iftestbankchapter7,8

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Chapter 18: The International Monetary System, 1870 – 1973

Multiple Choice Questions

1. Under the price-specie-flow mechanism, what happens when Germany’s current

account surplus is greater than its non-reserve capital account deficits?

A. German loans will finance all foreign net imports.B. here will !e an automatic drop in German domestic prices and a rise in foreign

prices.

". Gold reserves will flow into Germany.#. Gold reserves will flow out of Germany.

$. %one of the a!ove.

Answer& "

'. A country see(ing to maintain internal !alance would !e most concerned with

A. attaining low levels of unemployment.

B. ensuring that savings is weighted more toward domestic investment than the

current account.". large fluctuations in output.

#. an ade)uate stoc( of gold reserves.$. %one of the a!ove.

Answer& "

*. By internal !alance, most economists mean

A. only full employment.

B. only price sta!ility.

". full employment and price sta!ility.#. full employment and moderate increase in prices.

$. %one of the a!ove.Answer& "

+. By eternal !alance, most economists mean

A. avoiding ecessive im!alances in international payments.B. a !alance !etween eports and imports.

". a !alance !etween trade account and service account.

#. a fied echange rate.

$. %one of the a!ove.Answer& A

. hich one of the following statements is true?A. /nflation can occur even under conditions of full employment only if the central !an(

continues to in0ect money into the economy.

B. /nflation can occur even under conditions of full employment only if the central !an(continues to withdraw money from the economy.

". #eflation can occur even under conditions of full employment only if the central !an(




#. /nflation cannot occur even under conditions of full employment if the central !an(



. A sudden increase in the U.2. price levelA. ma(es those with dollar de!ts worse off.

B. ma(es those with dollar de!ts !etter off.

". does not affect those with dollar de!ts.#. ma(es those with #3 de!t !etter off.


Answer& B

4. A sudden increase in the U.2. price level

A. ma(es creditors in dollars !etter off.

B. ma(es creditors in dollars worse off.

". does not affect creditors in dollars.#. ma(es creditors in #3 worse off.

$. %one of the a!ove.Answer& B

15. A sudden decrease in the U.2. price levelA. ma(es those with dollar de!ts worse

B. ma(es those with dollar de!ts !etter

". does not affect those with dollar de!

#. ma(es those with #3 worse off.$. %one of the a!ove.

Answer& A

11. A sudden decrease in the U.2. price level

A. ma(es creditors in dollars !etter off

B. ma(es creditors in dollars worse off ". do not affect creditors in dollars.

#. ma(es creditors in #3 !etter off.


Answer& A

16. A current account surplus

A. poses a pro!lem if domestic savings are !eing invested more profita!ly a!road thanthey would !e at home.

B. may pose no pro!lem if domestic savings are !eing invested more profita!ly a!road

than they would !e at home.". may pose no pro!lem if domestic savings are !eing invested less profita!ly a!road

than they would !e at home.

#. there is no relation !etween current account surplus and !etween savings and

investment.




Answer& B

1. A current account deficit

A. poses a pro!lem if domestic savings are !eing invested more profita!ly a!road than

they would !e at home.B. may pose a pro!lem if domestic savings are !eing invested more profita!ly a!road

than they would !e at home.

". may pose no pro!lem if domestic savings are !eing invested less profita!ly a!roadthan they would !e at home.

#. here is no relation !etween the current account surplus and !etween savings and

investment.


1. hich one of the following statements is true?

A. "ountries with strong investment opportunities should invest little at home andchannel their savings into more productive investment activity a!road.

B. "ountries with wea( investment opportunities should invest little at home and channeltheir savings into more productive investment activity a!road.

". "ountries with wea( investment opportunities should invest more at home.

#. "ountries with wea( investment opportunities should invest little a!road.$. %one of the a!ove.

Answer& B

14. "ountries withA. strong investment opportunities should invest little at home and channel their

savings into more productive investment activity a!road.

B. strong investment opportunities should invest more at home and less a!road.". wea( investment opportunities should invest more at home.

