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©2018 by FlatWorld 1
 Chapter 6
International Monetary System

True/False Questions

1. The gold standard dramatically reduced the risk in exchange rates because it established fixed
exchange rates between currencies.
True; Easy

2. The adoption of the gold standard led to trade imbalances in the world market.
False; Easy

3. One of the advantages of the gold standard is that countries were forced to observe strict
monetary policies.
True; Easy

4. Under the gold standard, countries could not expand their money supply beyond what was
allowed by the gold reserves held in their vaults.
True; Easy

5. The devaluation of the dollar by the United States in 1934 forced U.S. firms to export less as
the price of their goods and services were higher vis-à-vis other nations.
False; Easy

6. The Bretton Woods Agreement was a new dollar-based monetary system, which did away
with all the provisions of the gold standard.
False; Easy

7. The Bretton Woods system tied the value of the currencies of all other countries to the U.S.
dollar rather than directly to gold.
True; Easy

8. Fixed exchange rates and pegged rates were the two different measures of the exchange rate,
which were developed by the United States and the United Kingdom respectively.
False; Easy

9. The Bretton Woods Agreement provided for the devaluation of a currency in order to enable
countries to manage temporary but serious downturns.
True; Easy

10. The Bretton Woods Agreement established a higher level of economic stability by having a
formal set of rules, regulations, and guidelines for decision making.
True; Easy

11. The collapse of the Bretton Woods system greatly reduced the influence of the Bretton
Woods Institutions in the international market.

©2018 by FlatWorld 2
 False; Easy

12. The fall of the gold standard led countries to raise trade barriers, revalue their currencies to
compete against one another for export markets, and curtail usage of foreign exchange by
their citizens.
False; Easy

13. SDRs were created in 1969 by the IMF in response to the Triffin Paradox.
True; Easy

14. The value of an SDR consists of the value of five of the IMF’s biggest members’ currencies,
which hold equal weight.
False; Easy

15. The basket, or group of currencies that constitute an SDR, is reviewed every five years by the
IMF executive board and is based on the currency’s role in international trade and finance.
True; Easy

16. The SDR is a currency, which constitutes a claim on the IMF.

False; Easy

17. SDRs can be exchanged between countries along with currencies.

True; Easy

18. The SDR serves as the unit of account of the IMF and countries borrow from the IMF in
SDRs in times of economic need.
True; Easy

19. The global economic crisis of 2008 began with the 2007 collapse of mortgage lending in the
United States.
True; Easy

20. Over the past two decades, many governments in Latin America have opted to stabilize
their countries’ economies by replacing their national currency with the US dollar.
True; Easy

21. Politically, the country whose currency is the reserve currency is perceived as the dominant
economic power.
True; Easy

22. The World Bank is directed to make loans for projects but never to fund a trade deficit.
True; Easy

23. Global firms monitor the policies and discussions of the G20 and other economic
organizations so that they can identify new opportunities and use their leverage to protect
their markets and businesses.
True; Easy

24. If a country’s currency increases in value, exports will become less expensive, thus making it
difficult for other companies to compete effectively against that country’s firms.
False; Easy

©2018 by FlatWorld 3
25. The local governments manage many of the projects that the World Bank Group funds in
specific countries, but the actual work is typically done by a private sector firm.
True; Easy

Multiple Choice Questions

26. Trade deficit refers to the:

a. amount of borrowing that a country does from either the private sector or other countries.
b. market value of all final goods and services produced within a country in a given period.
c. accounting record of all monetary transactions between a country and the rest of the
world.
d. value of imports being greater than the value of exports.
e. net inflow of investment to acquire a lasting management interest in an enterprise
operating in an economy other than that of the investor.
d; Moderate

27. _____ refers to the price of one currency in terms of a second currency.
a. Spot rate
b. Trade deficit
c. Exchange rate
d. Currency strength
e. Bank reserve
c; Easy

28. Gold standard refers to the:

a. pre–World War I global monetary system that used gold as the basis of international
economic exchange.
b. highest rating that is given to an organization for following the international standards of
corporate social responsibility.
c. highest rating that is given to a country with regard to the ease with which an
organization can set up business in that particular country.
d. best business practices that need to be followed by organizations in the international
market.
e. highest standard of transparency that national governments exhibit in their administrative
and financial dealings.
a; Easy

29. Which of the following is true of the gold standard as the international monetary system?
a. The gold standard allowed countries to observe lax monetary policies.
b. The volume of paper currency could not exceed the gold reserves.
c. The countries could just print money to combat economic downturns.
d. The gold standard provided for the devaluation of the currency to prevent the large-scale
economic downturn.
e. The gold standard tied the currencies of all the countries to the U.S. dollar.
b; Moderate

30. _____ refers to a situation when a currency’s value increases or decreases based on demand
and supply.
a. Float

