ECO 305 Week 11 Quiz – Strayer

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Quiz 10 Chapter 16 and 17

MACROECONOMIC POLICY IN AN OPEN ECONOMY

MULTIPLE CHOICE

1. A nation experiences internal balance if it achieves:a. Full employmentb. Price stabilityc. Full employment and price stabilityd. Unemployment and price instability

2. A nation experiences external balance if it achieves:a. No net changes in its international gold stocksb. Productivity levels equal to those of its trading partnersc. An increase in its money supply equal to increases overseasd. Equilibrium in its balance of payments

3. A nation experiences overall balance if it achieves:a. Balance-of-payments equilibrium, full employment, and price stabilityb. Balance-of-payments equilibrium, maximum productivity, and price stabilityc. Full employment, price stability and no change in its money supplyd. Full employment, price stability, and maximum productivity

4. Most industrial countries generally considered ____ as the most important economic goal.a. External balanceb. Internal balancec. Maximum efficiency for businessd. Maximum efficiency for labor

5. Which policies are expenditure-changing policies?

a. Currency devaluation and revaluationb. Import quotas and tariffsc. Monetary and fiscal policyd. Wage and price controls

6. Which policy is an expenditure-switching policy?a. Increase in the money supplyb. Decrease in government expendituresc. Increase in business and household taxesd. Decrease in import tariffs

7. An expenditure-increasing policy would consist of an increase in:a. Import tariffsb. Import quotasc. Governmental taxesd. The money supply

8. An expenditure-reducing policy would consist of a decrease in:a. The par value of a currencyb. Government expendituresc. Import dutiesd. Business or household taxes

9. Given fixed exchange rates, assume Mexico initiates expansionary monetary and fiscal policies to combat recession. These policies will also:a. Increase both imports and exportsb. Increase exports and reduce importsc. Reduce a balance-of-payments surplusd. Reduce a balance-of-payments deficit

10. Given fixed exchange rates, assume Mexico initiates contractionary monetary and fiscal policies to combat inflation. These policies will also:a. Reduce a balance-of-payments surplusb. Reduce a balance-of-payments deficitc. Increases both imports and exports

d. Decrease both imports and exports

11. The appropriate expenditure-switching policy to correct a current account surplus is:a. Currency revaluationb. Currency devaluationc. Expansionary monetary policyd. Contractionary fiscal policy

12. The appropriate expenditure-switching policy to correct a current account deficit is:a. Contractionary monetary policyb. Expansionary fiscal policyc. Currency devaluationd. Currency revaluation

13. Suppose the United States faces domestic recession and a current account deficit. Should the United States devalue the dollar, one would expect the:a. Recession to become less severe--deficit to become less severeb. Recession to become more severe--deficit to become less severec. Recession to become less severe--deficit to become more severed. Recession to become more severe--deficit to become more severe

14. Suppose the United States faces domestic inflation and a current account surplus. Should the United States revalue the dollar, one would expect the:a. Inflation to become more severe--surplus to become less severeb. Inflation to become less severe--surplus to become less severec. Inflation to become less severe--surplus to become more severed. Inflation to become more severe--surplus to become more severe

15. Suppose Brazil faces domestic recession and a current account surplus. Should Brazil revalue its currency, one would expect the:a. Recession to become less severe--surplus to become less severeb. Recession to become more severe--surplus to become more severec. Recession to become more severe--surplus to become less severe

d. Recession to become less severe--surplus to become more severe

16. Suppose that Brazil faces domestic inflation and a current account deficit. Should Brazil devalue its currency, one would expect the:a. Inflation to become more severe--deficit to become less severeb. Inflation to become more severe--deficit to become more severec. Inflation to become less severe--deficit to become less severed. Inflation to become less severe--deficit to become more severe

17. In a closed economy, which of the following will cause the economy's aggregate demand curve to shift to the right?a. decreases and wages and salaries paid to employeesb. increases in the prices of oil and natural gasc. decreases in income taxes for householdsd. decreases in the productivity of labor

18. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policya. cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real outputb. cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real outputc. have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real outputd. have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output

19. A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on:a. Trade flows onlyb. Capital flows onlyc. both trade flows and capital flowsd. Neither trade flows nor capital flows

20. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policya. cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real outputb. cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real outputc. have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real outputd. have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output

21. A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession:a. Expansionary fiscal policyb. Expansionary monetary policyc. Contractionary fiscal policyd. Contractionary monetary policy

