Studying Material for chapter 2

1. One potential drawback of the gold standard is that A. the world economy can be subject to deflationary pressure due to the limited supply of monetary gold. B. the world economy can be subject to inflationary pressure without changes in the supply of monetary gold. C. gold is scarce. D. all of the above

2. The first full-fledged gold standard A. was not established until 1821 in Great Britain, when notes from the Bank of England were made fully redeemable for gold. B. was not established until 1780 in the United States, when notes from the Continental Army were made fully redeemable for gold. C. was established in 986 during the Han dynasty in China. D. none of the above

3. An "international" gold standard can be said to exist when A. gold alone is assured of unrestricted coinage. B. there is two-way convertibility between gold and national currencies at stable ratios. C. gold may be freely exported or imported. D. all of the above

4. Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = 1. What should an ounce of gold be worth in U.S. dollars? A. $29.40 B. $30.00 C. $0.83 D. $1.20

5. The international monetary system can be defined as the institutional framework within which A. international payments are made. B. movement of capital is accommodated. C. exchange rates among currencies are determined. D. all of the above

6. Corporations today are operating in an environment in which exchange rate changes may adversely affect their competitive positions in the marketplace. This situation, in turn, makes it necessary for many firms to A. carefully manage their exchange risk exposure. B. carefully measure their exchange risk exposure. C. both a) and b)

7. Under the gold standard, international imbalances of payment will be corrected automatically under the A. Gresham Exchange Rate regime. B. European Monetary System. C. Price-specie-flow mechanism. D. Bretton Woods Accord.

8. During the period between World War I and World War II, A. the major European powers and the U.S. returned to the gold standard and fixed exchange rates. B. while most countries abandoned the gold standard during World War I, international trade and investment flourished during the interwar period under a coherent international monetary system. C. the U.S. dollar emerged as the dominant world currency, gradually replacing the British pound for the role. D. None of the above.

9. During the period of the classical gold standard (1875-1914) there were A. highly volatile exchange rates. B. volatile exchange rates. C. moderately volatile exchange rates. D. stable exchange rates. E. no exchange rates.

10. Under the Bretton Woods system A. each country established a par value for its currency in relation to the dollar. B. the U.S. dollar was pegged to gold at $35 per ounce. C. each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary. D. all of the above

11. Special Drawing Rights (SDR) are A. an artificial international reserve allotted to the members of the International Monetary Fund (IMF), who can then use it for transactions among themselves or with the IMF. B. a "portfolio" of currencies, and its value tends to be more stable than the currencies that it is comprised of. C. used in addition to gold and foreign exchanges, to make international payments. D. all of the above

12. Put the following in correct date order: A. Jamaica Agreement, Bretton Woods Agreement, Smithsonian Agreement. B. Smithsonian Agreement, Bretton Woods Agreement, Jamaica Agreement. C. Bretton Woods Agreement, Smithsonian Agreement, Jamaica Agreement. D. Bretton Woods Agreement, Jamaica Agreement, Smithsonian Agreement.

13. The Bretton Woods system ended in A. 1945. B. 1973. C. 1981. D. 2001.

14. The choice between the alternative exchange rate regimes (fixed or floating) is likely to involve a trade-off between A. national monetary policy autonomy and international economic integration. B. exchange rate uncertainty and national policy autonomy. C. Balance of Payments autonomy and inflation. D. unemployment and inflation.

15. Under a purely flexible exchange rate system A. supply and demand set the exchange rates. B. governments can set the exchange rate by buying or selling reserves. C. governments can set exchange rates with fiscal policy. D. answers b) and c) are correct.

16. The gold standard still has ardent supporters who believe that it provides A. an effective hedge against price inflation. B. fixed exchange rates between all currencies. C. monetary policy autonomy. D. all of the above

17 . The core of the Bretton Woods system was the A. World Bank. B. IMF. C. United Nations. D. Interstate Commerce Commission.

18. Gold was officially abandoned as an international reserve asset A. in the January 1976 Jamaica Agreement. B. in the 1971 Smithsonian Agreement. C. in the 1944 Bretton Woods Agreement. D. none of the above

19. With regard to the current exchange rate arrangement between the U.S. and the U.K., it is best characterized as A. independent floating (market determined). B. managed float. C. currency board. D. pegged exchange rate within a horizontal band.

20. On January 1, 1999, an epochal event took place in the arena of international finance when A. all EU countries adopted a common currency called the euro. B. eight of 15 EU countries adopted a common currency called the euro. C. nine of 15 EU countries adopted a common currency called the euro. D. eleven of 15 EU countries adopted a common currency called the euro.

