Chapter 2

Question 1

The Gold Standard

Answer 1

• “Rules of the Game”: Each country set the rate at which its currency unit could be converted to a weight of gold
• Currency exchange rates were in effect “fixed”
• Expansionary monetary policy was limited to a government’s supply of gold

Question 2

established a U.S. dollar-based international monetary system and created two new institutions the International Monetary Fund (I M F) and the World Bank

Answer 2

The Bretton Agreement

Question 3

was created to help countries defend their currencies and assist countries having structural trade problems

Answer 3

The International Monetary Fund

Question 4

helped fund post-war reconstruction and has since then supported general economic development

Answer 4

The International Bank for Reconstruction and Development

Question 5

Fixed Exchange Rates

Answer 5

• The U.S. dollar became the main reserve currency held by central banks, resulting in a heavy capital outflow of dollars
• The heavy overhang of dollars held by foreigners resulted in a lack of confidence in the ability of the U.S. to met its commitment to convert dollars to gold
• The lack of confidence forced President Richard Nixon to suspend official purchases or sales of gold by the U.S. Treasury on August 15, 1971
• This resulted in subsequent devaluations of the dollar
• Most currencies were allowed to float to levels determined by market forces as of March 1973

Question 6

The Floating Era

Answer 6

Since March 1973, exchange rates have become much more volatile and less predictable
There have been numerous, significant world currency events over the past 30 years

Question 7

The Emerging Era

Answer 7

• Emerging market economics are multiplying in number and growing in complexity
• This results in a growing number of emerging market currencies

Question 8

Countries that have given up their own sovereignty over monetary policy
E.g., dollarization or currency boards

Answer 8

Category 1: Hard Pegs

Question 9

A K A fixed exchange rates, with five subcategories of classification

Answer 9

Category 2: Soft Pegs

Question 10

To increase supply, you need to buy or sell?

Answer 10

Sell

Question 11

The remains of currency arrangements

Answer 11

Category 4: Residual

Question 12

To make the value of $ appreciate relative to foreign currency. What does the central bank do?

Answer 12

• Decrease the supply
• Buy the dollar and sell the foreign currency
• The central bank buys cash reserve and sells the treasuries

Question 13

Can the fixed rate and monetary policy work together?

Answer 13

No

Question 14

What are the 3 attributes of the Impossibility Triangle?

Answer 14

• Exchange rate stability
• Full financial integration
• Monetary independence

Question 15

Cheaper transaction costs in the _______

Answer 15

eurozone

Question 16

The primary driver of a currency’s value is its ability to maintain its _________ _____

Answer 16

purchasing power

Question 17

The single larges threat to maintaining purchasing power is ________, so the job of the EU has been to prevent __________ _____ from undermining the euro

Answer 17

Inflation; Inflationary forces

Question 18

exists when a country’s central bank commits to bank its monetary base– its money supply - entirely with foreign reserves at all times

Answer 18

Currency board

Question 19

the use of the U.S dollar as the official currency of the country

Answer 19

Dollarization