IB Chap 11

A pegged exchange rate means the value of a currency is fixed relative to a reference currency

• True

• False

Moral hazard arises when people behave recklessly because _____. 

• of the restrictions that exist in a country's monetary policy

• of the restrictions that IMF has imposed on them

• they know they will be saved if things go wrong

• they face financial difficulties arising out of external factors

A currency crisis occurs due to _____. 

• the loss of confidence in a country's banking system

• heavy foreign debt obligations

• high levels of trade deficit

• a speculative attack on the exchange value

Under a currency board system, _____. 

• inflation rates are maintained at high level

• countries issue domestic notes at will

• interest rates remain constant

• government lacks the ability to set interest rates

Which of the following statements is true of pegged exchange rates? 

• A pegged exchange rate allows a country's currency to be determined by market forces.

• A pegged exchange rate weakens the monetary discipline of a country.

• Pegged exchange rates are popular among many of the world's smaller nations.

• Adopting a pegged exchange rate regime increases inflationary pressures in a country.

Those in favor of floating exchange rate claim that _____. 

•  uncertainty in monetary markets dampens the growth of international trade

• inflation is beneficial to a country if it is controlled closely

• trade imbalances can be adjusted by using floating exchange rates

• governments can have rigid control over monetary markets by using floating rates

Which of the following arguments strengthen the idea of floating exchange rates? 

• External agencies should not interfere in the monetary policies of a country.

• Trade deficits can be corrected through changes in exchange rates.

• Changes in exchange rates will not impact the trade balance in a country.

• Governments should act in ways to minimize the uncertainty in monetary markets.

The monetary autonomy argument holds that _____. 

• each country should be allowed to choose its own inflation rate

• inflation is beneficial to a country's economy and growth

•  inflation is detrimental to a country's economy and growth

• countries should restrict inflation based on the global standards

Which of the following is the reason why the current foreign-exchange system is sometimes thought of as a managed-float system? 

• The exchange rates of a currency are determined by market forces.

• Governments intervene frequently in the foreign exchange market.

• Major currencies are allowed to freely float against each other.

• Countries use a reference currency to estimate the value of their currencies.

Which of the following is a disadvantage of using a rigid policy of fixed exchange rates? 

• It is likely to create high unemployment in some cases.

• It will lead to inflationary economies across the world.

•  It is likely to bring about trade wars between nations.

• It will instigate competitive devaluations and intense competition.