#. wea( investment opportunities should invest little a!road.


75. "ountries where investment is relatively

A. productive should !e net eporters of currently availa!le output.B. unproductive should !e net importers of currently availa!le output.

". unproductive should !e net eporters of currently availa!le output.

#. unproductive should !e net eporters of future availa!le output.$. %one of the a!ove.

Answer& "

71. "ountries where investment is relatively

A. productive should have current account deficits.

B. productive should have current account surpluses.

". unproductive should have current account surpluses.



#. productive should !alanced current account surpluses.


Answer& B

77. hich one of the following statements is true?

A. "ountries where investment is relatively productive should !e net importers of currentoutput.

B. "ountries where investment is relatively unproductive should !e net importers of

current output.". "ountries where investment is relatively productive should !e net eporters of current

output.

#. "ountries where investment is relatively productive should not eport or import

current output.$. %one of the a!ove.

Answer& A

7'. "ountries where investment isA. relatively unproductive should have current account deficits.

B. relatively productive should have current account surpluses.". relatively productive should have current account deficits.

#. relatively productive should have !alanced current accounts.


7*. Governments prefer to avoid ecessive current account surpluses !ecause

A. the returns to domestic savings may !e easier to ta than those on assets a!road.B. an addition to the home capital stoc( may reduce domestic unemployment and

therefore lead to higher national income.

". domestic investment !y one firm may have !eneficial technological spillover effectson other domestic producers that the investing firm does not capture.

#. All of the a!ove.

$. %one of the a!ove.Answer& #

7+. Under the gold standard era of 15 8 141*,

A. o(yo was the center of the international monetary system.B. 9aris was the center of the international monetary system.

". Berlin the center of the international monetary system.

#. %ew :or( was the center of the international monetary system.$. ;ondon was the center of the international monetary system.

Answer& $

76. Under the gold standard era of 15 8 141*,

A. central !an(s tried to have sharp fluctuations in the !alance of payments.

B. central !an(s tried to avoid sharp fluctuations in the current account of the !alance of

payments.



". central !an(s tried to avoid sharp fluctuations in the trade account of the !alance of

payments.

#. central !an(s tried to avoid sharp fluctuations in the capital account of the !alance of payments.

$. central !an(s tried to avoid sharp fluctuations in the !alance of payments.

Answer& $

*7. A converti!le currency is a currency that may !e freely echanged for

A. gold or silver.B. only silver.

". only copper.

#. national currency.

$. foreign currencies.Answer& $

**. he dollar of the United 2tates !ecame the postwar world’s (ey currency !ecause

A. of the early converti!ility of the U.2. dollar in 14*+.B. of the special position of the dollar under the Bretton oods system.

". of the strength of the American economy relative to the devastated economies of$urope and <apan.

#. "entral !an(s naturally found it advantageous to hold their international reserves in

the form of interest-!earing dollar assets..$. All of the a!ove.

Answer& $

*+. he 3arshall 9lan was a program of A. dollar grants from the United 2tates to $uropean countries initiated in 14*.

B. dollar grants from the United 2tates to $uropean countries initiated in 14*+.

". British pound grants from the $uropean countries to the United 2tates initiated in14*.

#. British pound grants from the $uropean countries to the United 2tates initiated in

14*.$. dollar grants from the United 2tates to Germany only initiated after orld

ar //.

Answer& A

*6. he current account surplus is

A. an increasing function of disposa!le income and an increasing function of the real

echange rate.B. a decreasing function of disposa!le income and a decreasing function of the real

echange rate.

". a decreasing function of disposa!le income and an increasing function of the realechange rate.

#. only a decreasing function of disposa!le income.

$. only an increasing function of the real echange rate.

Answer& "



*. Under fied echange rates,

A. monetary policy is not an effective policy.B. fiscal policy is not an effective policy.

". monetary policy and fiscal policy are not effective.

#. !oth monetary and fiscal policies are effective.$. %one of the a!ove.

