21) Which of the following led to the eventual demise of the fixed currency exchange rate
regime worked out at Bretton Woods?
A) widely divergent national monetary and fiscal policies among member nations
B) differential rates of inflation across member nations.
C) several unexpected economic shocks to member nations
D) all of the above
Answer: D
Topic: Exchange Rate Regimes
Skill: Conceptual
22) The IMFs exchange rate regime classification identifies ________ as the most rigidly fixed,
and ________ as the least fixed.
A) exchange arrangements with no separate legal tender; independent floating
B) crawling pegs; managed float
C) currency board arrangements; independent floating
D) pegged exchange rates within horizontal bands; exchange rates within crawling pegs
Answer: A
Topic: Exchange Rate Regimes
Skill: Recognition
23) Which of the following correctly identifies exchange rate regimes from less fixed to more
fixed?
A) independent floating, currency board arrangement, crawling pegs
B) independent floating, currency board arrangement, managed float
C) independent floating, crawling pegs, exchange arrangements with no separate legal
tender
D) exchange arrangements with no separate legal tender, currency board arrangement,
crawling pegs Answer: C
Topic: Exchange Rate Regimes
Skill: Conceptual
24) As of January 2002, the Independent Floating regime of exchange rate classifications was
used by over 75% of the 186 countries identified by the IMF. Answer: FALSE
Topic: Exchange Rate Regimes
Skill: Recognition
25) A small economy country whose GDP is heavily dependent on trade with the United States
could use a (an) ________ exchange rate regime to minimize the risk to their economy that could arise due to unfavorable changes in the exchange rate. A) pegged exchange rate with the United States
B) pegged exchange rate with the Euro
C) independent floating
D) managed float
Answer: A
Topic: Exchange Rate Regimes
Skill: Conceptual
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26) The United States currently uses a ________ exchange rate regime.
A) crawling peg
B) pegged
C) floating
D) fixed
Answer: C
Topic: Exchange Rate Regimes
Skill: Recognition
27) Based on the premise that, other things equal, countries would prefer a fixed exchange rate:
Variable rates provide stability in international prices for the conduct of trade. Answer: FALSE
Topic: Exchange Rate Regimes
Skill: Conceptual
28) Based on the premise that, other things equal, countries would prefer a fixed exchange rate,
which of the following statements is NOT true?
A) Fixed rates provide stability in international prices for the conduct of trade.
B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of
international reserves for use in the occasional defense of the fixed rate.
C) Fixed rates are inherently inflationary in that they require the country to follow loose
monetary and fiscal policies.
D) Stable prices aid in the growth of international trade and lessen exchange rate risks for
businesses. Answer: C
Topic: Exchange Rate Regimes
Skill: Recognition
29) Which of the following is not an attribute of the \
A) monetary independence
B) full financial integration
C) exchange rate stability
D) All are attributes of an ideal currency.
Answer: D
Topic: Exchange Rate Regimes
Skill: Conceptual
30) If exchange rates were fixed, investors and traders would be relatively certain about the
current and near future exchange value of each currency. Answer: TRUE
Topic: Exchange Rate Regimes
Skill: Conceptual
6
31) The authors discuss the concept of the \
simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve?
A) monetary independence and exchange rate stability
B) exchange rate stability and full financial integration
C) full financial integration and monetary independence
D) A country cannot attain any of the exchange rate goals with a pure float exchange rate
regime. Answer: C
Topic: Currency Regimes
Skill: Conceptual
32) The attempt by many countries to stimulate their domestic economies and to gain access to
global financial markets, is causing more and more countries to choose a ________ or ________ exchange rate regime. A) floating; monetary union
B) monetary union; full capital controls
C) full capital controls; floating
D) pegged; fixed
Answer: A
Topic: Currency Regimes
Skill: Recognition
33) Beginning in 1991 Argentina conducted its monetary policy through a currency board. In
January 2002, Argentina abandoned the currency board and allowed its currency to float against other currencies. The country took this step because
A) the Argentine Peso had grown too strong against major trading powers thus the
currency board policies were hurting the domestic economy.
B) the United States required the action as a prerequisite to finalizing a free trade zone
with all of North, South, and Central America.
C) the Argentine government lost the ability to maintain the pegged relationship as in fact
investors and traders perceived a lack of equality between the Argentine Peso and the U.S. dollar.
D) all of the above.
Answer: C
Topic: Currency Regimes
Skill: Recognition
34) In January 2002, the Argentine Peso was officially valued at a rate of Peso1.40/USD. More
recently the exchange rate is Peso 3.10/USD, thus, the Argentine Peso ________ against the U.S. dollar.
A) strengthened
B) weakened
C) remained neutral
D) all of the above
Answer: B
Topic: Currency Regimes
Skill: Analytical
7
35) On September 9, 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre,
with the U.S. dollar. This practice is known as ________. A) bi -currencyism B) sucrerization
C) a Yankee bailout
D) dollarization
Answer: D
Topic: Currency Regimes
Skill: Conceptual
36) You have been hired as a consultant to the central bank for a country that has for many years
suffered from repeated currency crises and depends heavily on the U.S. financial and
product markets. Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the United States? A) dollarization
B) an exchange rate pegged to the U.S. dollar
C) an exchange rate with a fixed price per ounce of gold
D) an internationally floating exchange rate
Answer: A
Topic: Currency Regimes
Skill: Conceptual
37) A bank holiday
A) occurs every day after 3:00 p.m.
B) is a term used when a country's central government freezes (temporarily) all deposits
in commercial banks.
C) is observed in Europe every fourth Friday.
D) occurs the last three working days of the year to prepare financial statements for tax
purposes. Answer: B
Topic: Bank Holiday
Skill: Recognition
38) Which of the following is NOT an argument against dollarization?
A) The dollarized country's central bank can no longer act as a lender of last resort.
B) The dollarized country can no longer profit from seignorage (the ability to profit from
the creation of money within its economy).
C) The dollarized country losses sovereignty over its own monetary policy.
D) All of the above are arguments against dollarization from the viewpoint of the affected
country. Answer: D
Topic: Currency Regimes
Skill: Conceptual
39) The Euro currency is fixed against other currencies on the international currency exchange
markets, but allows member country currencies to float against each other. Answer: FALSE
Topic: The Euro
Skill: Recognition
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