International Finance

Question 1

A system of managed floating exchange rates is

Answer 1

a system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed

Question 2

Any central bank purchase of assets automatically results in an _____ in the domestic money supply, while any central bank sale of assets automatically causes the money supply to ______

Answer 2

increase, decrease

Question 3

By fixing the exchange rate, the central bank gives up its ability to

Answer 3

influence the economy through monetary policy

Question 4

Currency crises may result from

Answer 4

speculative attacks on the currency or central banks purchasing excessive amounts of government bonds

Question 5

A balance of payments crisis is best described as

Answer 5

a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate

Question 6

By internal balance, most economists mean

Answer 6

full employment and price stability

Question 7

by external balance, most economists mean

Answer 7

avoiding excessive imbalances in international payments

Question 8

The components of the monetary trilemma that is encountered when a country chooses its monetary policy are

Answer 8

Exchange rate stability, monetary autonomy/policy oriented toward domestic goals, freedom of international capital movements

Question 9

Under the Gold standard, a country is said to be in balance of payments equilibrium when the current account balance is

Answer 9

financed entirely by international lending without reserve movements

Question 10

The dollar of the US became the postwar world’s key currency because of all EXCEPT

Answer 10

the ease of transporting US dollars compared with other currencies

Question 11

The Bretton Woods system was

Answer 11

a system that required participants to peg their currency to the US dollar, which was pegged to the price of gold

Question 12

The collapse of the Bretton Woods system marked

Answer 12

the end of fixed exchange rates and a move to floating exchange rates

Question 13

Fixed exchange rates are

Answer 13

exchange rates in which a currency’s value is “pegged” by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold.

Question 14

Floating exchange rates are

Answer 14

exchange rates that are determined by the supply and demand of one currency in terms of another on the open market

Question 15

Securitization is

Answer 15

the conversion of an asset, especially a loan, into marketable securities, typically for the purpose of raising cash by selling them to investors.

Question 16

the main problem with securitization is that

Answer 16

governments are not able to monitor bank assets or to assess a banks risk to the soundness of the international banking system

Question 17

a random walk model is

Answer 17

a model that takes today’s exchange rate as the best guess for tomorrows exchange rate

Question 18

A random walk model can more accurately predict exchange rates as compared to a sophisticated forecast for up to ____ (day/month/year(s)) away

Answer 18

one year

Question 19

Large differences in interest rates between countries would indicate that

Answer 19

there are unrealized gains from trade

Question 20

U.S. reserve requirements

Answer 20

force banks to hold a portion of its assets in a liquid form easily mobilized to meet sudden deposit outflows

Question 21

Capital inflows are

Answer 21

money invested by foreigners willing to take a stake in an economy

Question 22

Capital outflows are

Answer 22

money taken out of an economy

Question 23

The purpose of the Basel Committee was to

Answer 23

achieve a better coordination of the surveillance exercised by national authorities over the international banking system

Question 24

The case where people purposely act in a careless way due to the incentive to is called

Answer 24

moral hazard

Question 25

The EU countries were prompted to seek closer coordination of monetary policies and greater exchange rate stability in order

Answer 25

both to enhance Europes world in the world monetary system and to turn the European Union into a truly unified market

Question 26

A ____ exchange rate (does/does not) automatically cushion the economy’s ______ and _____ by allowing an immediate change in the _____ price of domestic and foreign goods

Answer 26

flexible/floating, Does, output and unemployment, relative

Question 27

The intersection of GG and LL determines

Answer 27

the minimum level of integration that will cause a country to join a fixed exchange rate regime

Question 28

Optimum currency areas/fixed exchange rate regimes are

Answer 28

groups of regions with economies closely linked by trade in goods and services and by factor mobility

Question 29

The theory of optimum currency areas predicts that

Answer 29

fixed exchange rates are most appropriate for areas closely integrated through international trade and factor movements

Question 30

The benefits of joining a fixed-exchange rate area are

Answer 30

reduced transaction costs, less speculation on returns, less uncertainty about purchasing power of wages

Question 31

The costs of joining a fixed-exchange rate area are

Answer 31

increased vulnerability to international economic conditions, benefits depend on the level of integration

Question 32

compared with industrialized economies, most developing countries are poor in the factors of production essential to modern industry, which are

Answer 32

skilled labor and capital

Question 33

How would you define convergence

Answer 33

tendency for gaps between industrial countries’ per-capita incomes to narrow

Question 34

Seigniorage refers to

Answer 34

real resources a government earns when it prints money to use for spending on goods and services

Question 35

A trend that has been reinforced by many developing countries is privatization. Privatization refers to

Answer 35

selling large state-owned enterprises to private owners in key areas such as electricity, telecommunications, or petroleum

Question 36

there are many ways developing countries finance their external deficits EXCEPT

Answer 36

foreign exchange rates

Question 37

the term Original Sin by two economists Barry Eichengreen and Ricardo Hausmann is used to describe what?

Answer 37

developing countries’ inability to borrow in their own currencies

Question 38

How would you define exchange control?

Answer 38

the government allocates foreign exchange through decree rather than through the market

Question 39

Since foreign credit dries up in crises when its most needed, developing countries can protect themselves from default by

Answer 39

accumulating high levels of international reserves

Question 40

How would you define a currency board?

Answer 40

The monetary base is backed entirely by foreign currency and the central bank holds no domestic assets

Question 41

What are the three main lessons on crisis learned from early developing countries in Latin America?

Answer 41

choosing the right exchange rate regime, the importance of contagion and the importance of the banking system

Question 42

Information that a country must consider when deciding to peg the exchange rate includes

Answer 42

economic stability, trade patterns, foreign reserves, flexibility of monetary policy, capital mobility and financial stability

Question 43

Serving as a reserve currency refers to

Answer 43

a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves.

Question 44

advantages of serving as a reserve currency include

Answer 44

enjoying seigniorage, significant monetary policy autonomy, lower borrowing costs, and influence in international financial institutions

Question 45

disadvantages of serving as a reserve currency include

Answer 45

risk of currency appreciation and its impact on export competition, risk of financial instability as a result of large liabilities, and the responsibility of maintaining the stability of the currency

Question 46

Liability dollarization is

Answer 46

when a significant portion of financial liabilities of a country are denominated in foreign currencies

Question 47

the most frequent users of liability dollarization are ____-income economies/ _____ countries

Answer 47

low, developing

Question 48

How can liability dollarization worsen a financial market disruption caused by a sharp depreciation of the domestic currency against the denominated currency?

Answer 48

Through increased debt burden, foreign exchange mismatch, weakened balance sheets, capital flight, macroeconomic challenges, and central bank interventions.