Answer& A

*4. he == schedule shows how much

A. fiscal epansion is needed to hold the current account surplus at = as the currency is

devalued !y a given amount.

B. monetary epansion is needed to hold the current account surplus at = as the currencyis devalued !y a given amount.

". fiscal epansion is needed to hold the current account surplus at = as the currency is

evaluated !y a given amount.

#. fiscal and monetary epansions are needed to hold the current account surplus at = asthe currency is devalued !y a given amount.


+5. Advocates of floating rate suggested it is favora!le for economies for the followingreasons $="$9 that

A. it discourages attac( from foreign echange speculators !ecause of the fact that

echange rate ad0ustment is immediate.

B. it helps sta!ili>e the shoc( effect on unemployment in case of economic changes suchas fall in eport demand.

". it automatically matches the domestic inflation with ongoing foreign inflation.

#. it gives every country the opportunity to guide its own monetary conditions at home.$. it !rings the ; echange rate to the level predicted !y 999 without government

policy decisions.

Answer& "

+1. Governments would !e a!le to use monetary policy to reach

A. internal !alance.

B. eternal !alance.". internal and eternal !alance.

#. internal !ut not eternal !alance.

$. eternal !ut not internal !alance.Answer& "

+7. Advocates of flei!le echange rates claim that under flei!le echange rates,A. he United 2tates would now !e a!le to set world monetary conditions all !y itself.

B. Germany would no longer !e a!le to set world monetary conditions all !y itself.

". he United @ingdom would no longer !e a!le to set world monetary conditions all !y

itself.



#. he United 2tates would no longer !e a!le to set world monetary conditions all !y

itself.

$. Germany would now !e a!le set world monetary conditions all !y itself.Answer& #

+'. Advocates of flei!le echange rates claim that under flei!le echange rates,A. he United 2tates would no longer have the same opportunity as other countries to

influence its echange rate against foreign currencies.

B. he United 2tates would have the same opportunity as other countries to influence itsechange rate against foreign currencies.

". he United @ingdom would not have the same opportunity as other countries to

influence its echange rate against foreign currencies.

#. Germany would not have the same opportunity as other countries to influence itsechange rate against foreign currencies.


Answer B

+*. Advocates of flei!le echange rates claim that under flei!le echange rates, if the

central !an( faced unemploymentA. and thus wished to decrease its money supply, there would no longer !e any legal

!arrier to the currency depreciation this would cause.

B. and thus wished to epand its money supply, there would no longer !e any legal !arrier to the currency depreciation this would cause.

". and wished to epand its money supply, there would no longer !e any legal !arrier to

the currency appreciation this would cause.

#. and wished to decrease its money supply, there now would !e legal !arriers to thecurrency depreciation this would cause.


Answer B

++. Advocates of flei!le echange rates claim that under flei!le echange rates, a

currencyA. depreciation caused !y increasing the money supply would reduce unemployment !y

increasing world demand for them.

B. appreciation caused !y increasing the money supply would reduce unemployment !y

increasing world demand for them.". appreciation caused !y decreasing the money supply would reduce unemployment !y

increasing world demand for them.

#. appreciation caused !y increasing the money supply would increase unemployment !y increasing world demand for them.

$. appreciation caused !y increasing the money supply would increase unemployment

!y decreasing world demand for them.Answer A

+6. hen all changes in the world are due to



A. fiscal policy, purchasing power parity holds true in the long run.

B. monetary policy, purchasing power parity does not hold true in the long run.

". monetary policy, purchasing power parity holds true in the long run.#. monetary policy, purchasing power parity holds true even in the short run.


Answer& "

+. Under purchasing power parity,

A. echange rates immediately move to offset eactly national differences in inflation.. B. echange rates eventually move to offset eactly national differences in inflation..

". echange rates eventually move to offset to some etent national differences in

inflation..

#. echange rates eventually move to offset eactly national differences inunemployment.