22. A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession:a. Expansionary fiscal policyb. Expansionary monetary policyc. Contractionary fiscal policyd. Contractionary monetary policy

23. Given an open economy with high capital mobility, all of the following statements are true except:a. fiscal policy is strengthened under fixed exchange ratesb. monetary policy is weakened under fixed exchange ratesc. monetary policy is strengthened under floating exchange ratesd. fiscal policy is strengthened under floating exchange rates

24. Under a system of managed-floating exchange rates with heavy exchange rate intervention:a. Fiscal policy is successful in promoting internal balance, while monetary policy is unsuccessful

b. Monetary policy is successful in promoting internal balance, while fiscal policy is unsuccessfulc. Both fiscal policy and monetary policy are successful in promoting internal balanced. Neither fiscal policy nor monetary policy are successful in promoting internal balance

25. Given a system of floating exchange rates, an expansionary monetary policy by the Federal Reserve will causea. the dollar to appreciate and will decrease U.S. net exportsb. the dollar to appreciate and will increase U.S. net exportsc. the dollar to depreciate and will increase U.S. net exportsd. the dollar to depreciate and will decrease U.S. net exports

26. Given a system of floating exchange rates, a contractionary monetary policy by the Federal Reserve will causea. the dollar to appreciate and will decrease U.S. net exportsb. the dollar to appreciate and will increase U.S. net exportsc. the dollar to depreciate and will increase U.S. net exportsd. the dollar to depreciate and will decrease U.S. net exports

27. All of the following are obstacles to international economic policy coordination except:a. Different national objectives and institutionsb. Different national political climatesc. Different phases in the business cycled. Different national currencies

28. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes thea. domestic money supply to decrease and a decline in aggregate demandb. domestic money supply to increase and a decline in aggregate demandc. domestic money supply to decrease and a rise in aggregate demandd. domestic money supply to increase and a rise in aggregate demand

29. At the ____, the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in the U.S. dollar's exchange value.a. Plaza Agreement of 1985b. Louvre Accord of 1987c. Bonn Summit of 1978d. Tokyo Summit of 1962

30. The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of:a. Tariff trade barrier formationb. Nontariff trade barrier formationc. International economic policy coordinationd. Beggar-thy-neighbor policies

Exhibit 16.1

At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.

31. Refer to Exhibit 16.1. To help drive the dollar's exchange value downward, the Federal Reserve would:a. Reduce taxesb. Increase taxesc. Decrease the money supplyd. Increase the money supply

32. Refer to Exhibit 16.1. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar's exchange value downward, it promotes an increase in the U.S.:a. Rate of inflationb. Budget deficitc. Unemployment leveld. Economic growth rate

33. Under a fixed exchange-rate system and high capital mobility, an expansion in the domestic money supply leads to:

a. Trade-account deficit and a capital-account surplusb. Trade-account deficit and a capital-account deficitc. Trade-account surplus and a capital-account surplusd. Trade-account surplus and a capital-account deficit

34. Under a fixed exchange-rate system and high capital mobility, a contraction in the domestic money supply leads to a:a. Trade-account deficit and a capital-account surplusb. Trade-account deficit and a capital-account deficitc. Trade-account surplus and a capital-account surplusd. Trade-account surplus and a capital-account deficit

35. Under a fixed exchange-rate system and high capital mobility, an expansionary fiscal policy leads to a:a. Trade-account deficit and a capital-account surplusb. Trade-account deficit and a capital-account deficitc. Trade-account surplus and a capital-account surplusd. Trade-account surplus and a capital-account deficit

36. Under a fixed exchange-rate system and high capital mobility, a contractionary fiscal policy leads to a:a. Trade-account deficit and a capital-account surplusb. Trade-account deficit and a capital-account deficitc. Trade-account surplus and a capital-account surplusd. Trade-account surplus and a capital-account deficit

37. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes thea. domestic money supply to decrease and a decline in aggregate demandb. domestic money supply to increase and a decline in aggregate demandc. domestic money supply to decrease and a rise in aggregate demandd. domestic money supply to increase and a fall in aggregate demand

38. Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency. This causes thea. domestic money supply to decrease and a decline in aggregate demandb. domestic money supply to increase and a decline in aggregate demandc. domestic money supply to decrease and a rise in aggregate demandd. domestic money supply to increase and a fall in aggregate demand

