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Exam 10: The International Monetary System

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Question 1

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Explain the concept of a currency board.How successful is this system?

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A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.To make this commitment credible,the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100 percent of the domestic currency issued.Under this arrangement,the currency board can issue additional domestic notes and coins only when there are foreign exchange reserves to back it.This limits the ability of the government to print money and,thereby,create inflationary pressures.Under a strict currency board system,interest rates adjust automatically. Since its establishment in 1983,the Hong Kong currency board has weathered several storms.This success persuaded several other countries in the developing world to consider a similar system.Argentina introduced a currency board in 1991 (but abandoned it in 2002)and Bulgaria,Estonia,and Lithuania have all gone down this road in recent years (seven IMF members have currency boards).Economic collapse in Argentina in 2001 and the subsequent decision to abandon its currency board dampened much of the enthusiasm for this mechanism of managing exchange rates.

Question 2

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______ arises when people behave recklessly because they know they will be saved if things go wrong.

A) The lemon problem
B) Moral hazard
C) Insurance paradigm
D) Banking paradox

E) All of the above
F) C) and D)

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Question 3

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Which of the following exchange rate regimes is least practiced by IMF member nations?

Which of the following is true of the IBRD scheme of the World Bank?

Describe what happened at the 1944 Bretton Woods conference.Are the monetary principles established by the Bretton Woods conference still in effect today?

What is the official name for the World Bank?

The exchange rates for almost all currencies are determined by the free play of market forces.

Which of the following helps explain the rise of the dollar against most major currencies in the late 1990s,even though the United States was still running a significant balance-of-payments deficit?

A big bank follows rash lending policies for short-term gains because it knows that it will be bailed out because it is too big to fail.This behavior illustrates:

If the IMF agreed that the country's balance of payments was in "fundamental disequilibrium," the system of adjustable parities allowed for the devaluation of a country's currency by more than 10 percent.

The gold standard worked well from the 1870s until the start of World War II in 1939,when it was abandoned.

The fall in the value of the U.S.dollar between 1985 and 1988 was caused by a combination of:

The IMF has become a powerful institution with sufficient checks and balances to ensure accountability.

Which of the following actions by the Mexican government in December 1994,exacerbated the sale of the peso and contributed to the rapid 40 percent drop in its value?

The ____ was a system to regulate fixed exchange rates before the introduction of the euro.

Why is the current foreign exchange system thought of as a dirty-float system?

Approximately 14 percent of the IMF's members allow their currency to float freely.

The system of adjustable parities allowed for the devaluation of a country's currency by more than _____ percent if the IMF agreed that a country's balance of payments was in "fundamental disequilibrium."

Since the Bretton Woods system of floating exchange rates collapsed in 1973,the world has operated with a fixed exchange rate system.

The aim of the Bretton Woods agreement,of which the ____ was the main custodian,was to try to avoid a repetition of the financial chaos of the previous years through a combination of discipline and flexibility.