©2018 by FlatWorld 4
 b. Trade deficit
c. Exchange rate
d. Reserve currency
e. Bank reserve
a; Easy

31. The major significance of the _____ was that it was the first formal institution that governed
international monetary systems.
a. Nixon Shock
b. Bretton Woods Agreement
c. Smithsonian Agreement
d. World Trade Organization
e. General Agreement on Tariffs and Trade
b; Easy

32. The _____ Agreement was a new dollar-based monetary system, which gave countries the
flexibility they needed to manage temporary economic setbacks.
a. Jamaica
b. Basel
c. Bonn
d. Smithsonian
e. Bretton Woods
e; Easy

33. The Bretton Woods Agreement, with regard to currency conversion, established that:
a. only major economic powers could convert their U.S. dollar holdings into gold.
b. only governments could convert their U.S. dollar holdings into gold.
c. only government accredited business organizations could convert their U.S. dollar
holdings into gold.
d. anyone could convert their U.S. dollar holdings into gold.
e. only American businesses could convert their U.S. dollar holdings into gold.
b; Moderate

34. The Bretton Woods Agreement provided for the devaluation of a currency to enable:
a. countries to lower the prices of goods and services which would boost consumer
spending.
b. the United States to increase the concentration of manufacturing industries.
c. countries to competitively manipulate imports and exports.
d. countries to manage temporary but serious downturns.
e. countries to put in effect the best trade practices.
d; Moderate

35. Triffin Paradox refers to:

a. the situation where the imposition of a tariff on imports may reduce the relative internal
price of that good.
b. the situation where technological progress that increases the efficiency with which a
resource is used tends to increase the rate of consumption of that resource.
c. the situation where the United States, the most capital-abundant country in the world,
exported labor-intensive commodities and imported capital-intensive commodities.
d. the situation where the more dollars foreign countries held, the less faith they had in the
ability of the U.S. government to convert those dollars.

©2018 by FlatWorld 5
 e. a situation during recession wherein when everyone tries to save more money, and it
leads to a fall in the aggregate demand which in turn lowers total savings in the
population.
d; Easy

36. The US dollar, the euro, the British pound, the Swiss franc, and the Japanese yen are
examples of current _____.
a. Exchange rates
b. Spot rates
c. Float currencies
d. Reserve currencies
e. International monetary systems
d; Easy

37. The Nixon Shock refers to a series of economic decisions made in 1971 that led to the:
a. demise of the World Trade Organization.
b. correction of the Leontief Paradox.
c. establishment of the International Monetary Fund.
d. demise of the Bretton Woods system.
e. demise of the GATT agreement.
d; Easy

38. The _____, which devalued the U.S. dollar to $38 per ounce of gold, increased the value of
other countries’ currencies to the dollar, and increased the band within which a currency was
allowed to float from 1 percent to 2.25 percent.
a. Jamaica Agreement
b. Basel Convention
c. Bonn Agreement
d. Smithsonian Agreement
e. Barcelona Convention
d; Easy

39. When Bretton Woods was established, John Maynard Keynes, a highly influential British
economic thinker, initially proposed creating an international currency called _____ as the
main currency.
a. Wocu
b. Ven
c. unitas
d. Bancor
e. dollar
d; Easy

40. _____ refers to a main currency that many countries and institutions hold as part of their
foreign exchange reserves.
a. Reserve currency
b. Float
c. Trade deficit
d. Exchange rate
e. Bank reserve
a; Easy

©2018 by FlatWorld 6
41. When Bretton Woods was established, the Americans initially proposed creating an
international currency called _____ as the central currency.
a. Wocu
b. Ven
c. unitas
d. Bancor
e. dollar
c; Easy

42. Managed float system of exchange rates refers to a system in which currencies float against
one another with:
a. the G8 intervening only to stabilize the currencies at set target exchange rates.
b. governments intervening only to stabilize their currencies at set target exchange rates.
c. big business houses intervening only to stabilize the currencies at set target exchange
rates.
d. international financial institutions intervening only to stabilize the currencies at set target
exchange rates.
e. the developed countries intervening only to stabilize the currencies at set target exchange
rates.
b; Easy

43. Which of the following is true of the Jamaica Agreement?

a. It established the gold standard as the new international monetary system.
b. It established the managed floating exchange rate system as the new international
monetary system.
c. It led to the devaluation of the U.S. dollar to $38 per ounce of gold, which increased the
value of other countries’ currencies to the dollar.
d. It was a series of economic decisions made in 1971 that led to the demise of the Bretton
Woods system.
e. It was a series of economic decisions made in 1971 that led to the demise of the GATT
agreement.
b; Moderate

44. The _____ removed gold as the primary reserve asset of the IMF.
a. Jamaica Agreement
b. Basel Convention
c. Bonn Agreement
d. Smithsonian Agreement
e. Bretton Woods Agreement
a; Easy

45. Which of the following is true about the Plaza Accord?

a. It focused on the establishment of the European Monetary System (EMS) and the
creation of a single currency, the euro.
b. It focused on the formulation of broad supervisory standards and guidelines and
recommended statements of best practice in banking supervision.
c. It focused on stabilizing the value of the dollar through collective efforts.
d. It focused on forcing down the value of the U.S. dollar through collective efforts.
e. It focused on establishing the U.S. dollar as the reserve currency through collective
efforts.

