Chapter 18: The International Monetary System, 1870 1973 Multiple Choice Questions 1.

. Under the price-specie-flow mechanism, what happens when Germanys 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 e,ternal !alance, most economists mean A. avoiding e,cessive im!alances in international payments. B. a !alance !etween e,ports and imports. ". a !alance !etween trade account and service account. #. a fi,ed e,change 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( continues to in0ect money into the economy.

#. /nflation cannot occur even under conditions of full employment if the central !an( continues to in0ect money into the economy. $. %one of the a!ove. Answer& A 1. A sudden increase in the U.2. price level A. 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. $. %one of the a!ove. 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 level A. 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. $. %one of the a!ove. Answer& A 16. A current account surplus 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 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.

$. %one of the a!ove. 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!road than they would !e at home. #. here is no relation !etween the current account surplus and !etween savings and investment. $. %one of the a!ove. Answer& B 11. .hich one of the following statements is true? A. "ountries with strong investment opportunities should invest little at home and channel their savings into more productive investment activity a!road. B. "ountries with wea( investment opportunities should invest little at home and channel their 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 with A. 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. $. %one of the a!ove. Answer& B 75. "ountries where investment is relatively A. productive should !e net e,porters of currently availa!le output. B. unproductive should !e net importers of currently availa!le output. ". unproductive should !e net e,porters of currently availa!le output. #. unproductive should !e net e,porters 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. $. %one of the a!ove. Answer& B 77. .hich one of the following statements is true? A. "ountries where investment is relatively productive should !e net importers of current output. B. "ountries where investment is relatively unproductive should !e net importers of current output. ". "ountries where investment is relatively productive should !e net e,porters of current output. #. "ountries where investment is relatively productive should not e,port or import current output. $. %one of the a!ove. Answer& A 7'. "ountries where investment is A. 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. $. %one of the a!ove. Answer& " 7*. Governments prefer to avoid e,cessive 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 effects on 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 11-5 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 11-5 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 e,changed for A. gold or silver. B. only silver. ". only copper. #. national currency. $. foreign currencies. Answer& $ **. he dollar of the United 2tates !ecame the postwar worlds (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*1. 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 in 14*1. #. British pound grants from the $uropean countries to the United 2tates initiated in 14*1. $. 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 e,change rate. B. a decreasing function of disposa!le income and a decreasing function of the real e,change rate. ". a decreasing function of disposa!le income and an increasing function of the real e,change rate. #. only a decreasing function of disposa!le income. $. only an increasing function of the real e,change rate. Answer& "

