Chapter 11The International Monetary System True / False Questions 1. The international monetary system refers to a system to regulate fixed exchange rates before the introduction of the euro. True False 2. When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a pegged exchange rate regime. True False 3. A pegged exchange rate means the value of the currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate. True False 4. In a fixed exchange rate system, the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency. True False 5. As the volume of international trade expanded in the wake of the Industrial Revolution, shipping large quantities of gold around the world to finance internationaltrade became impractical. True False 6. Given a common gold standard, the value of any currency in units of any other currency (the exchange rate) was easy to determine. True False 11-1© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distributionin any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.7. A country is said to be in balance-of-trade equilibrium when the income its residents earn from exports is greater than the money its residents pay to other countries for imports. True False 8. Under the gold standard, a country in balance-of-trade equilibrium will experience a net flow of gold from other countries. True False 9. If more dollars are needed to buy an ounce of gold than before, the implication is thatthe dollar is worth more. True False 10. The major problem with the gold standard was that no multinational institution could stop countries from engaging in competitive devaluations. True False 11. According to the Bretton Woods agreement, if a currency became too weak to defend,a devaluation of up to 10 percent would be allowed without any formal approval by the International Monetary Fund. True False 12. The architects of the Bretton Woods agreement wanted to avoid high unemployment,so they built the fixed exchange rate system to be highly inflexible. True False 13. When the Bretton Woods participants established the World Bank, the need to lend money to third world nations was foremost in their minds. True False 14. Under the International Bank for Reconstruction and Development scheme, the WorldBank offers low-interest loans to risky customers whose credit rating is often poor. True False 15. As the only currency that could be converted into gold, the British pound occupied a central place in the fixed exchange rate system. True False 11-2© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distributionin any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.16. Under the fixed exchange rate system, the dollar could be devalued only if all countries agreed to simultaneously revalue against the dollar. True False 17. The Bretton Woods system could work only as long as the U.S. inflation rate remainedlow and the United States did not run a balance-of-payments deficit. True False 18. Since March 1973, currency exchange rates have become less volatile and more predictable than they were between 1945 and 1973. True False 19. Under a floating exchange rate regime, market forces have produced a volatile dollar exchange rate. True False 20. Under a floating exchange rate system, a country’s ability to expand or contract its money supply as it sees fit is limited by the need to maintain exchange rate parity. True False 21. Under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade, it would require the International Monetary Fund to agree to a currency devaluation. True False 22. Under a pegged exchange rate regime, a country will peg the value of its currency to that of a major currency, so that if the reference currency rises in value, its own currency rises too. True False 23. The disadvantage of a pegged exchange rate regime is that it aggravates inflationarypressures in a country. True False 24. It can be very difficult for a small country to maintain a peg against another currency if capital is flowing out of the country and foreign exchange traders are speculating against the currency. True False 11-3© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distributionin any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.25. A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate. True False 26. Under a currency board system, the government has the absolute authority to set interest rates. True False 27. The activities of the International Monetary Fund have declined after the collapse of the Bretton Woods system in 1973. True False 28. At times, elements of currency, banking, and debt crises may be present simultaneously in a region. True False 29. All International Monetary Fund loan packages come with conditions attached. True False 30. A benefit of the International Monetary Fund is that it does not have a mechanism for accountability. True False 31. The International Monetary Fund can force countries to adopt the policies required to correct economic mismanagement. True False 32. Some economists argue that higher inflation rates might be good if the consequence is greater growth in aggregate demand. True False 33. The forward exchange market is an accurate predictor of future exchange rates. True False 34. In the face of unpredictable exchange rate movements, a firm should pursue strategies that reduce its economic exposure. True False 11-4© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not