©2018 by FlatWorld 7
 d; Moderate

46. Identify the correct statement about the Louvre Accord.

a. It focused on the establishment of the European Monetary System (EMS) and the
creation of a single currency, the euro.
b. It focused on the formulation of broad supervisory standards and guidelines and
recommended statements of best practice in banking supervision.
c. It focused on stabilizing the value of the dollar through collective efforts.
d. It focused on forcing down the value of the U.S. dollar through collective efforts.
e. It focused on establishing the U.S. dollar as the reserve currency through collective
efforts.
c; Moderate

47. Which of the following is true of the Group of Five (G5)?

a. Britain, France, Germany, Canada, and the United States were the founding members of
this group.
b. The reason for forming the group was the increasing value of the U.S. dollar, which
pushed up the prices of U.S. exports, thereby increasing the trade deficit.
c. The European Union was represented in G20 and could host or chair the group.
d. The 1985 agreement of G5 was called the Jamaica Accord.
e. The G5 was expanded in 1989 to include 20 countries.
b; Easy

48. The _____ are often called the Bretton Woods Institutions.
a. Asian Development Bank and EBRD
b. Inter-American Development Bank and AFDB
c. World Trade Organization and GATT
d. World Bank and the IMF
e. West African Development Bank and BDEAC
d; Easy

49. Which of the following is true for the World Bank and the IMF?
a. They are cooperative institutions that seek to maintain an orderly system of payments and
receipts between nations.
b. They are development institutions whose primary responsibility is financing economic
development.
c. They are managed and controlled by the United States.
d. They concentrate their efforts on broadening and strengthening the economies of their
member nations.
e. They control and manage the financial institutions of the member countries.
d; Moderate

50. A Special Drawing Right (SDR) refers to:

a. an international monetary reserve asset issued by the IMF.
b. the main currency that many countries and institutions hold as part of their foreign
exchange reserves.
c. a fast-disbursing loan facility with low conditionality aimed at reassuring investors by
injecting liquidity.
d. a system where currencies float against one another with governments intervening only to
stabilize their currencies at set target exchange rates.

©2018 by FlatWorld 8
 e. a negotiable certificate issued by a U.S. bank representing a specified number of shares
(or one share) in a foreign stock that is traded on a U.S. exchange.
a; Easy

51. Today, the value of an SDR consists of the value of five of the IMF’s biggest members’
currencies. Which of the following is NOT one of them?
a. The U.S. dollar
b. The Japanese yen
c. The Chinese renminbi
d. The British pound
e. The Indian Rupee
e; Moderate

52. The purpose of the International Monetary Fund is to:

a. promote foreign direct investment into developing countries by insuring investors against
political risk.
b. promote sustainable private sector development primarily by financing private sector
projects and companies located in the developing world.
c. promote exchange stability, to maintain orderly exchange arrangements among members,
and to avoid competitive exchange depreciation.
d. promote economic and social progress in developing countries by helping raise
productivity so that their people may live a better and fuller life.
e. provide facilities for the conciliation and arbitration of investment disputes between
member countries and individual investors.
c; Moderate

53. Which of the following is true of the economic policies that have to be implemented by a
country in order to avail loans by the IMF?
a. Increasing government borrowing
b. Lowering interest rates to stabilize the currency
c. Allowing failing firms to go bankrupt
d. Nationalization of the country’s assets
e. Presence of regulated markets
c; Moderate

54. The IMF has been criticized for:

a. ignoring the dynamics of a country that they were dealing with.
b. following a strict policy of non-intervention in the free market.
c. imposing harsh economic sanctions against nations ruled by dictators.
d. prolonged and unnecessary consultations with the affected countries while implementing
policies.
e. disbursing loans without any conditions to be fulfilled by the borrowing nation.
a; Moderate

55. Flexible Credit Line (FCL) refers to:

a. a system in which currencies float against one another with governments intervening only
to stabilize their currencies at set target exchange rates.
b. a negotiable certificate issued by a U.S. bank representing a specified number of shares
(or one share) in a foreign stock that is traded on a U.S. exchange.
c. a fast-disbursing loan facility with low conditionality aimed at reassuring investors by
injecting liquidity.