*-. Under fi,ed e,change 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 e,pansion is needed to hold the current account surplus at = as the currency is devalued !y a given amount. B. monetary e,pansion is needed to hold the current account surplus at = as the currency is devalued !y a given amount. ". fiscal e,pansion is needed to hold the current account surplus at = as the currency is evaluated !y a given amount. #. fiscal and monetary e,pansions are needed to hold the current account surplus at = as the currency is devalued !y a given amount. $. %one of the a!ove. Answer& A +5. Advocates of floating rate suggested it is favora!le for economies for the following reasons $="$9 that A. it discourages attac( from foreign e,change speculators !ecause of the fact that e,change rate ad0ustment is immediate. B. it helps sta!ili>e the shoc( effect on unemployment in case of economic changes such as fall in e,port 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 ;? e,change 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. e,ternal !alance. ". internal and e,ternal !alance. #. internal !ut not e,ternal !alance. $. e,ternal !ut not internal !alance. Answer& " +7. Advocates of fle,i!le e,change rates claim that under fle,i!le e,change 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 fle,i!le e,change rates claim that under fle,i!le e,change rates, A. he United 2tates would no longer have the same opportunity as other countries to influence its e,change rate against foreign currencies. B. he United 2tates would have the same opportunity as other countries to influence its e,change rate against foreign currencies. ". he United @ingdom would not have the same opportunity as other countries to influence its e,change rate against foreign currencies. #. Germany would not have the same opportunity as other countries to influence its e,change rate against foreign currencies. $. %one of the a!ove. Answer B +*. Advocates of fle,i!le e,change rates claim that under fle,i!le e,change rates, if the central !an( faced unemployment A. 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 e,pand its money supply, there would no longer !e any legal !arrier to the currency depreciation this would cause. ". and wished to e,pand 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 the currency depreciation this would cause. $. %one of the a!ove. Answer B ++. Advocates of fle,i!le e,change rates claim that under fle,i!le e,change rates, a currency A. 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. $. %one of the a!ove. Answer& " +-. Under purchasing power parity, A. e,change rates immediately move to offset e,actly national differences in inflation.. B. e,change rates eventually move to offset e,actly national differences in inflation.. ". e,change rates eventually move to offset to some e,tent national differences in inflation.. #. e,change rates eventually move to offset e,actly national differences in unemployment. $. %one of the a!ove. Answer& A +1. Under purchasing power parity A999B, if U.2. monetary growth leads to a long-run dou!ling of the U.2. price level, while Germanys 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. $. %one of the a!ove. Answer& B +4. "omparing fi,ed to fle,i!le e,change-rate regimes, the response of an economy to a temporary fall in foreign demand for its e,ports is A. output actually falls less under fi,ed rate than under floating rate. B. output actually falls more under fi,ed rate than under floating rate. ". output actually remains the same under fi,ed rate than under floating rate. #. /t is impossi!le to tell. $. %one of the a!ove. Answer& B ssay !uestion 1+. CA monetary policy is not a policy tool under fi,ed e,change rates.D #iscuss. Answer& rue. Under fi,ed e,change 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 e,changed 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 trade B. Figh unioni>ation of U.2. ;a!or force ". / dont (now. #. Figh mo!ility of la!or force, more transfer payments !etween regions $. Figher uniformity of populations taste in consumption Answer& # *. he $uropean $conomic and 3onetary Union A. 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 fi,ed e,change rates !etween all $3U mem!er countries. B. resulted in fle,i!le e,change rates !etween all $3U mem!er countries. ". resulted in crawling-peg e,change rates !etween all $3U mem!er countries. #. resulted in non-currency !oard e,change rates !etween all $3U mem!er countries. $. %one of the a!ove. Answer& A 1. he $U countries were prompted to see( closer coordination of monetary policies and greater e,change rate sta!ility in the late 1465s in order A. to enhance $uropes role in the world monetary system. B. to turn the $uropean Union into a truly unified mar(et. ". !oth to enhance $uropes 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. Grance and Germany. B. Grance, Germany, and Belgium. ". Grance, Germany, Belgium, and ;u,em!urg. #. Grance, Germany, Belgium, ;u,em!urg, and the %etherlands. $. Grance, Germany, Belgium, ;u,em!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& " 11. Under the $32, Germany set the systems 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 fluctuating relative to the #3. #. fiscal policy while the other $uropean countries pegged their currencies to the #3. $. %one of the a!ove. Answer& A 75. he most important feature of the 2ingle $uropean Act of 1416, 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 Grance 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 Grance 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 a A. 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 the lowest 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 have A. 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. $. %one of the a!ove. 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 fi,ed e,change rates it that they simplify economic calculations and provide a more predicta!le !asis for decisions that involve international transactions than do floating rates.. B. !enefit of floating e,change rates it that they simplify economic calculations and provide a more predicta!le !asis for decisions that involve international transactions than do fi,ed rates. ". cost of fi,ed e,change rates it that they simplify economic calculations and provide a more predicta!le !asis for decisions that involve international transactions than do currency !oard rates. #. !enefit of fle,i!le e,change 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 Afor e,ampleB 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 Afor e,ampleB 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 Afor e,ampleB 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 Afor e,ampleB 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 e,tensive are cross-!order trade and factor movements, the greater is the gain from a fi,ed cross-!order e,change rate. B. he more e,tensive are cross-!order trade and factor movements, the greater is the loss from a fi,ed cross-!order e,change rate. ". he more e,tensive are cross-!order trade and factor movements, the greater is the gain from a fi,ed cross-!order e,change rate. #. he more e,tensive are cross-!order trade, the greater is the loss from a fi,ed cross!order e,change rate. $. he more e,tensive are factor movements, the greater is the loss from a fi,ed cross!order e,change rate. Answer& " '5. A country that 0oins an e,change rate area A. gives up its a!ility to use the e,change rate for the purpose of sta!ili>ing output and employment. B. does not give up its a!ility to use the e,change rate and monetary policy for the purpose of sta!ili>ing output and employment. ". gives up its a!ility to use the e,change 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 output and 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 fi,ed e,change rate has an advantage over a fle,i!le rate. B. a floating e,change rate has an advantage over a fi,ed rate. ". a crawling peg e,change rate has an advantage over a fi,ed rate. #. a floating e,change rate has the same effect as a fi,ed rate. $. %one of the a!ove. Answer& B '7. .hich one of the following statements is true? A. A fi,ed e,change rate automatically cushions the economys output and employment !y allowing an immediate change in the relative price of domestic and foreign goods. B. A fle,i!le e,change rate does not automatically cushion the economys output and employment !y allowing an immediate change in the relative price of domestic and foreign goods.

". A fle,i!le e,change rate automatically cushions the economys output and employment !y allowing an immediate change in the relative price of domestic and foreign goods. #. A fle,i!le e,change rate automatically cushions the economys 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 e,change rate is A. fle,i!le, purposeful sta!ili>ation is more difficult !ecause monetary policy has no power at all to affect domestic output and employment. B. fi,ed, purposeful sta!ili>ation is less difficult !ecause monetary policy has no power at all to affect domestic output and employment. ". fi,ed, 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 fi,ed, purposeful sta!ili>ation is more difficult !ecause monetary policy has no power at all to affect domestic output and employment. $. fi,ed 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& " '1. /f %orways 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 capital cannot !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!road A. 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 to investors. ". 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. $. %one of the a!ove. Answer& A

*1. he intersection of GG and ;; determines A. the optimal level of integration desired !y %orway. B. the ma,imum integration level desired !y %orway. ". the minimum level of integration that will cause %orway to 0oin the fi,ed e,change rate regime. #. the ma,imum level of integration that will cause %orway to 0oin the fi,ed e,change rare regime. $. %one of the a!ove. Answer& " *7. he $uropean "entral Ban( has its head)uarter in A. ;ondon. B. Berlin. ". Gran(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 fi,ed-e,change area. 17. C he costs and !enefits for a country from 0oining a fi,ed-e,change 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 was awarded the %o!el 9ri>e for developing the theory.