fixed rate.
C) Thai central bank had converted its gold reserves into foreign exchange.
D) Thai president and the central bank would be overthrown.

99) A speculative attack occurs often when there is a problem of

A) time inconsistency.
B) automatic stabilizers.
C) currency appreciation.
D) irresponsible fiscal policy.

100) Speculative attacks

A) can only result from irresponsible fiscal policy.
B) can always be stopped by the country's central bank if they act quickly.
C) can be triggered even when domestic policymakers are acting responsibly.
D) are illegal, and if caught, speculators are assessed large fines.

101) A fixed exchange rate policy is

A) best for countries with low and stable prices.
B) appropriate for a country that lacks a central bank.
C) only appropriate for countries with little international reserves.
D) a monetary policy.

102) A country would be better off fixing its exchange rate if

A) it lacks ample foreign exchange reserves.
B) it has a strong reputation for controlling inflation on its own.
C) it is well-integrated with the economy of the country to whose currency its currency is fixed.
D) its own macroeconomic characteristics are inversely correlated with the macroeconomic characteristics of the country to whose currency its currency is fixed.

103) A country that suffers from bouts of high inflation and wants to fix its exchange rate should tie its currency to the currency of a country

A) that is larger.
B) with similar inflation performance.
C) that is still on the gold standard.
D) with a strong reputation for low inflation.

104) Prior to World War I, when the United States was on the gold standard, inflation in the United States averaged

A) 3.5 percent per year but was highly variable.
B) less than one percent per year and was highly variable.
C) less than one percent per year and was stable.
D) 3.5 percent per year and was stable.

105) Most economists do not advocate a return to the gold standard because

A) doing so would be time inconsistent.
B) there are no longer gold reserves to mine.
C) the central bank could hold too much gold and destabilize the economy.
D) it forces the central bank to fix the price of something that is crucial for economic growth.

106) If the United States were to revert to a gold standard, trade deficits would

A) result in gold reserves in the United States decreasing.
B) result in lower domestic interest rates.
C) quickly disappear.
D) result in high inflation.

107) If the United States were to revert to a gold standard, trade deficits would

A) result in gold reserves in the United States increasing.
B) result in higher domestic interest rates.
C) quickly disappear.
D) result in high inflation.

108) Under a gold standard, a central bank

A) wants to keep their gold reserves fixed.
B) stabilizes the prices of goods and services.
C) can have too little gold but never have too much.
D) will have gold reserves depleted when exports exceed imports.

109) Most economic historians believe that

A) if more countries had been on the gold standard the Great Depression would have been averted.
B) the gold standard did not play a major role in the Great Depression.
C) the gold flows played a central role in spreading the Great Depression.
D) countries that held on to the gold standard recovered from the Great Depression the quickest.

110) Fixed exchange rate regimes include each of the following, except which one?

A) the Bretton Woods exchange rate system
B) exchange rate pegs
C) dollarization
D) currency boards

111) The Breton Woods System was an agreement that required each participating country to

A) abolish all trade barriers.
B) stay on the gold standard.
C) peg their currency to the U.S. dollar.
D) adopt standardized tariffs across all participating countries.

112) Under the Bretton Woods System each participating country had to

A) adopt capital controls.
B) be willing to exchange their own currency for gold.
C) hold ample reserves of currency of each of the participating countries.
D) stand ready to exchange its own currency for U.S. dollars at a fixed exchange rate.

113) The Bretton Woods System failed in 1971 due to

A) stable and low rates of inflation in the United States.
B) restricted mobility of capital across international borders.
C) the desire on the part of participating countries to have an independent monetary policy.
D) the agreement forcing more policy inflexibility than had accompanied the gold standard.

114) The International Monetary Fund was created as a part of the

A) United Nations.
B) Bretton Woods System.
C) European Monetary Union.
D) Federal Reserve System.

115) The International Monetary Fund's primary role under the Bretton Woods System was to be

A) the issuer of gold.
B) the arbiter of trade disputes.
C) the clearinghouse for international transactions.
D) a short-term lender for countries with an excess of imports over exports.

116) China has used its current account surplus to

A) buy stocks on the New York Stock Exchange.
B) buy German government and agency securities.
C) buy U.S. government and agency securities.
D) make loans to foreigners.

117) Only two exchange rate regimes can be considered hard pegs. These are

A) currency boards and dollarization.
B) dollarization and managed floating.
C) flexible exchange rates and currency boards.
D) the gold standard and inflation targeting.

118) In Hong Kong, the monetary authority can only increase the monetary base if they accumulate more U.S. dollars because

A) the currency of Hong Kong is the U.S. dollar.
B) the monetary authority in Hong Kong operates a currency board where its sole objective is to fix the exchange rate between its currency and the U.S. dollar.
C) the IMF required Hong Kong to peg its currency to the U.S. dollar in order to obtain a loan.
D) Hong Kong has received substantial funding from the U.S. Treasury and the loans were conditional on maintaining the value of the Hong Kong currency.

119) When a country operates with a currency board, the central bank's sole objective is to maintain the

A) flexibility of domestic monetary policy.
B) domestic interest rate.
C) exchange rate.
D) target inflation rate.

120) In April 1991, Argentina adopted a currency board primarily to address the problem of

A) slow growth.
B) high interest rates.
C) large trade surpluses.
D) triple-digit inflation.

121) The failure of the Argentinian currency board can be attributed to many factors, including the

A) failure right from the start to lower inflation.
B) pegging of the Argentine peso to the euro.
C) prices of Argentinian exports rising significantly in the late 1990s hurting their economy.
D) reduction in domestic government spending that accompanied the development of the currency board.

122) A lesson that policymakers should learn from the Argentinian experience with currency boards is that

A) they never work.
B) poor fiscal policies can undermine any monetary policy regime.
C) the only fixed exchange rate that works is the gold standard.
D) a flexible exchange rate is always preferred to a pegged exchange rate.

123) A problem with currency boards is that the central bank loses

A) control over fiscal policy.
B) control over the government budget.
C) influence over interest rates.
D) the ability to supervise banks.

124) Which one of the following best defines dollarization?

A) A country uses the U.S. dollar as well as its currency for all transactions.
B) A country adopts a foreign currency for all transactions, basically eliminating its own monetary policy.
C) A country eliminates its own currency for international transactions and requires that all international transactions be conducted in U.S. dollars.
D) The central bank of a country agrees to exchange its own currency for U.S. dollars at a fixed exchange rate.

125) The benefits to a country from dollarization include each of the following, except which one?

A) a lower risk premium since inflationary finance is no longer a possibility
B) greater and faster integration into world markets, increasing trade and investment
C) no risk of an exchange rate crisis
D) increased revenue from seignorage

126) Dollarization is associated with each of the following, except which one?

A) slower integration into world markets
B) adopting the monetary policy of the country whose currency is being used
C) the central bank no longer having the ability to be the lender of last resort
D) the loss of revenue from printing currency

127) Monetary union, in comparison to dollarization, means that

A) countries forgo revenues from seignorage.
B) countries share in monetary policy decisions.
C) the central bank no longer has the ability to be the lender of last resort.
D) participating countries relinquish shared governance.

128) Monetary union and dollarization

A) are the same thing.
B) have the same impact on monetary policy in all participating countries.
C) involve participating countries sharing revenues from seignorage.
D) are different because dollarization does not involve shared governance.