©2018 by FlatWorld 9
 d. an international monetary reserve asset issued by the IMF.
e. the main currency that many countries and institutions hold as part of their foreign
exchange reserves.
c; Easy

56. Rapid Credit Facility refers to:

a. a system in which currencies float against one another with governments intervening only
to stabilize their currencies at set target exchange rates.
b. a negotiable certificate issued by a U.S. bank representing a specified number of shares
(or one share) in a foreign stock that is traded on a U.S. exchange.
c. an international monetary reserve asset issued by the IMF.
d. the main currency that many countries and institutions hold as part of their foreign
exchange reserves.
e. a system of disbursing loans which is front-loaded and has low conditionality.
e; Easy

57. The World Bank’s first loans were extended during the late 1940s to finance the:
a. infrastructural development of the newly independent countries of Asia.
b. reconstruction of the war-ravaged economies of Western Europe.
c. economic rehabilitation of the famine-struck countries of West Africa.
d. repatriation and the settlement of the Jewish population in Israel.
e. restoration of the financial institutions of North America.
b; Easy

58. The central purpose of the World Bank is to:

a. promote foreign direct investment into developing countries by insuring investors against
political risk.
b. promote sustainable private sector development primarily by financing private sector
projects and companies located in the developing world.
c. promote exchange stability, to maintain orderly exchange arrangements among members,
and to avoid competitive exchange depreciation.
d. end extreme poverty within a generation and boost shared prosperity.
e. provide facilities for the conciliation and arbitration of investment disputes between
member countries and individual investors.
d; Moderate

59. The World Bank consists of two main bodies which are the:
a. Asian Development Bank and EBRD.
b. Inter-American Development Bank and AFDB.
c. World Trade Organization and GATT.
d. International Finance Corporation (IFC) and the Multilateral Investment Guarantee
Agency (MIGA).
e. IBRD and the International Development Association (IDA).
e; Easy

60. Which of the following is true for the International Finance Corporation (IFC)?
a. It disburses loans to countries with the purpose of building economies and reducing
poverty.
b. It provides interest-free loans to countries with sovereign guarantees.
c. It facilitates sustainable development by improving investments in the private sector.
d. It focuses on improving the foreign direct investment of developing countries.

©2018 by FlatWorld 10
 e. It provides a means for dispute resolution between governments and private investors
with the end goal of enhancing the flow of capital.
c; Moderate

61. The _____ focuses on improving the foreign direct investment of developing countries.
a. International Bank for Reconstruction and Development
b. International Development Association
c. Multilateral Investment Guarantee Agency
d. International Finance Corporation
e. International Centre for Settlement of Investment Disputes
c; Easy

62. Which of the following is true for the International Development Association (IDA)?
a. It disburses loans to countries with the purpose of building economies and reducing
poverty.
b. It provides interest-free loans to countries with sovereign guarantees.
c. It facilitates sustainable development by improving investments in the private sector.
d. It focuses on improving the foreign direct investment of developing countries.
e. It provides a means for dispute resolution between governments and private investors
with the end goal of enhancing the flow of capital.
b; Moderate

63. Soft loans refer to loans which are free of interest with a provision:
a. that the country receiving the loan shall not be eligible to borrow till the repayment of the
present loan.
b. that till the time the loan is returned, the lending institution shall control the country’s
financial institutions.
c. of a 10-year grace period before the country receiving the loan needs to begin repayment.
d. that the country receiving the loan shall pay the whole sum in a single lump sum amount
after the end of the grace period.
e. that the country receiving the loan can enter into an agreement with another country to
offload its loan.
c; Easy

64. The bonds issued by the World Bank are rated _____ because they are backed by the member
states’ shared capital and by borrowers’ sovereign guarantees.
a. BBB
b. CCC
c. AA
d. AAA
e. BB
d; Easy

65. Which of the following is true for the International Centre for Settlement of Investment
Disputes (ICSID)?
a. It disburses loans to countries with the purpose of building economies and reducing
poverty.
b. It provides interest-free loans to countries with sovereign guarantees.
c. It facilitates sustainable development by improving investments in the private sector.
d. It focuses on improving the foreign direct investment of developing countries.

©2018 by FlatWorld 11
 e. It provides a means for dispute resolution between governments and private investors
with the end goal of enhancing the flow of capital.
e; Easy

66. Which of the following is an issue on which the World Bank has been criticized?
a. The shifting of the World Bank from being an international welfare organization to a
“lender of last resort.”
b. The bank’s lending policies which often reward macroeconomic inefficiency in the
developing world.
c. The attempt of the bank to focus on local initiatives rather than large projects.
d. It entertains too many alternative perspectives on development, which jeopardizes its
main objectives.
e. It has allowed itself to be dominated and controlled by developing nations.
b; Moderate