39. Assume a system of floating exchange rates. In response to relatively high interest rates abroad, suppose domestic investors place their funds in foreign capital markets. The result would bea. a depreciation of the domestic currency and a rise in net exportsb. a depreciation of the domestic currency and a fall in net exportsc. an appreciation of the domestic currency and a rise in net exportsd. an appreciation of the domestic currency and a fall in net exports

40. Assume a system of floating exchange rates. In response to relatively high domestic interest rates, suppose that foreign investors place their funds in domestic capital markets. The result would bea. a depreciation of the domestic currency and a rise in net exportsb. a depreciation of the domestic currency and a fall in net exportsc. an appreciation of the domestic currency and a rise in net exportsd. an appreciation of the domestic currency and a fall in net exports

41. When a nation realizes external balancea. it can have a current account deficitb. it can have a current account surplusc. it has neither a current account deficit nor a current account surplusd. Both a and b

42. Direct controls may take the form ofa. Tariffsb. Export subsidiesc. Export quotasd. All of the above

43. With a fixed exchange rate system, internal balance is most effectively achieved by usinga. Expansionary monetary policy to combat recessionb. Expansionary fiscal policy to combat inflationc. Contractionary monetary policy to combat recessiond. Contractionary fiscal policy to combat recession

44. Policy coordination is complicated bya. Different economic objectivesb. Different national institutionsc. Different phases in the business cycled. All of the above

TRUE/FALSE

1. A nation realizes internal balance if economy achieves full employment and price stability.

2. Nations have typically placed greater importance to the goal of internal balance than to the goal of external balance.

3. A nation realizes external balance when its current account is in equilibrium.

4. A nation realizes overall balance when it achieves full employment and current account equilibrium.

5. Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic output and imports.

6. Expenditure-switching policies include fiscal policy and monetary policy.

7. Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-reducing policies to combat recession.

8. Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced domestically and those imported.

9. Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country's aggregate demand for goods and services.

10. Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls such as tariffs, quotas, and subsidies.

11. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect.

12. Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy cause aggregate demand to increase, thus strengthening the policy's expansionary effect.

13. When the economy is in deep recession or depression, it is operating on that portion of its aggregate supply curve that is horizontal.

14. Changes in a country's net exports, investment spending, or government spending will cause its aggregate demand curve to shift.

15. Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates.

16. Given an open economy with high capital mobility, monetary policy is strengthened under fixed exchange rates.

17. Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country resolve a recession and a current account deficit.

18. Exchange rate management policies require international policy coordination because a depreciation of one nation's currency implies an appreciation of its trading partner's currency.

19. Currency devaluation and revaluation primarily affect the economy's current account and have secondary effects on domestic employment and inflation.

20. Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects on the balance of payments.

21. The Group of five (G-5) nations include Japan, Germany, China, and Australia.

22. The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.

23. International policy coordination is plagued by differing national economic objectives, institutions, political climates, and phases in the business cycle.

24. The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S. Congress, promote world economic expansion by stimulating demand in Germany and Japan, and to ease the burden of the U.S. debt service.

SHORT ANSWER

1. What policy instrument should be used when demand-pull inflation exists?

2. What happens to the balance of payments under a fixed exchange rate system, when expansionary or contractionary monetary policy is used?

ESSAY

1. Was the Plaza Agreement of 1985 a success?

2. What is international economic policy coordination?

CHAPTER 17—INTERNATIONAL BANKING: RESERVES, DEBT, AND RISK

MULTIPLE CHOICE

1. Which of the following assets makes use of the basket valuation technique?a. Swap agreementsb. Oil facilityc. Buffer stock facilityd. Special drawing rights

2. Swap agreements are generally conducted by the:a. Federal Reserve with foreign central banksb. Federal Reserve with foreign commercial banksc. U.S. Treasury with foreign central banksd. U.S. Treasury with foreign commercial banks

3. Which of the following is a main central bank function of the International Monetary Fund?a. The conduct of open market operationsb. The issuance of gold certificatesc. The provision of monetary policy for member nationsd. The granting of loans to member nations

4. The Federal Reserve's swap network represents:a. Efforts to stabilize only the value of the dollarb. Efforts to stabilize only the value of foreign currenciesc. Long-term borrowing among countriesd. Short-term borrowing among countries

5. International trade and investment are most frequently financed by the U.S. dollar and the:a. Japanese yenb. British poundc. Australian dollard. Swiss franc