Studying material for chapter 3

1. The current account balance, which is the difference between a country's exports and imports, is a component of the country's GNP. Other components of GNP include A. consumption and investment and government expenditure. B. consumption and government expenditure and net exports. C. consumption and net exports and government expenditure. D. consumption less imports.

2. If the United States imports more than it exports, then this means that A. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. B. the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus. C. the U.S. dollar would be under pressure to appreciate against other currencies. D. both b) and c) are correct

3. Balance of payments A. is defined as the statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping. B. provides detailed information concerning the demand and supply of a country's currency. C. can be used to evaluate the performance of a country in international economic competition. D. all of the above

4. Credit entries in the U.S. balance of payments A. result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets. B. result from U.S. purchases of foreign goods and services, goodwill, financial claims, and real assets. C. give rise to the demand for dollars. D. give rise to the supply of dollars. E. both a) and c)

5. A country experiencing a significant balance-of-payments surplus would be likely to A. expand imports, offering marketing opportunities for foreign enterprises. B. refrain from imposing foreign exchange restrictions. C. expand exports, offering international marketing opportunities for domestic enterprises. D. Both a) and b)

6. Suppose the McDonalds Corporation imports Canadian beef, paying for it by transferring the funds to a New York bank account kept by the Canadian Beef producer. A. Payment by McDonalds will be recorded as a debit. B. The deposit of the funds by the seller will be recorded as a debit. C. Payment by McDonalds will be recorded as a credit. D. The deposit of the funds by the buyer will be credit.

7. Since the balance of payments is presented as a system of double-entry bookkeeping, A. every credit in the account is balanced by a matching debit. B. every debit in the account is balanced by a matching credit. C. answers a) and b) are both true D. none of the above

8. Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch Corporation, paying the U.S. shareholders cash. A. Payment by InBev will be recorded as a debit. B. The deposit of the funds by the sellers will be recorded as a debit. C. Payment by InBev will be recorded as a credit. D. The deposit of the funds by the buyer will be credit.

9. The current account includes A. the export and import of goods and services. B. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. C. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). D. none of the above

10. The official reserve account includes A. the export and import of goods and services. B. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. C. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). D. none of the above

11. A country's international transactions can be grouped into the following three main types: A. current account, medium term account, and long term capital account. B. current account, long term capital account, and official reserve account. C. current account, capital account, and official reserve account. D. capital account, official reserve account, trade account.

12. Invisible trade refers to A. services that avoid tax payments. B. the underground economy. C. legal, consulting, and engineering services. D. tourist expenditures, only.

13. When a country's currency depreciates against the currencies of major trading partners, A. the country's exports tend to rise and imports fall. B. the country's exports tend to fall and imports rise. C. the country's exports tend to rise and imports rise. D. the country's exports tend to fall and imports fall.

14. A depreciation will begin to improve the trade balance immediately if A. imports and exports are responsive to the exchange rate changes. B. imports and exports are inelastic to the exchange rate changes. C. consumers exhibit brand loyalty and price inelasticity. D. b) and c)

15. In the short run a currency depreciation can make a trade balance worse if A. there is no domestic producer of an import. B. there is no domestic buyer for an import. C. there is no export market for a country's output.

16. Which of the following would not count as a foreign-exchange reserve held by a central bank? A. The local currency B. U.S. dollars C. SDRs D. Euro

17. Continued U.S. trade deficits coupled with foreigners' desire to diversify their currency holdings away from U.S. dollars A. could further diminish the position of the dollar as the dominant reserve currency. B. could affect the value of U.S. dollar (e.g. through the currency diversification decisions of Asian central banks). C. could lend steam to the emergence of the euro as a credible reserve currency. D. all of the above

18. Currently, international reserve assets are comprised of A. gold, platinum, foreign exchanges, and special drawing rights (SDRs). B. gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF). C. gold, diamonds, foreign exchanges, and special drawing rights (SDRs). D. reserve positions in the International Monetary Fund (IMF), only.

19. Government controlled investment funds, known as sovereign wealth funds, A. are playing a less-important role in international finance following the end of the fixed exchange rate era. B. are mostly domiciled in Asian and Middle Eastern countries. C. are usually responsible for converting trade surpluses and oil revenues into foreign exchange reserves. D. none of the above

20. Foreign direct investment (FDI) occurs A. when an investor acquires a measure of control of a foreign business. B. when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting shares of a business. C. with sales and purchases of foreign stocks and bonds that do not involve a transfer of control. D. both a) and b)