67. The Millennium Development Goals refer to the seventeen international development goals
that:
a. all the nongovernmental organizations have pledged to achieve on their own as a protest
against government inaction, ineptitude, and indifference.
b. the business world has pledged to plan, work for, and achieve as a part of its ambitious
corporate responsibility plan to make a better world.
c. are outlined in the Tenth Five Year Plan by the Indian Planning Commission.
d. all 193 United Nations member states agreed to achieve by the year 2030.
e. the developed countries of the world have undertaken with the avowed aim of bringing
about a qualitative change in the life of the people.
d; Easy

68. Which of the following is true for the International Bank for Reconstruction and
Development (IBRD)?
a. It disburses loans to countries with the purpose of building economies and reducing
poverty.
b. It provides interest-free loans to countries with sovereign guarantees.
c. It facilitates sustainable development by improving investments in the private sector.
d. It focuses on improving the foreign direct investment of developing countries.
e. It provides a means for dispute resolution between governments and private investors
with the end goal of enhancing the flow of capital.
a; Moderate

69. The brainchild of Swiss economics professor Klaus Schwab, _____, is an annual forum that
the world’s largest businesses attend with senior government officials from around the world
and leaders of thought on economic, social, and political issues.
a. Zurich
b. Geneva
c. Davos
d. Bern
e. Basel
c; Moderate

70. Renminbi is the official name of Chines currency. _____ is the main unit of the currency.
a. Pound
b. Yen

©2018 by FlatWorld 12
 c. Yuan
d. Cent
e. Kuna
c; Easy

Short Answer Questions

71. How did the Bretton Woods system help those countries which had less gold in reserve than
they had the currency in circulation?
The Bretton Woods system worked to fix this by tying the value of the U.S. dollar to gold but
also by tying all of the other countries to the U.S. dollar rather than directly to gold. The par
value of the U.S. dollar was fixed at $35 to one ounce of gold. All other countries then set the
value of their currencies to the U.S. dollar. The British pound had undergone a substantial
loss in value and by that point, which was $2.40 to £1. Member countries had to maintain the
value of their currencies within 1 percent of the fixed exchange rate. Lastly, the agreement
established that only governments, rather than anyone who demanded it, could convert their
U.S. dollar holdings into gold. Most businesspeople eventually ignored the technicality of
pegging the U.S. dollar to gold and simply utilized the actual exchange rates between
countries as an economic measure for doing business.
Moderate

72. What was the Triffin Paradox?

The Bretton Woods Agreement ran into challenges in the early 1970s despite a fixed
exchange rate based on the U.S. dollar and more national flexibility. The U.S. trade balance
had turned to a deficit as Americans were importing more than they were exporting.
Throughout the 1950s and 1960s, countries had substantially increased their holdings of U.S.
dollars, which was the only currency pegged to gold. By the late 1960s, many of these
countries expressed concern that the U.S. did not have enough gold reserves to exchange all
of the U.S. dollars in global circulation. This became known as the Triffin Paradox, named
after the economist Robert Triffin, who identified this problem. He noted that the more
dollars foreign countries held, the less faith they had in the ability of the U.S. government to
convert those dollars.
Easy

73. What was the Smithsonian Agreement?

The Smithsonian Agreement was a response to the economic crisis that was created due to a
host of reasons such as the presence of the Triffin Paradox, the Vietnam War, and the Nixon
Shock. In 1971, the member countries reached an agreement known as the Smithsonian
Agreement, which devalued the U.S. dollar to $38 per ounce of gold, increased the value of
other countries’ currencies to the dollar, and increased the band within which a currency was
allowed to float from 1 percent to 2.25 percent. This agreement still relied on the U.S. dollar
to be the strong reserve currency and the persistent concerns over the high inflation and trade
deficits continued to weaken confidence in the system. Countries gradually dropped out of
the system. Germany, the United Kingdom, and Switzerland began to allow their currencies
to float freely against the dollar. The Smithsonian Agreement was an insufficient response to
the economic challenges. The idea of fixed exchange rates was over by 1973.
Easy

74. What was the significance of the Bretton Woods Agreement in the international monetary
market?

©2018 by FlatWorld 13
 The Bretton Woods Agreement was the first formal institution that governed international
monetary systems. By having a formal set of rules, regulations, and guidelines for decision
making, the Bretton Woods Agreement established a higher level of economic stability.
International businesses benefited from the almost 30 years of stability in exchange rates.
Bretton Woods established a standard for future monetary systems to improve on; countries
today continue to explore how best to achieve this.
Easy

75. What are the main responsibilities of the IMF as envisaged by John Maynard Keynes and
Harry Dexter White?
The responsibilities of the International Monetary Fund are:
• To promote international monetary cooperation through a permanent institution which
would provide the machinery for consultation and collaboration on international
monetary problems.
• To facilitate the expansion and balanced growth of international trade, and to contribute
thereby to the promotion and maintenance of high levels of employment and real income
and to the development of the productive resources of all members as primary objectives
of economic policy.
• To promote exchange stability, to maintain orderly exchange arrangements among
members, and to avoid competitive exchange depreciation.
• To assist in the establishment of a multilateral system of payments in respect of current
transactions between members and in the elimination of foreign exchange restrictions
which hamper the growth of world trade.
• To give confidence to members by making the general resources of the Fund temporarily
available to them under adequate safeguards, thus providing them with opportunity to
correct maladjustments in their balance of payments without resorting to measures
destructive to national or international prosperity.
• In accordance with the above, to shorten the duration and lessen the degree of
disequilibrium in the international balances of payments of members.
Moderate

