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POLS 360: Exam 2
During the time of the Bretton Woods monetary system the US dollar was
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pegged to a fixed price for gold.
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At present the US dollar is
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floated against other major currencies such as JPY, GBP and EUR.
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In a fixed exchange rate system, if the USD falls below the fixed price for JPY, the US should
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sell JPY and buy USD.
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Which type of exchange rate system permits the greatest degree of monetary policy autonomy?
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floating exchange rate systems.
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A key advantage of a fixed exchange rate system is
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predictability in the value of currencies.
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Foreign aid expenditures by the US government would be counted in the
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unilateral transfers account.
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The purchase of stock in a foreign company would be recorded in the
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captial account
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The current account is comprised of the
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trade, service, unilateral transfer accounts
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In a fixed exchange rate system, balance of payments adjustments occur naturally by
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changes to domestic prices.
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In a floating exchange rate system, balance of payments adjustments occur naturally by
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changes to the value of currency.
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When a country's money supply increases there is likely to be
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inflation or an increase in prices.
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International financial integration refers to financial transactions involving
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borrowers and savers from different countries.
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The so-called "unholy trinity" includes the goal of
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autonomous monetary policy, fixed exchange rates, capital mobility
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The country that came to dominate the European Currency System in the 1980s was
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Germany
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Neoclassical economists prior to Keynes generally assumed
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an automatic equilibrium between supply and demand.
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Keynes proposed managing the economy's aggregate demand by
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increasing government spending while not raising taxes.
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The easiest and quickest to increase aggregate demand is to
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decrease interest rates.
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The instruments of fiscal policy include
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tax rates and expenditures
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A "sociotropic" voter is one who bases voting decisions on
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the material well-being of the entire economy at the time
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Parties of the left generally pursue policies to
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lower unemployment while tolerating inflation
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The Phillips curve as originally proposed posits a trade-off between
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unemployment and inflation.
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Export-oriented and import-competing sectors of the economy are both likely to prefer
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a depreciating currency.
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Parties of the right generally pursue policies to
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lower inflation while tolerating high unemployment.
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The natural rate of unemployment
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cannot be reduced over the long term by monetary policy.
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Most industrialized countries are now committed to controlling
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inflation through monetary policy
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The increasing use of independent central banks is intended to keep
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monetary policy free from electoral politics
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Official development assistance to developing countries includes
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concessionary loans to developing countries
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Commercial lending to developing countries grew rapidly in the 1970s because there was
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rapid growth in the dollars available to lend
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The exogenous shocks precipitating the Latin American debt crisis included the
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oil prices increase of 1979, rise in interest rates of commercial lenders, recession in the US and Europe
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Structural adjustment reforms in Latin America usually involved
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efforts to reduce import barriers and increase exports
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Structural adjustment reforms often had the unfortunate effect of
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raising unemployment, lowering real wages, lowering consumption
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The best way to think of debt service capacity is as
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outstanding principal and interest as a percentage of export earnings
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The main source of bargaining power by the coalition of debtor countries was
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the threat of collective default
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A key implication of the 1980s Latin American debt crisis was that
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import substitution industrialization policies are doomed to fail
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A common feature among the financial crises of the 1990s was
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some form of fixed exchange rate
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One implication of the Mexican peso crisis of 1994-95 was that
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the economy can be seriously affected by exogenous political shocks
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Following the assassination of PRI presidential candidate Luis Donaldo Colosio in March of 1994 the peso
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quickly depreciated against the US dollar
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Among the risks of intermediated loans undertaken by East Asian banks was
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depreciation of domestic currency against the international loan currency
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The IMF extended loans to the East Asian governments in financial crisis on condition that they
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open their economies to competition from foreign financial institutions
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The East Asian financial crises and implementation of IMF reforms resulted in short-term
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economic contraction and rising unemployment and poverty rates
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The IMF has been criticized for its handling of the East Asian financial crisis on grounds that
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macroeconomic stabilization policies were inappropriate given the economic conditions
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Intermediated bank loans can be risky because
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depreciation of the borrower's domestic currency might raise the cost of servicing debt
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The debt servicing crisis of the world's poorest countries was overlooked until the 1990s because
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loans were from official sources such as governments and multilateral agencies rather than private commercial banks
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The Heavily Indebted Poor Countries debt relief initiative
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was initiated by the IMF and World Bank, covered multilateral debt as well as bilateral debt, required a debt sustainability study to determine how much debt could be maintained (ATB)
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Debt relief of 100% to qualifying countries was made available through the
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Multilateral Debt Relief Initiative.
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What is meant by the "dollar overhang" at the end of the Bretton Woods System around 1970 or so?
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the difference between the dollars in international circulation and the value of the gold backing held in Fort Knox
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Why do export-oriented producers prefer a weak currency to a strong one?
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encourages more nations to buy their low cost goods
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What is the main goal of monetary policy in most advanced industrialized economies?
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promote maximum employment, stable prices and moderate long-term interest rates, thereby supporting conditions for long-term economic growth
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Name two sources of foreign capital available to developing countries to make up for their lack of savings for investment.
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IMF, World Bank
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Name two exogenous shocks that precipitated the Latin American Debt Crisis of the 1980s.
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oil prices increase of 1979, rise in interest rates between US and Europe
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