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INTERNATIONAL FINANCE

Assignment Problems (4) Name: Student#:

I. Choose the correct answer for the following questions (only correct answer) (3.5 credits for each question, total credits 3.5 x 20 = 70)

1. The exchange rate system refers to __________.

A. a country’s internal economic policies such as employment, inflation and interest rate levels

B. a country’s monetary policies C. a country’s fiscal polices

D. a country’s choice as to which exchange rate regime such as fixed or floating or between to follow

2. The international monetary system is broadly defined as ___________.

A. the set of conventions, rules, procedures and institutions that govern the conduct of financial relations between nations

B. the set of rules to manage every country’s central banks C. the set of rules to solve trade disputes between countries D. the set of rules to develop world economy

3. Under the gold standard, the exchange rate was fixed because __________. A. each currency unit could be converted to a weight of gold B. the gold could be exported and imported with no restrictions C. gold coins could be freely minted D. all of the above

4. When the gold standard prevailed, the United States fixed the price of gold at $20.646 per ounce and the Britain fixed the price at 4.252 per ounce. Now suppose the fees for transporting one ounce of gold were approximately $0.03 per sterling of gold. Then the exchange rate of dollar versus sterling would fluctuate between _________.

A. $4.8856/? and $4.8256/? B. $4.9042/? and $4.8070/? C. $4.9770/? and $4.7463/?

D. We don’t know, because it depends on the supply and demand forces in the foreign exchange market

5. Under the gold standard, the par value of the exchange rate was determined by __________ .

A. gold parity of the relative currencies B. interest rate of the relative currencies

C. demand and supply forces in the foreign exchange market D. inflation rate of the relative currencies

6. Which of the following is true regarding the collapse of the gold standard system? A. The World War I had many European countries suspend convertibility of their currencies into gold.

B. The political costs of maintaining the overvalued pound were so great in the United Kingdom.

C. Nations facing 1929 – 1933 worldwide recession decided to pursue objectives such as higher employment rates and real growth rates, rather than to maintain the exchange value of their currencies.

D. All of the above are the reasons that the gold standard finally collapsed.

7. The U.S. dollar was designated as the international currency in international settlements under the Bretton Woods system. The dollar was accepted by the rest of the world because __________.

A. it could be used to purchase U.S. goods and services B. it could be converted to gold at a price of $35/ounce C. the U.S. was the only super power at that time

D. the IMF forced the rest of the world to use dollar to settle international debts

8. The principal function of the International Monetary Fund (IMF) was originally to __________.

A. act as a supranational regulatory agency for all countries’ central banks

B. lend to member nations experiencing a shortage of foreign exchange reserves C. finance postwar reconstruction, particularly in Europe and Japan

D. reduce trade barriers and settle disputes among countries relating to currency negotiations

9. Before 1971 the exchange rates were pretty stable because of the Bretton Woods Agreement. So if the par value of the Japanese Yen and U.S. dollar was set by ￥100/$, the upper limit and lower limit that this exchange rate was allowed to fluctuate freely would be __________ . A. ￥ 101/$ and ￥ 99/$ B. ￥ 102.25/$ and ￥ 97.75/$ C. ￥ 105/$ and ￥ 95/$ D. ￥ 110/$ and ￥ 90/$

10. The increase in value of a currency pegged to gold or another currency is known as __________, A. appreciation B. depreciation C. revaluation D. devaluation

11. A country that regulates the rate at which its currency is exchanged for all other

currencies is considered to have a __________ exchange rate system. A. fixed or managed B. floating or flexible C. currency board D. dollarization

12. Which of the following is true for those who are in favor of floating exchange rate system?

A. Floating exchange rates ensure balance-of-payments equilibrium B. Floating exchange rates ensure monetary autonomy C. Floating exchange rates promote economic stability D. All of the above are true.

13. Since the advent of floating exchange rates in 1973 it has become evident that authorities have not always let their currency float freely but rather they have frequently intervened to influence the exchange rate. This floating exchange rate system is also called __________. A. clean float B. managed float C. dirty float

D. Both B and C are correct

14. One of the benefits of the creation of euro is that it __________. A. promotes trades and investments in those euro-zone countries B. makes those euro-zone countries avoid the exchange rate risks C. helps those euro-zone countries restrain inflation D. All of the above are benefits for euro-zone countries.

15. Which of the following correctly identifies exchange rate systems from less fixed to more fixed?

A. independent floating, currency board, crawling pegs B. independent floating, crawling pegs, dollarization

C. independent floating, currency board, managed floating D. dollarization, currency board, crawling pegs

16. A currency board’s foreign exchange reserves are equal to __________ or slightly more of its notes and coins in circulation, as set by law. A. 100% B. 90% C. 75% D. 50%

17. Which of the following features are NOT shared by independent floating exchange rate system?