76. What are the conditions that countries have to fulfill in order to be able to borrow from the
IMF?
The IMF makes the loan given to countries conditional on the implementation of certain
economic policies, which typically include the following:
• Reducing government borrowing (higher taxes and lower spending)
• Higher interest rates to stabilize the currency
• Allowing failing firms to go bankrupt
• Structural adjustment (privatization, deregulation, reducing corruption and bureaucracy)
Easy

77. What was the impact of the 2008 global crisis on the IMF?
The 2008 global crisis uncovered fragility in the advanced financial markets that soon led to
the worst global downturn since the Great Depression. The IMF was inundated with requests
for standby arrangements and other forms of financial and policy support. The international
community recognized that the IMF’s financial resources were as important as ever and were
likely to be stretched thin before the crisis was over. With broad support from creditor
countries, the IMF’s lending capacity tripled to around $750 billion. To use those funds
effectively, the IMF overhauled its lending policies. It created a flexible credit line for
countries with strong economic fundamentals and a track record of successful policy

©2018 by FlatWorld 14
 implementation. Other reforms targeted low-income countries. These factors enabled the IMF
to disburse very large sums quickly. The disbursements were based on the needs of
borrowing countries and were not as tightly constrained by quotas as in the past.
Hard

78. What are the key areas for which the IMF has been criticized and why?
1.Conditions for loans. The IMF makes the loans given to countries conditional on the
implementation of certain economic policies, which typically include austerity measures
2.Lack of country specific reforms, such exchange rate reforms, which critics see as an example
of how the IMF fails to understand the dynamics of the country that they were dealing with.
3.Lack of transparency and involvement. The IMF has been criticized for “imposing policy
withlittle or no consultation with the affected countries.”
4.Devaluations. In the initial stages, the IMF has been criticized for allowing inflationary
devaluations.
5.Disruption of the Free-market, as critics believe it is better to allow currencies to reach their
market level. They also assert that bailing out countries with large debts is morally hazardous;
countries that know that there is always a bailout provision will borrow and spend more
recklessly.
6. Supporting military dictatorships. The IMF has been criticized over the decades for supporting
military dictatorships with poor human rights records, thereby creating a conflict between the
economic and moral obligations of the institution.
Moderate

79. The World Bank’s focus on large projects rather than local initiatives has had a negative
impact on the social and environmental front. Explain with an example.
Some critics claim that World Bank loans give preference to large infrastructure projects like
building dams and electric plants over projects that would benefit the poor, such as education
and basic health care. The projects often destroy the local environment, including forests,
rivers, and fisheries. The Sardar Sarovar dam on the Narmada River in India was expected to
displace almost a quarter of a million people into squalid resettlement sites. The Polonoroeste
Frontier Development scheme has led to large-scale deforestation in the Brazilian rain forest.
In Thailand, the Pak Mun dam has destroyed the fisheries of the Mun River, impoverishing
thousands who had made their living fishing and forever altering the diet of the region.
Further, the larger projects become targets for corruption by local government officials
because there is so much money involved.
Moderate

80. What are the key issues that the World Bank is focused on in order to achieve the Millennium
Development Goals (MDGs)?
The World Bank’s current focus is on helping countries achieve the Millennium
Development Goals (MDGs), engaging in development projects in remote locations around
the globe to improve living standardsand reduce poverty. They include reducing extreme
poverty, reducing child mortality rates, fighting disease epidemics, promoting clean energy,
and developing a global partnership for development. As of 2017, progress toward the goals
was uneven. Some countries achieved many goals, while others were not on track to realize
any. By providing funding that serves as a resource for countries to utilize in order to meet
key development targets, the World Bank continues to play an integral role in helping
countries reduce poverty and improve the well-being of their citizens. World Bank funding
provides a resource to countries toutilize the services of global companies to accomplish their
objectives.
Hard

©2018 by FlatWorld 15
Essay Questions

81. What were the advantages of the gold standard?

The gold standard dramatically reduced the risk in exchange rates because it established fixed
exchange rates between currencies. Any fluctuations were relatively small. This made it
easier for global companies to manage costs and pricing. The second advantage is that
countries were forced to observe strict monetary policies. They could not just print money to
combat economic downturns. One of the key features of the gold standard was that a currency
had to actually have in reserve enough gold to convert all of its currency being held by
anyone into gold. Therefore, the volume of paper currency could not exceed the gold
reserves. The third major advantage was that gold standard helped a country correct its trade
imbalance. If a country was importing more than it is exporting, then under the gold standard
the country had to pay for the imports with gold. The government of the country had to
reduce the amount of paper currency, because there could not have been more currency in
circulation than its gold reserves. With less money floating around, people spent less (thus
causing a decrease in demand) and prices would eventually decrease. As a result, with
cheaper goods and services to offer, companies from the country exported more, changing the
international trade balance gradually back to being in balance.
Moderate

