Test Bank Exporting Chapter.16

Student name:__________

1) What is the international monetary system? What are the major trading currencies?

2) Explain the events that led to the failure of the Bretton Woods system of fixed exchange rates.

3) Discuss the significance of the Jamaica Agreement.

4) Compare and contrast a pegged exchange system with a dirty-float system of exchange rates.

5) What is the gold standard? What was the major advantage of the system?

6) With the help of an example, explain how balance-of-trade equilibrium is maintained under the gold standard.

7) What is the Bretton Woods agreement? How was it different from the gold standard?

8) Identify the multinational institutions that were established at the Bretton Woods agreement. What were their roles in the international monetary system?

9) Discuss the arguments that favor a floating exchange rate system against a fixed exchange rate system.

10) Present the common arguments that favor fixed exchange rates.

11) Describe the different exchange rate policies that are in practice today.

12) What is a currency board? Why do countries choose this type of system? What are the disadvantages of this type of arrangement?

13) Recent policies of the International Monetary Fund have drawn a lot of criticism. Discuss these criticisms.

14) How can international companies reduce their economic exposure in a world of constantly fluctuating exchange rates?

15) Do you think businesses can influence government policies? Explain your answer.

16) The _____ refers to the institutional arrangements that govern exchange rates.

A) World Bank
B) international monetary system
C) currency exchange
D) gold standard

17) A _____ means the value of a currency is fixed relative to a reference currency.

A) pegged exchange rate
B) floating exchange rate
C) managed float system
D) fixed exchange rate

18) When a country tries to hold the value of its currency within some range against an important reference currency such as the U.S. dollar without adopting a formal pegged rate, it is referred to as a

A) gold standard.
B) pegged float.
C) dirty float.
D) currency peg.

19) The amount of a currency needed to purchase one ounce of gold was referred to as the

A) golden rule.
B) gold standard.
C) pegged gold value.
D) gold par value.

20) A country is said to be in balance-of-trade equilibrium when

A) the income its residents earn from exports is equal to the money its residents pay to other countries for imports.
B) it produces all the goods needed for domestic consumption.
C) the income its residents earn from imports is equal to the money its residents pay to other countries for exports.
D) it produces all the goods needed for exportation.

21) The world’s four major trading currencies, the Japanese yen, the U.S. dollar, the British pound, and the European Union’s euro, are all free to float against each other. What is this an example of?

A) pegged exchange rate regime
B) floating exchange rate regime
C) managed-float system
D) fixed exchange rate regime

22) Prior to the introduction of the euro, many EU countries participated in a ________ system, in which the values of a set of currencies are fixed against each other at some mutually agreed upon exchange rate.

A) floating exchange rate
B) currency board
C) fixed exchange rate
D) pegged exchange rate

23) International Monetary Fund members were _____ in the Jamaica agreement.

A) not permitted to sell their own gold reserves
B) permitted to sell their own gold reserves, but only at the price set by IMF
C) required to hold their gold reserves in escrow
D) permitted to sell their own gold reserves at the market price

24) The value of U.S. dollar increased between 1980 and 1985

A) despite running a growing trade deficit.
B) despite exporting substantially more than it imported.
C) because of a growing trade surplus.
D) because of strong fiscally conservative policies of the U.S. government.

25) Which of the following is a factor that initiated the collapse of the fixed exchange rate system?

A) worsening of Great Britain’s balance of trade
B) recession in third world countries
C) price inflation in Europe
D) worsening of U.S. foreign trade position

26) Which of the following changes were made to the International Monetary Fund’s Articles of Agreement in the Jamaica agreement?

A) IMF members were permitted to use the U.S. dollar as the convertible currency.
B) Gold was declared as a formal reserve asset for IMF members.
C) IMF members were permitted to sell their gold reserves at the market price.
D) IMF members were restricted from entering the foreign exchange market.

27) _____ exchange rates were declared as acceptable in the Jamaica agreement of the International Monetary Fund.

A) Pegged
B) Fixed
C) Floating
D) Gold standard

28) Which of the following is the reason the current foreign exchange system is sometimes thought of as a managed-float system?

A) The exchange rates of a currency are determined by market forces.
B) Governments intervene frequently in the foreign exchange market.
C) Major currencies are allowed to freely float against each other.
D) Countries use a reference currency to estimate the value of their currencies.

29) The rise in the value of the dollar between 1985 and 1988

A) gave U.S. goods a competitive advantage over others.
B) made imports relatively cheap.
C) gave U.S. goods a comparative advantage over others.
D) made imports expensive.

30) The international monetary system refers to the institutional arrangements that govern

A) microeconomic parameters.
B) exchange rates.
C) gross domestic produce.
D) foreign direct investment.

31) When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a _____ regime.