Answer& A

+. Under purchasing power parity 999, if U.2. monetary growth leads to a long-run

dou!ling of the U.2. price level, while Germany’s price level remains constant, 999 predicts that the

A. long-run #3 price of the dollar will !e dou!led.

B. long-run #3 price of the dollar will !e halved.". long-run #3 price of the dollar will remain the same.

#. short-run #3 price of the dollar will !e halved.


Answer& B

+4. "omparing fied to flei!le echange-rate regimes, the response of an economy to a

temporary fall in foreign demand for its eports isA. output actually falls less under fied rate than under floating rate.

B. output actually falls more under fied rate than under floating rate.

". output actually remains the same under fied rate than under floating rate.#. /t is impossi!le to tell.


Answer& B

ssay !uestion

1+. CA monetary policy is not a policy tool under fied echange rates.D #iscuss.Answer& rue. Under fied echange rates, domestic asset transactions !y the central

!an( can !e used to alter the level of foreign reserves !ut not to affect the state of

employment and output.

17. hat is a converti!le currency?

Answer& A converti!le currency is a currency that may !e freely echanged for foreign

currencies.



Chapter "0: #ptimum Currency $reas an% the uropean &perience

Multiple Choice Questions

1. hat are the !iggest advantages the U.2. has a!ove the $U in terms of !eing an

Eptimum "urrency Area?

A. ;ow mo!ility of la!or, higher la!or productivity, lower level of intra-regional tradeB. Figh unioni>ation of U.2. ;a!or force

". / don’t (now.

#. Figh mo!ility of la!or force, more transfer payments !etween regions$. Figher uniformity of population’s taste in consumption

Answer& #

*. he $uropean $conomic and 3onetary UnionA. set up a single currency and sole !an( for $uropean economic monetary policy.

B. eliminated all !arriers to trade such as ta differentials !etween !orders.

". produced a single government for handling $uropean affairs.

#. created the "ommon Agricultural 9act .$. %one of the a!ove.

Answer& A

+. he !irth of the $uro

A. resulted in fied echange rates !etween all $3U mem!er countries.B. resulted in flei!le echange rates !etween all $3U mem!er countries.

". resulted in crawling-peg echange rates !etween all $3U mem!er countries.

#. resulted in non-currency !oard echange rates !etween all $3U mem!er countries.


. he $U countries were prompted to see( closer coordination of monetary policies andgreater echange rate sta!ility in the late 1465s in order

A. to enhance $urope’s role in the world monetary system.

B. to turn the $uropean Union into a truly unified mar(et.". !oth to enhance $urope’s role in the world monetary system and to turn the $uropean

Union into a truly unified mar(et.

#. %one of the a!ove.

$. !oth to turn the $uropean Union into a truly unified mar(et and to counter the rise of<apan in international financial mar(ets.

Answer& "

4. hich of the following statements is true?

A. he 14+ reaty of ome founded the $U and created a custom union.

B. he 14+ reaty of ome founded the $U.". he 14+ reaty of ome founded the euro.

#. he 14+ reaty of ome founded the $uropean "entral Ban(.

$. he 14+ reaty of ome founded the 2ta!ility and Growth 9act.(nown as 2G9.

Answer& A



11. he $uropean 3onetary 2ystem was founded on the initiative of

A. rance and Germany.B. rance, Germany, and Belgium.

". rance, Germany, Belgium, and ;uem!urg.

#. rance, Germany, Belgium, ;uem!urg, and the %etherlands.$. rance, Germany, Belgium, ;uem!urg, the %etherlands, and Austria.

Answer& A

1+. "entral !an( independence appears to !e associated with

A. high inflation.

B. low unemployment.

". low inflation.#. high unemployment.

$. high government deficit.

Answer& "

1. Under the $32, Germany set the system’s

A. monetary policy while the other $uropean countries pegged their currencies to the#3.

B. fiscal policy while the other $uropean countries pegged their currencies to the #3.

". monetary policy while the other $uropean countries (ept their currencies fluctuatingrelative to the #3.

#. fiscal policy while the other $uropean countries pegged their currencies to the #3.