82. How did World War I combined with the Great Depression at a later period contribute to the
collapse of the gold standard?
The gold standard eventually collapsed from the impact of World War I. During the war,
nations on both sides had to finance their huge military expenses and did so by printing more
paper currency. As the currency in circulation exceeded each country’s gold reserves, many
countries were forced to abandon the gold standard. In the 1920s, most countries returned to
the gold standard at the same price level. However, the revival of the gold standard was short-
lived due to the Great Depression, which began in the late 1920s. The gold standard limited
the flexibility of the monetary policy of each country’s central banks by limiting their ability
to expand the money supply. Countries could not expand their money supply beyond what
was allowed by the gold reserves held in their vaults. World War I had seen the creation of
too much money to allow a return to the gold standard without either large currency
devaluations or price deflations. In addition, the U.S. gold stock had doubled. There simply
was not enough monetary gold in the rest of the world to support the countries’ currencies at
the existing exchange rates. By 1931, the United Kingdom had to officially abandon its
commitment to maintain the value of the British pound. The currency was allowed to float.
The U.S. dollar and the French franc were the next strongest currencies and nations sought to
peg the value of their currencies to either the dollar or franc. However, in 1934, the United
States devalued its currency from $20.67 per ounce of gold to $35 per ounce. With a cheaper
U.S. dollar, U.S. firms were able to export more as the price of their goods and services were
cheaper vis-à-vis other nations. Other countries devalued their currencies in retaliation of the
lower U.S. dollar. Many of these countries used arbitrary par values rather than a price
relative to their gold reserves. Each country hoped to make its exports cheaper to other
countries and reduce expensive imports. However, with so many countries simultaneously
devaluing their currencies, the impact on prices was canceled out. Many countries also
imposed tariffs and other trade restrictions in an effort to protect domestic industries and jobs.
By 1939, the gold standard was dead; it was no longer an accurate indicator of a currency’s
real value.
Hard

©2018 by FlatWorld 16
83. What led to the collapse of the Bretton Woods system?
The U.S. trade balance had turned to a deficit as Americans were importing more than they
were exporting. Throughout the 1950s and 1960s, countries had substantially increased their
holdings of U.S. dollars, which was the only currency pegged to gold. By the late 1960s,
many of these countries expressed concern that the U.S. did not have enough gold reserves to
exchange all of the U.S. dollars in global circulation. This became known as the Triffin
Paradox, named after the economist Robert Triffin. He noted that the more dollars foreign
countries held, the less faith they had in the ability of the U.S. government to convert those
dollars. The expense of the Vietnam War and an increase in domestic spending worsened the
Triffin Paradox. The U.S. government began to run huge budget deficits, which further
weakened global confidence in the U.S. dollar. When nations began demanding gold in
exchange for their dollars, there was a huge global sell-off of the U.S. dollar, resulting in the
Nixon Shock in 1971. The Nixon Shock was a series of economic decisions made by the U.S.
President Richard Nixon in 1971 that led to the demise of the Bretton Woods system.
Without consulting the other member countries, on August 15, 1971, Nixon ended the free
convertibility of the U.S. dollar into gold and instituted price and wage freezes among other
economic measures. These are the reasons that led to the collapse of the Bretton Woods
system.
Hard

84. Explain the establishment of G5 and its transformation to G20.

In the early 1980s, the value of the U.S. dollar increased, pushing up the prices of U.S.
exports and thereby increasing the trade deficit. To address the imbalances, five of the
world’s largest economies met in September 1985 to determine a solution. The five countries
were Britain, France, Germany, Japan, and the United States. This group became known as
the Group of Five, shortened to G5. The 1985 agreement, called the Plaza Accord, focused on
forcing down the value of the U.S. dollar through collective efforts. By February 1987, the
markets had pushed the dollar value down, and some worried it was now valued too low. The
G5 met again, but now as the Group of Seven, adding Italy and Canada. It became known as
the G7. The Louvre Accord stabilized the dollar. The countries agreed to support the dollar at
the current valuation. The G7 continued to meet regularly to address ongoing economic
issues. The G7 was expanded in 1999 to include 20 countries as a response to the financial
crises of the late 1990s and the growing recognition that key emerging-market countries were
not adequately included in the core of global economic discussions and governance. It was
not until a decade later, though, that the G20 effectively replaced the G8, which was made up
of the original G7 and Russia. The key point to remember is that anything related to a G is
likely to be a forum consisting of finance ministers and governors of central banks who are
meeting to discuss matters related to cooperating on an international monetary system and
key issues in the global economy. The G20 is likely to be the stronger forum for the
foreseeable future, given the number of countries it includes and the amount of world trade it
represents.
Moderate

