International Monetary Systems Overview
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Questions and Answers

What happens to purchasing power when inflation occurs?

  • It remains the same.
  • It increases.
  • It decreases. (correct)
  • It fluctuates unpredictably.

    • What does a stronger dollar relative to the euro indicate?

  • The euro is gaining value.
  • The euro is depreciating. (correct)
  • The dollar is getting weaker.
  • The economies are equally strong.

    • Who primarily influences the nominal exchange rate?

  • Market forces. (correct)
  • Individual investors.
  • Government regulations.
  • Central banks.

    • What does it mean when the exchange rate 'E' is going up?

    <p>The foreign currency depreciates.</p> Signup and view all the answers

    How does the appreciation of a currency affect purchasing power?

    <p>Purchasing power increases for domestic citizens.</p> Signup and view all the answers

    What is the primary goal of the Central Bank regarding purchasing power?

    <p>To control inflation.</p> Signup and view all the answers

    What risk preference do most investors exhibit?

    <p>They generally avoid taking risks.</p> Signup and view all the answers

    In a bilateral exchange rate system, who fixes the value of the Chinese exchange rate?

    <p>A mutual agreement between China and another region.</p> Signup and view all the answers

    What happens to the price of a currency when demand exceeds supply?

    <p>The price increases.</p> Signup and view all the answers

    What is the extreme case of a fixed exchange rate?

    <p>Currency union.</p> Signup and view all the answers

    What happens to the value of a currency when a country experiences high imports?

    <p>The value decreases due to reduced domestic demand.</p> Signup and view all the answers

    What do the liabilities of the Central Bank provide?

    <p>Currency to the economy.</p> Signup and view all the answers

    How is the monetary basis (MB) defined?

    <p>Total of assets of the Central Bank.</p> Signup and view all the answers

    What does a positive trade balance indicate for foreign reserves?

    <p>An inflow of foreign reserves.</p> Signup and view all the answers

    What is the money supply (M S) formula when cashless money is considered?

    <p>M S = M B * k</p> Signup and view all the answers

    Which of the following is a characteristic of dollarization?

    <p>Using a foreign currency for domestic transactions.</p> Signup and view all the answers

    What happens to purchasing power when there is a change in the exchange rate?

    <p>It directly impacts our ability to buy imported goods.</p> Signup and view all the answers

    What does a 20% variation in the exchange rate imply for an investment made in euros?

    <p>It leads to a significant increase in value.</p> Signup and view all the answers

    What is the Nominal Effective Exchange Rate (NEER)?

    <p>An average reflecting all bilateral exchange rates weighted by trade importance.</p> Signup and view all the answers

    When calculating the NEER, what type of currencies may be excluded?

    <p>Currencies that are linked.</p> Signup and view all the answers

    Which partners are considered in the broad NEER calculation?

    <p>All trading partners of the US.</p> Signup and view all the answers

    What is a consequence of a collapsing exchange rate in emerging countries?

    <p>Negative impact on the economies of these countries.</p> Signup and view all the answers

    Why is a bilateral measure preferred by firms over a macro approach?

    <p>Firms only care about their direct trading relationships.</p> Signup and view all the answers

    How might the choice of weights affect the NEER calculation?

    <p>Different weights can give disparate importance to trading partners.</p> Signup and view all the answers

    What primarily gives value to paper currency?

    <p>The trust of individuals in the Central Bank</p> Signup and view all the answers

    Which of the following statements about Central Banks is true?

    <p>Central Banks manage the trust and liability associated with currency.</p> Signup and view all the answers

    How does the historical context of currency differ from current paper currency?

    <p>Historically, currency was based on physical goods like gold.</p> Signup and view all the answers

    What is the primary function of a Central Bank regarding currency?

    <p>To build and maintain public trust in currency value</p> Signup and view all the answers

    What is meant by the phrase 'In God, we trust' on U.S. currency?

    <p>It indicates public faith in the currency's purchasing power.</p> Signup and view all the answers

    Which of the following describes a liability of the Central Bank?

    <p>The issuance of banknotes representing trust value</p> Signup and view all the answers

    What is indicated by the phrase 'a currency without physical value'?

    <p>It possesses no inherent worth beyond public trust.</p> Signup and view all the answers

    What was a key feature of currencies in earlier economies compared to modern currencies?