Answer& A

75. he most important feature of the 2ingle $uropean Act of 146, which amended the

founding reaty of ome, was dropping the re)uirement of A. unanimous consent for measures related to mar(et completion and ma(ing it a

decision that only Germany and rance agreed a!out.

B. unanimous consent for measures related to mar(et completion.". ma0ority consent for measures related to mar(et completion and ma(ing it a decision

that only Germany and rance agreed a!out.

#. unanimous consent for measures related to agricultural policies only.

$. unanimous consent for measures related only to fiscal policies.Answer& B

71. o 0oin the $3U, a country should have no more than aA. 1.+ percent inflation rate a!ove the average of the three $U mem!er states with the

highest inflation.

B. ' percent inflation rate a!ove the average of the three $U mem!er states with thelowest inflation.

". * percent inflation rate a!ove the average of the three $U mem!er states with the

lowest inflation.



#. 1.+ percent inflation rate a!ove the average of the three $U mem!er states with the

lowest inflation.

$. %one of the a!ove.Answer& #

77. o 0oin the $3U, a country must haveA. a pu!lic-sector deficit no higher than ' percent of its G#9 in general.

B. a pu!lic-sector deficit no higher than 7 percent of its G#9 in general.

". a pu!lic-sector deficit no higher than 1 percent of its G#9 in general.#. a >ero pu!lic-sector deficit.


Answer& A

7'. o 0oin the $3U, a country must have a pu!lic de!t !elow or approaching a

reference

level of

A. +5 percent of its G#9. B. 15 percent of its G#9.

". 65 percent of its G#9. #. 155 percent of its G#9.

$. + percent of its G#9.

Answer& "

7*. A ma0or economic

A. !enefit of fied echange rates it that they simplify economic calculations and

provide a more predicta!le !asis for decisions that involve international transactions thando floating rates..

B. !enefit of floating echange rates it that they simplify economic calculations and

provide a more predicta!le !asis for decisions that involve international transactions thando fied rates.

". cost of fied echange rates it that they simplify economic calculations and provide a

more predicta!le !asis for decisions that involve international transactions than docurrency !oard rates.

#. !enefit of flei!le echange rates it that they simplify economic calculations and

provide a more predicta!le !asis for decisions that involve international transactions than

do crawling peg rates.$. %one of the a!ove.

Answer& A

76. he monetary efficiency

A. loss from pegging the %orwegian (rone to the euro for eample will !e higher if

factors of production can migrate freely !etween %orway and the euro area.B. gain from pegging the %orwegian (rone to the euro for eample will !e lower if

factors of production can migrate freely !etween %orway and the euro area.

". gain from pegging the %orwegian (rone to the euro for eample will !e higher if

factors of production cannot migrate freely !etween %orway and the euro area.



#. gain from pegging the %orwegian (rone to the euro for eample will !e higher if

factors of production can migrate freely !etween %orway and the euro area.

$. Fard to tell.Answer& #

7. hich one of the following statements is true?A. he less etensive are cross-!order trade and factor movements, the greater is the

gain from a fied cross-!order echange rate.

B. he more etensive are cross-!order trade and factor movements, the greater is theloss from a fied cross-!order echange rate.

". he more etensive are cross-!order trade and factor movements, the greater is the

gain from a fied cross-!order echange rate.

#. he more etensive are cross-!order trade, the greater is the loss from a fied cross- !order echange rate.

$. he more etensive are factor movements, the greater is the loss from a fied cross-

!order echange rate.

Answer& "

'5. A country that 0oins an echange rate areaA. gives up its a!ility to use the echange rate for the purpose of sta!ili>ing output and

employment.

B. does not give up its a!ility to use the echange rate and monetary policy for the purpose of sta!ili>ing output and employment.

". gives up its a!ility to use the echange rate and monetary policy for the purpose of

sta!ili>ing output and employment.

#. gives up its a!ility to use only monetary policy for the purpose of sta!ili>ing outputand employment.