85. What steps have been taken by the IMF to undo some of the criticisms that it has been
subjected to by economists?
The IMF has sought to correct some of the criticisms.
a. Flexibility and speed: The IMF created the Flexible Credit Line (FCL), which is a fast-
disbursing loan facility with low conditionality aimed at reassuring investors by injecting
liquidity. Traditionally, IMF loan programs required the imposition of austerity measures
such as raising interest rates that could reduce foreign investment. In the case of the FCL,

©2018 by FlatWorld 17
 countries qualified for it not on the basis of their promises, but on the basis of their
history. Countries with sound macroeconomic fundamentals were eligible for drawings
under the FCL. A similar program was proposed for low-income countries known as the
Rapid Credit Facility, which was front-loaded and was intended to have low
conditionality.
b. Cheerleading: The Fund positioned itself to be less of an adversary and more of a
cheerleader to member countries. Some countries needed loans more for reassurance than
reform. This enabled more domestic political and economic stability.
c. Adaptability: Instead of providing the same medicine to all countries regardless of their
particular problems, the new loan facilities aided reform-minded governments by
providing short-term resources to reassure investors. In this manner, they help politicians
in developing countries manage the downside costs of integration.
d. Transparency: The IMF made efforts to improve its own transparency and encouraged its
member countries to do so. This creates a barrier to any one or more countries that have
more geopolitical influence in the organization.
Moderate

86. One recent example of the extensive influence that Bretton Woods Institution have on
global business involves the International Monetary Fund (IMF) and China. Explain.
A July 2010 report from the IMF stated that China’s trade surplus would increase unless the
government takes steps to increase more domestic consumption by the Chinese and also
byletting the Chinese currency, the renminbi, appreciate or increase in value.China’s export
machine has been fueled in large part by the low value of the renminbi, as set and maintained
by the government. Letting the currency trade with reduced or no government intervention
would likely reduce the country’s massive exports. While the IMF can only issue a report,
action is completely at the discretion of the country’s government. However, for global
businesses, this can be encouraging in several ways. In this case, companies that are eager to
enter the Chinese market to sell their goods and services may find it easier or thegeneral
climate more welcoming of foreign businesses. Second, if the renminbi increases in value, the
Chinese can purchase more goods and services from overseas firms. On the flip side,
companies thatcompete with Chinese firms in other markets may be frustrated by China’s
cheap costs and undervalued currency. If the Chinese currency increases in value, Chinese
exports will become more expensive, allowing other companies to compete more effectively
against Chinese firms.
Hard

Fill in the Blanks

87. _____ is defined as a unit of account that is used as a medium of exchange in transactions.
Money; Easy

88. Ancient Egypt and Mesopotamia used a system based on the highly coveted coins of gold and
silver, also known as _____.
bullion; Easy

89. The latest version of currency is now _____ and digital currency.
bitcoin; Easy

©2018 by FlatWorld 18
Test Bank for International Business: Opportunities and Challenges in a Flattening World, Ve

90. The _____ refers to the system and rules that govern the use of money around the world and
between countries.
international monetary system; Easy

91. A(n) _____ refers to a system in which the price of one currency vis-à-vis another is fixed
and does not change.
fixed exchange rate system; Easy

92. _____ and Harry Dexter White were the two key figures who paved the way for the meeting
at Bretton Woods that led to the creation of a new monetary system.
John Maynard Keynes; Easy

93. The initial primary purpose of the _____ was to help manage the fixed rate exchange system
in the world market.
International Monetary Fund; Easy

94. The World Bank’s purpose was to help with _____ European reconstruction.
post–World War II; Moderate

95. The _____ was the first formal institution that governed international monetary systems.
Bretton Woods Agreement; Easy

96. _____ refers to a system in which currencies freely float against each other and there is no
government intervention.
Free floating exchange rate system; Easy

97. The _____ Agreement expanded the purpose of the IMF to include lending money as a last
resort to countries with balance-of-payment challenges.
Jamaica; Easy

98. _____ became the first nation to borrow from the IMF.
France; Easy

99. A(n)_____ is an international monetary reserve asset of the IMF.

Special Drawing Right (SDR); Easy

100. The IDA offers an alternative loan option wherein loans are free of interest and offered
for several decades. These loans are often called _____.
soft loans; Easy

101. The _____ stated that the more USdollars were used as a base reserve currency,
the less faith that countries had in the ability of the USgovernment to convert those
dollars to gold.
Triffin Paradox; Moderate

©2018 by FlatWorld 19

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