    <p>They were often backed by real physical goods.</p> Signup and view all the answers

    What indicates the occurrence of a currency crisis?

    <p>Stock of reserves equals 0</p> Signup and view all the answers

    What is a key feature of floating exchange rate systems?

    <p>Exchange rates are determined by the market</p> Signup and view all the answers

    Which of the following best describes the purpose of an international monetary system?

    <p>To facilitate international movements of goods and capital</p> Signup and view all the answers

    What was the primary reserve currency during the Gold Standard period?

    <p>Gold</p> Signup and view all the answers

    What is a potential advantage of a fixed exchange rate system?

    <p>Investor certainty and stability</p> Signup and view all the answers

    What happens to the balance of payments in a fixed exchange rate system?

    <p>Positive and negative balances can occur over time</p> Signup and view all the answers

    Which countries were traditionally part of the G7, that has now expanded to include others?

    <p>Germany, France, and Japan</p> Signup and view all the answers

    What is the role of liquidity in the international monetary system?

    <p>To provide sufficient funds for international trade</p> Signup and view all the answers

    What happens to the money supply when the trade balance increases under a fixed exchange rate?

    <p>It increases automatically.</p> Signup and view all the answers

    How does the Central Bank respond when inflation is too high?

    <p>It decreases the money supply.</p> Signup and view all the answers

    What does a fixed exchange rate imply about a country's monetary policy?

    <p>It leads to a loss of monetary policy control.</p> Signup and view all the answers

    Under flexible exchange rates, what indicates that a currency will appreciate?

    <p>Higher exports than imports.</p> Signup and view all the answers

    What does the Balance of Payments (BoP) equate to under a flexible exchange rate?

    <p>It is equal to 0.</p> Signup and view all the answers

    In what situation do countries with negative Balance of Payments typically find themselves?

    <p>Losing reserves.</p> Signup and view all the answers

    What is a major characteristic of monetary policy in countries with fixed exchange rates?

    <p>The trade balance solely dictates the money supply.</p> Signup and view all the answers

    Why do some countries control their monetary policy despite having a surplus in the Balance of Payments?

    <p>To control the money supply and inflation.</p> Signup and view all the answers

    Study Notes

    Table of Contents

    • Exchange Rate and International Monetary Systems (IMS) History
    • European Monetary System (EMS)
    • Theoretical Relationships
    • Models of Monetary Policy and Exchange Rates
    • Exchange Rate Misalignment Measurement
    • Exchange Rate and the Firm
    • Exam

    Exchange Rate and International Monetary Systems (IMS) History

    • Definition of nominal and effective exchange rates
    • Bilateral vs. Multilateral exchange rates
    • Exchange rate regimes
    • Balance sheets of Central Banks
    • Exchange rates and national accounting
    • History of the International Monetary System (IMS)
    • Aims of international monetary systems
    • Historical systems practiced
    • Current state-of-the-art
    • European Monetary System (EMS)

    European Monetary System (EMS)

    • EMS history
    • EMS-1 and EMS-2 differences
    • EMS revival
    • Importance of EMS

    Theoretical Relationships

    • Uncovered interest rate parity
    • Purchasing power parity (PPP)
    • Dornbusch-Fisher model
    • Close economy model (IS-LM)
    • Open economy model (Mundell-Fleming)

    Models of Monetary Policy and Exchange Rates

    • Relation between monetary policy and exchange rates
    • Overshooting of the exchange rate
    • Exercises related to models

    Exchange Rate Misalignment Measurement

    • Measures of exchange rate misalignment
    • Exchange rate trends
    • Deterministic trend
    • Moving average
    • Hodrick-Prescott Filter
    • End-point bias
    • Exchange rate misalignments

    Exchange Rate and the Firm

    • Balance sheet approach
    • Mic-Mac link
    • Currency risk
    • Exchange rate market strategies
    • Hedging strategies
    • Exercises related to exchange rates and firms

    Exam

    • Information about the exam format.

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    International Finance Synthesis PDF

    Description

    Explore the fundamentals of International Monetary Systems and exchange rate concepts through this quiz. Understand the historical context, key theories, and models of monetary policy. Test your knowledge on EMS and the relationships between exchange rates and economic indicators.

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