1 The ________ is an exchange rate system that is free from central bank and other

government-type interventions.
a) managed float
b) clean float
c) dirty float
d) target-zone arrangement

2 What is the name for the exchange rate system where market participants will adjust
their current and expected future currency needs as price levels change, interest
differentials appear, and economic growth occurs?
a) free float
b) clean float
c) managed float
d) dirty float

3 When governments attempt to reduce the uncertainty caused by short and medium
term exchange rate changes, it is referred to as _________.
a) smoothing out daily fluctuations
b) leaning against the wind
c) unofficial pegging
d) a dirty float

4 Under a _________, countries adjust their national economic policies to maintain their
exchange rates within a specific margin around agreed-upon, fixed central exchange rates.
a) managed float
b) ‘beggar-thy-neighbor” devaluation
c) dirty float
d) target-zone arrangement

5 What is the name of the policy aimed to lessen the need to monetize a government’s
budget deficit by reducing expenditures often with the unintended outcome of increased
unemployment?
a) fixed-rate system
b) managed float
c) target-zone arrangement
d) austerity
6 ________ is nonconvertible paper money backed only by faith in the monetary
authorities.
a) Specie
b) Fiat money
c) Seignorage
d) Par value

7 Under the classic gold standard, if prices began rising in the U.S.
a) the dollar value of the pound would rise
b) the dollar value of the pound would fall
c) the U.S. would begin running a balance of trade surplus
d) gold would flow out of the U.S. and the U.S. money supply would drop

8 The Bretton Woods system

a) ended in 1971
b) ended in 1939 when World War II began
c) is currently the basis for the international monetary system
d) is currently in use only by the major industrial nations

9 The current exchange rate system can best be characterized as a ___ system.
a) free float
b) managed float
c) fixed rate
d) hybrid

10 Managed floats do NOT fall into which of the following categories of central bank
intervention?
a) smoothing out daily fluctuations
b) leaning against the wind
c) unofficial pegging
d) letting market forces set exchange rate

11 The European Monetary System is best described as a

a) clean float
b) target zone arrangement
c) dirty float
d) managed float

12 Which of the following produced a valuable lesson about exchange-rate stability and
target-zone arrangements?
a) European Monetary System
b) European Community
c) European Common Market
d) European Union

13 What is the name given to profits earned by a central bank from money creation?
a) seigniorage
b) interest arbitrage
c) moral hazard
d) fiat money

14 A weak peso is most likely to cause

a) added employment and inflation in Mexico
b) less unemployment but more inflation in Mexico
c) more unemployment but less inflation in Mexico
d) less unemployment and less inflation in Mexico

15 The Bretton Woods system fell apart because

a) of the oil crisis
b) U.S. monetary policy was too expansionary
c) Japan ran a large trade surplus
d) the United States no longer supported a pegged gold standard

16 The gold standard was dissolved in 1973 because

a) the U.S. printed too many dollars to maintain gold at $35/oz

b) exchange markets preferred a floating rate system
c) high interest rates raised the cost of holding gold
d) some countries preferred to hold gold instead of dollars
17 The rising dollar in the early 1980s can be attributed to
a) high real interest rates in the United States
b) improved investment prospects in the United States
c) the growing U.S. budget deficit
d) a and b only

18 The fall of the dollar beginning in 1985 can be attributed to

a) the growing U.S. budget deficit
b) the large U.S. trade deficit
c) rapid U.S. economic growth
d) the slowdown in U.S. economic growth relative to growth overseas

19 The characteristic of gold that is most important to the success of a gold standard is
that it is
a) portable
b) storable
c) easily standardized
d) expensive to produce as well as universally acceptable

20 A gold standard ensures a long run tendency toward price stability because
a) gold is desirable
b) gold is durable and storable
c) the cost of producing an ounce of gold stays relatively constant overtime
d) gold supply is directly related to consumer satisfaction

21 Calls for a new gold standard reflect

a) fundamental distrust of government's willingness to maintain the integrity of fiat
money
b) a general willingness to accept fiat money
c) a short memory of what actually transpired under the gold standard
d) the durability and desirability of gold

22 Assume you are a critic of the World Bank. Which one of the following would NOT be
one of your criticisms?
a) World Bank projects do not come under the scrutiny of the global financial markets.
b) The Bank should move its lending operations out of China.
c) The Bank is financing projects that encourage governments to enact changes that make
countries more attractive to private investors.
d) The Bank is funding projects to countries without giving them any incentive to change
inefficient operations in the economy.
23 Under the gold standard
a) price levels rose dramatically
b) price levels stayed constant over time
c) the long run stability of the price level includes alternating periods of inflation and
deflation
d) fiat money is more valuable

24 Under a fixed rate system, a country that followed policies that would lead to a higher
rate of inflation than that experienced by its trading partners would
a) experience a balance of payments surplus as its goods became more expensive
b) see an decrease in the supply of its currency on the foreign exchange markets
c) find its currency subject to upward pressure
d) experience a balance of payments deficit as its goods became more expensive

25 Under a fixed rate system, a country that followed policies leading to a lower inflation
rate than that experienced by its trading partners would
a) come under pressure to expand its money supply
b) restrict the growth of its money supply
c) experience a balance of payments deficit
d) be forced to buy its currency in the foreign exchange market

26 Under which one of the following would a country that followed policies leading to a
lower inflation rate than that experienced by its trading partners would come under
pressure to expand its money supply?
a) fixed-rate currency system
b) freely-floating currency system
c) managed float
d) currency board
27 Underlying the emerging markets currency crises, there is a fundamental conflict
among policy objectives that the target nations have failed to resolve. Which one of the
following is NOT in conflict?
a) IMF bailouts
b) fixed exchange rates
c) independent domestic monetary policy
d) free capital movement

28 In a fixed rate system central banks would NOT maintain currency values by
a) increasing the money supplies of nations with overvalued currencies
b) boosting the money supplies of nations with undervalued currencies
c) buying up overvalued currencies in the foreign exchange market
d) selling undervalued currencies in the foreign exchange market

29 Governments intervene in the foreign exchange markets for all of the following
EXCEPT to
a) earn foreign exchange
b) reduce economic uncertainty
c) improve the nation's export competitiveness
d) reduce inflation

30 Under a fixed rate system, which of the following four alternatives to devaluation is
most likely to succeed?
a) foreign borrowing
b) austerity
c) wage and price controls
d) exchange controls