A) currency board exchange
B) pegged exchange rate
C) fixed exchange rate
D) floating exchange rate

32) Pegged exchange rate means that the value of a currency is

A) fixed against other currencies based on an agreement.
B) not determined by free market forces.
C) fixed relative to a reference currency.
D) independent of the valuations of other currencies.

33) A country wanted to hold its currency against an important reference currency without a formal pegged rate. This is known as

A) a monetary run.
B) a currency flip.
C) an unpegged rate.
D) a dirty float.

34) After World War II, the world’s major industrial nations arranged their currencies against each other at a mutually agreed on exchange rate. This is an example of a _____ system.

A) fixed exchange rate
B) dirty float exchange
C) pegged exchange rate
D) floating exchange rate

35) Which of the following statements is true of the gold standard?

A) The gold standard was adopted only by the smaller nations of the world.
B) Currencies were pegged to gold under the gold standard.
C) Convertibility to gold was not guaranteed under the gold standard.
D) The gold standard was not helpful in maintaining balance-of-trade equilibrium.

36) Gold par value refers to the

A) ratio of the price of gold in a currency to the price of gold in U.S. dollars.
B) amount of a currency needed to purchase one ounce of gold.
C) ratio of price of gold in a currency to the price of gold in euros.
D) amount of gold required to equal the reference currency that a nation is using.

37) A country is said to be in balance-of-trade equilibrium when

A) it has the potential to produce all goods that its residents want without engaging in foreign trade.
B) the income its residents earn from exports is equal to the money its residents pay for imports.
C) the country imports all goods that its residents want by engaging in foreign trade.
D) it has the potential to balance the production and procurement of the basic amenities that it needs.

38) A country’s trade balance is in surplus when

A) its exports are more than its imports.
B) it experiences negative inflation.
C) its exports equal the imports.
D) the prices of commodities are low in the country.

39) Which of the following is an advantage of using the gold standard?

A) The standard makes sure that goods are not priced out from markets due to inflation.
B) The standard does not require a commitment from a nation to maintain its currency’s value.
C) The standard effectively prevents the devaluation of currencies across the world.
D) The standard contains a powerful mechanism for achieving balance-of-trade equilibrium by all countries.

40) International Development Association loans

A) receive direct funding from the World Bank.
B) must be countersigned by a partnering, wealthy country such as the United States, Japan, or Germany.
C) are funded through subscriptions from wealthy members.
D) receive direct funding from the International Monetary Fund.

41) The agreement reached at Bretton Woods established the

A) International Monetary Fund.
B) World Economic Forum.
C) United Nations.
D) International Atomic Energy Agency.

42) Which of the following statements is true of the Bretton Woods agreement?

A) All countries agreed to fix the value of their currency in terms of gold under the agreement.
B) The system accepted the British pound as the official reference currency against gold.
C) The agreement established a floating system of monetary exchange.
D) Two multinational institutions, the World Economic Forum and WTO, were formed under the agreement.

43) The World Bank was established at the at Bretton Woods conference to

A) establish an international monetary system.
B) promote general economic development.
C) establish the gold standard across the world.
D) fund the initiatives of the United Nations.

44) Identify the currency that was directly linked to gold under the Bretton Woods system.

A) pound
B) yen
C) euro
D) dollar

45) What will happen if a country increases its money supply rapidly under a fixed exchange rate regime?

A) Imports will become less attractive in that country.
B) The country will face negative inflation.
C) The trade deficit would widen in that country.
D) The country’s products will become more attractive in world markets.

46) Which of the following is a disadvantage of using a rigid policy of fixed exchange rates?

A) It is likely to create high unemployment in some cases.
B) It will lead to inflationary economies across the world.
C) It is likely to bring about trade wars between nations.
D) It will instigate competitive devaluations and intense competition.

47) What was the World Bank’s initial mission?

A) implementing a rigid fixed exchange rate regime
B) promoting the gold standard across the world
C) providing low-interest loans to help finance the building of Europe’s economy
D) implementing a flexible fixed exchange rate regime

48) Which of the following arguments is in favor of floating exchange rates?

A) A country’s ability to expand or contract its money supply should be limited by the need to maintain exchange rate parity.
B) Maintaining balance of trade equilibrium is not in the best interest of a country.
C) Countries can isolate themselves from uncertainties when they trade using a mutually agreed on exchange rate.
D) Governments can restore monetary control by removing the obligation to maintain exchange rate parity.

49) Advocates of a _____ argue that removal of the obligation to maintain exchange rate parity would restore monetary control to a government.

A) fixed exchange rate regime
B) dirty-float system
C) floating exchange rate regime
D) pegged exchange rate regime

50) The monetary autonomy argument is supported by the advocates of

A) a dirty-float system.
B) fixed exchange rates.
C) pegged exchange rates.
D) floating exchange rates.

