Chapter 2 Practice questions and answer keys

Lecture #2

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Practice Questions

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International Financial Management

Chapter 2

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International Monetary System

1.

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

2.

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.

3.

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.

4.

A currency board arrangement is

A. when the currency of another country circulates as the sole legal tender.

B. when the country belongs to a monetary or currency union in which the same legal tender is shared

by the members of the union.

C. a monetary regime based on an explicit legislative commitment to exchange domestic currency for

a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing

authority to ensure the fulfillment of its legal obligation.

D. where the country pegs its currency at a fixed rate to a major currency where the exchange rate

fluctuates within a narrow margin of less than one percent.

5.

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.

6.

The advent of the euro marks the first time that sovereign countries have voluntarily given up their

A. national borders to foster economic integration.

B. monetary independence to foster economic integration.

C. fiscal policy independence to foster economic integration.

D. national debt to foster economic integration.

7.

The European Monetary System (EMS) has the chief objective(s)

A. to establish a

B. to coordinate exchange rate policies vis-à

-vis the non-EMS currencies.

C. to pave the way for the eventual European monetary union.

D. all of the above

8.

Benefits from adopting a common European currency include

A. reduced transaction costs.

B. elimination of exchange rate risk.

C. increased price transparency that will promote Europe-wide competition.

D. all of the above

9.

The main cost of European monetary union is

A. the loss of national monetary and exchange rate policy independence.

B. increased exchange rate uncertainty.

C. lessened political integration.

D. none of the above

10.

The Mexican Peso Crisis was touched off by

A. an unsurprising announcement by the Mexican government to devalue to peso against the dollar by

14 percent.

B. an unexpected announcement by the Mexican government to devalue to peso against the dollar by

14 percent.

C. an announcement by the Mexican government to enact a currency board arrangement with the U.S.

dollar.

D. contagion from other Latin American and Asian financial markets.

11.

The Mexican peso crisis is significant in that

A. it is perhaps the first serious international financial crisis touched off by cross-border flight of

portfolio capital.

B. selling by international portfolio managers had a highly destabilizing, contagious effect on the

world financial system.

C. it provides a cautionary tale that as the world's financial markets are becoming more integrated, this

type of contagious financial crisis is likely to occur more often.

D. all of the above.

12.

Generally speaking, liberalization of financial markets when combined with a weak, underdeveloped

domestic financial system tends to

A. strengthen the domestic financial system in the short run.

B. create an environment susceptible to currency and financial crises.

C. raise interest rates and lead to domestic recession.

D. none of the above

13.

A

A. liquidity, elasticity, and flexibility.

B. elasticity, sensitivity, and reliability.

C. liquidity, adjustments, and confidence.

D. none of the above

14.

Advantages of a flexible exchange rate include which of the following?

A. National policy autonomy

B. Easier external adjustments

C. The government can use monetary and fiscal policies to pursue whatever economic goals it chooses.

D. All of the above