$. gives up its a!ility to use only monetary policy for the purpose of sta!ili>ing output

and employment.Answer& "

'1. hen the economy is distur!ed !y a change in the output mar(et,A. a fied echange rate has an advantage over a flei!le rate.

B. a floating echange rate has an advantage over a fied rate.

". a crawling peg echange rate has an advantage over a fied rate.

#. a floating echange rate has the same effect as a fied rate.$. %one of the a!ove.

Answer& B

'7. hich one of the following statements is true?

A. A fied echange rate automatically cushions the economy’s output and employment

!y allowing an immediate change in the relative price of domestic and foreign goods.B. A flei!le echange rate does not automatically cushion the economy’s output and

employment !y allowing an immediate change in the relative price of domestic and

foreign goods.



". A flei!le echange rate automatically cushions the economy’s output and

employment !y allowing an immediate change in the relative price of domestic and

foreign goods.#. A flei!le echange rate automatically cushions the economy’s output and

employment !y allowing an immediate change in the a!solute price of domestic and

foreign goods$. %one of the a!ove.

Answer& "

''. hen the echange rate is

A. flei!le, purposeful sta!ili>ation is more difficult !ecause monetary policy has no

power at all to affect domestic output and employment.

B. fied, purposeful sta!ili>ation is less difficult !ecause monetary policy has no powerat all to affect domestic output and employment.

". fied, purposeful sta!ili>ation is more difficult !ecause monetary policy has no power

at all to affect domestic output and employment.

#. a crawling peg, rather than fied, purposeful sta!ili>ation is more difficult !ecausemonetary policy has no power at all to affect domestic output and employment.

$. fied rather than crawling peg, purposeful sta!ili>ation is more difficult !ecause fiscal policy has no power at all to affect domestic output and employment.

Answer& "

'. /f %orway’s la!or and capital mar(ets are highly correlated with those of its euro

>one neigh!ors,

A. unemployed wor(ers can easily move a!road to find wor(, and domestic capital can

!e shifted to more profita!le uses in other countries.B. unemployed wor(ers cannot easily move a!road to find wor(, and domestic capital

cannot !e shifted to more profita!le uses in other countries.

". while unemployed wor(ers can easily move a!road to find wor(, domestic capitalcannot !e shifted to more profita!le uses in other countries.

#. while capital can easily move a!road to !e put to a more profita!le use, unemployed

wor(ers cannot easily move a!road to find wor(.$. %one of the a!ove.

Answer& A

'4. he a!ility of factors to migrate a!roadA. reduces the severity of unemployment and the fall in the rate of return availa!le to

investors.

B. increases the severity of unemployment and the fall in the rate of return availa!le toinvestors.

". reduces the severity of unemployment !ut increases the fall in the rate of return

availa!le to investors.#. cannot change the severity of unemployment and the constant rate of return availa!le

to investors.


Answer& A



*1. he intersection of GG and ;; determines

A. the optimal level of integration desired !y %orway.B. the maimum integration level desired !y %orway.

". the minimum level of integration that will cause %orway to 0oin the fied echange

rate regime.#. the maimum level of integration that will cause %orway to 0oin the fied echange

rare regime.


*7. he $uropean "entral Ban( has its head)uarter in

A. ;ondon.B. Berlin.

". ran(furt.

#. 9aris.

$. Brussels.Answer& "

*'. he level of fiscal federalism in the $uropean Union is

A. too !ig to cushion mem!er countries from adverse economic events.

B. too small to cushion mem!er countries from adverse economic events.". appropriate to cushion mem!er countries from adverse economic events.

#. too !ig relative to the one in the U.2.

$. similar in its level to that of the U.2.

Answer& B

ssay !uestion

1'. #iscuss the !enefits and costs of 0oining a fied-echange area.

17. Che costs and !enefits for a country from 0oining a fied-echange rate area such as

the $32 depend on how well-integrated its economy is with those of its potential

partners.D #iscuss.

Answer& /n general, true. his is the theory of optimum currency area. 3undell wasawarded the %o!el 9ri>e for developing the theory.

iftestbankchapter7,8

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