51) Supporters of floating exchange rates

A) argue that floating rates help adjust trade imbalances.
B) argue that floating rates lead to a more stable world monetary system.
C) claim that trade deficits are determined by the balance between savings and investment in a country.
D) claim that trade deficits are not determined by the external value of currency.

52) The monetary autonomy argument holds that

A) each country should be allowed to choose its own inflation rate.
B) inflation is beneficial to a country’s economy and growth.
C) inflation is detrimental to a country’s economy and growth.
D) countries should restrict inflation based on the global standards.

53) Which of the following arguments is against the use of fixed exchange rates?

A) Monetary discipline is the most important determinant of a strong economy.
B) Each country has the freedom to choose its own inflation rate.
C) Market speculation can cause fluctuations in exchange rates.
D) Governments are likely to expand the monetary supply far too rapidly due to political pressures.

54) Which of the following arguments strengthen the idea of floating exchange rates?

A) External agencies should not interfere in the monetary policies of a country.
B) Trade deficits can be corrected through changes in exchange rates.
C) Changes in exchange rates will not impact the trade balance in a country.
D) Governments should act in ways to minimize the uncertainty in monetary markets.

55) Which of the following is an exchange rate policy where the exchange rate is determined completely by market forces?

A) managed float
B) fixed peg
C) free float
D) currency board

56) Which of the following is the exchange rate policy where the government intervenes in the exchange rate system only in a limited way?

A) managed-float
B) fixed peg
C) free-float
D) currency board

57) Under a _____ exchange rate regime, a country will attach the value of its currency to that of a major currency.

A) managed-float
B) pegged
C) free-float
D) currency board

58) Which of the following statements is true of pegged exchange rates?

A) A pegged exchange rate allows a country’s currency to be determined by market forces.
B) A pegged exchange rate weakens the monetary discipline of a country.
C) Pegged exchange rates are popular among many of the world’s smaller nations.
D) Adopting a pegged exchange rate regime increases inflationary pressures in a country.

59) A country that introduces a currency board commits itself to converting its domestic currency on demand into

A) another currency at a fixed exchange rate.
B) gold or silver at a fixed exchange rate.
C) gold or silver at a floating exchange rate.
D) another currency at a floating exchange rate.

60) Under a currency board system

A) inflation rates are maintained at a high level.
B) countries issue domestic notes at will.
C) interest rates remain constant.
D) the government lacks the ability to set interest rates.

61) Exchange rates are _____ under a pure “free float” system.

A) completely balanced
B) determined by market forces
C) wildly variable and unpredictable
D) determined by the government

62) The great virtue claimed for a _____ is that it imposes monetary discipline on a country and leads to low inflation.

A) fixed exchange rate
B) managed-float system
C) pegged exchange rate
D) floating exchange rate

63) _____ limits the ability of the government to print money and, thereby, create inflationary pressures.

A) A dirty-float system
B) A managed-float system
C) The European Monetary System
D) A currency board system

64) Currencies of countries with currency boards will become uncompetitive and overvalued if

A) local inflation rates remain higher than the inflation rate in the country to which the currency is pegged.
B) the country to which the currency is pegged experiences a trade deficit.
C) local inflation rates are lower than the inflation rate in the country to which the currency is pegged.
D) the country to which the currency is pegged experiences a trade surplus.

65) The International Monetary Fund has been criticized for exacerbating moral hazard

A) with its rescue programs.
B) by increasing the probability of debt default.
C) making loans to countries that are trying to reduce national debt by “playing the market.”
D) by refusing to bail out banks that made loans to overleveraged Asian companies during the 1990s.

66) A currency crisis occurs due to

A) the loss of confidence in a country’s banking system.
B) heavy foreign debt obligations.
C) high levels of trade deficit.
D) a speculative attack on the exchange value.

67) Moral hazard arises when people behave recklessly because

A) of the restrictions that exist in a country's monetary policy.
B) of the restrictions the IMF has imposed on them.
C) they know they will be saved if things go wrong.
D) they face financial difficulties arising out of external factors.

68) Which of the following is a common criticism against the powerful International Monetary Fund?

A) IMF lacks any real mechanism for accountability.
B) It is hesitant to help banks when they are in crisis.
C) IMF has not intervened to resolve the Asian crisis.
D) It did not try to resolve the Mexican currency crisis.

69) A _____ is a situation in which a country cannot service its foreign debt obligations.

A) currency crisis
B) banking crisis
C) foreign debt crisis
D) moral crisis

70) Loans issued by the IMF

A) are conditional loans.
B) are unconditional loans.
C) include a macroeconomic policy that calls for lower interest rates.
D) include a macroeconomic policy that calls for increases in public spending to improve infrastructure in a country.

71) The Asian economic crisis and the global financial crisis of 2008–2009 were caused by

A) high inflation rates.
B) excessive debt.
C) low inflation rates.
D) a huge trade surplus.

72) Which of the following is a common underlying cause of financial crises?

A) a narrowing current account deficit
B) excessive expansion of domestic borrowing
C) low relative price inflation rates
D) asset price deflation

73) A _____ crisis refers to a loss of confidence in the banking system that leads to a run on banks as individuals and companies withdraw their deposits.

A) currency
B) banking
C) foreign debt
D) domestic debt

74) Which of the following observations is true of the current system of the foreign exchange market?

A) Most of the currencies can be converted to gold in the current system of foreign exchange.
B) The current system is driven by fixed exchange rates.
C) Currencies float freely against others in the current system.
D) The current system is a combination of government intervention and speculative activity.

75) Which of the following will help a company hedge against currency fluctuations?

A) finding a large supplier to supply all the raw materials
B) manufacturing raw materials in-house
C) basing business in a single country
D) dispersing production to different geographic locations

76) Contracting out manufacturing allows companies to reduce economic exposure because

A) multiple suppliers attract subsidies from government.
B) it reduces the pressure on them to maintain a trade surplus.
C) it allows companies to shift suppliers from country to country.
D) quality issues are insignificant when manufacturing is contracted to others.

77) Increasingly the _____ has been acting as macroeconomic police of the world economy, insisting that countries seeking significant borrowings adopt certain macroeconomic policies.

A) Economic and Social Council (ECOSOC)
B) International Monetary Fund (IMF)
C) United Nations (UN)
D) World Bank

78) Countries that require substantial loans from the International Monetary Fund to survive will probably _____ due to IMF-mandated economic policies.

A) benefit from a sharp expansion of demand in the long term
B) endure a sharp contraction of demand in the long term
C) benefit from a sharp expansion of demand in the short term
D) endure a sharp contraction of demand in the short term

79) In the face of unpredictable movements in exchange rates, businesses should

A) pursue strategies that will reduce their economic exposure.
B) pursue strategies that will decrease their strategic flexibility.
C) pursue strategies that will reduce their foreign market exposure.
D) sell off investments in foreign subsidiaries and consolidate domestic facilities.

80) It is difficult if not impossible to get adequate insurance coverage for exchange rate changes that

A) will occur in the next few weeks.
B) might occur in the next few months.
C) might occur several years in the future.
D) might occur in the coming days.

81) One aspect of the international monetary system is the institutional arrangements that can govern or set exchange rates.

⊚ true
⊚ false

82) The gold standard called for fixed exchange rates against the U.S. dollar.

⊚ true
⊚ false

83) The fixed exchange rate system established at Bretton Woods failed due to speculative pressures on the U.S. dollar.

⊚ true
⊚ false

84) Gold was declared as the formal reserve asset in the Jamaica agreement of 1976.

⊚ true
⊚ false

85) Market forces have produced a stable dollar exchange rate under a floating exchange rate regime.

⊚ true
⊚ false

86) The agreement reached at Bretton Woods established the International Monetary Fund (IMF) and the World Bank.

⊚ true
⊚ false

87) After the agreement reached at Bretton Wood, the dollar was the only currency that could be convertible into gold.

⊚ true
⊚ false

88) Implementing a fixed exchange rate regime increases the price inflation in countries.

⊚ true
⊚ false

89) The World Bank offers low-interest loans to risky customers whose credit rating is often poor.

⊚ true
⊚ false

90) Fixed exchange rates lead to speculation and uncertainty in the value of currencies.

⊚ true
⊚ false

91) Adopting a pegged exchange rate regime increases the inflationary pressures in a country.

⊚ true
⊚ false

92) A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.

⊚ true
⊚ false

93) Interest rates adjust automatically under a strict currency board system.

⊚ true
⊚ false

94) The International Monetary Fund’s original function was to provide a pool of money from which members could borrow in the short term.

⊚ true
⊚ false

95) The IMF does not expect governments to meet any obligations except to pay back the money it borrows.

⊚ true
⊚ false

96) In 2002, the IMF stepped in to help stabilize the value of the Brazilian currency on foreign exchange markets by lending it foreign currency. This constitutes a foreign debt crisis.

⊚ true
⊚ false

97) The definition of moral hazard is when people behave recklessly without regard for the consequences.

⊚ true
⊚ false

98) The current system of foreign exchange is a mixed system of government intervention and speculative activity.

⊚ true
⊚ false

99) Firms cannot utilize the forward exchange market when they are faced with uncertainty about the future value of currencies.

⊚ true
⊚ false

100) An effective business strategy to reduce economic exposure is to contract out high-value-added manufacturing.

⊚ true
⊚ false