6. The purpose of international reserves is to finance:a. Short-term surpluses in the balance of paymentsb. Long-term surpluses in the balance of paymentsc. Short-term deficits in the balance of paymentsd. Long-term deficits in the balance of payments

7. The currencies generally referred to as "reserve currencies" are the:a. Japanese yen and U.S. dollarb. Swiss franc and Japanese yenc. British pound and U.S. dollard. Swiss franc and British pound

8. Which of the following does not represent a form of international liquidity?a. IMF reserve positions

b. General arrangements to borrowc. U.S. government securitiesd. Reciprocal currency arrangements

9. Which of the following is not considered an "owned" reserve?a. National currenciesb. Goldc. Special drawing rightsd. Oil facility

10. Which of the following is not considered a "borrowed" reserve?a. Special drawing rightsb. Oil facilityc. IMF drawingsd. Reciprocal currency arrangement

11. Eurodollars are:a. Dollar-denominated deposits in overseas banksb. European currencies used to finance transactions in the United Statesc. Dollars that U.S. residents spend in Europed. European currencies used to finance imports from the United States

12. Which of the following is not a characteristic of the Eurodollar market? It:a. Is mainly located in the United Kingdom and continental Europeb. Operates as a financial intermediary, bringing together lenders and borrowersc. Deals in interest-bearing time deposits and loans to governmentsd. Grew in response to the deregulation of interest rate ceilings on U.S. savings accounts

13. Which of the following assets was (were) created in 1970 to provide additional international liquidity, in the belief that increasing world trade requires more liquidity for larger expected payments imbalances?a. Eurodollar marketb. Special drawing rights

c. Reciprocal currency arrangementsd. General arrangements to borrow

14. Which of the following constitute(s) the largest component of the world's international reserves?a. Goldb. Special drawing rightsc. IMF drawingsd. Foreign currencies

15. With an international gold standard, if a country ended up with a deficit from the balances on its current and capital accounts, it would:a. Import gold to settle the balanceb. Export gold to settle the balancec. Officially decrease the price of goldd. Officially increase the price of gold

16. Which of the following is not a condition of the international gold standard? That a nation must:a. Convert gold into paper currency, and vice versa, at a stipulated rateb. Permit gold to be freely imported and exportedc. Tolerate wide fluctuations in its exchange rated. Define its monetary unit in terms of a stipulated amount of gold

17. All of the following exchange-rate systems require international reserves to finance balance-of-payments disequilibriums except:a. Pegged or fixed exchange ratesb. Managed floating exchange ratesc. Adjustable pegged exchange ratesd. Freely floating exchange rates

18. A dollar shortage would indicate that the dollar is:a. Undervalued in international marketsb. Overvalued in international marketsc. Overvalued in terms of gold

d. Overvalued in terms of special drawing rights

19. The U.S. gold outflow that began in the late 1940s and continued through the 1960s was due in part to:a. Crawling pegged exchange ratesb. Freely floating exchange ratesc. An undervalued dollard. An overvalued dollar

20. The U.S. dollar glut of the 1960s was due in part to:a. An undervalued dollarb. An overvalued dollarc. Freely floating exchange ratesd. Crawling pegged exchange rates

21. For developing countries such as Mexico and Brazil, severe economic problems in the 1980s were caused by:a. A fall in the world demand for products produced by developing countriesb. High prices of basic raw materials and other commoditiesc. Low real interest rates in the United Statesd. High levels of income and imports for the United States

22. In response to the international debt problem, the United States set up a special fund in 1986 to help make up for lost oil revenues. Under the plan, the United States would make more money available as world oil prices fell. This plan was designed to help:a. Argentinab. Saudi Arabiac. Mexicod. Brazil

23. Which indicator of international debt burden schedules interest and principal payments on long-term debt as a percent of export earnings?a. Debt service ratiob. Debt-to-export ratio

c. Ratio of external debt to gross domestic productd. Ratio of external debt to gross national product

24. Which term best describes the process in which the International Monetary Fund provides loans to countries facing balance-of-payments difficulties provided that they initiate programs holding promise of correcting these difficulties?a. Conditionalityb. Debt servicec. Reciprocal currency arrangementd. Swap agreement

25. All of the following are major goals of the International Monetary Fund except:a. Promoting international cooperation among member countriesb. Fostering a multilateral system of international paymentsc. Making long-term development and reconstruction loansd. Promoting exchange-rate stability and the elimination of exchange restrictions

26. Which international reserve asset was officially phased out of the international monetary system by the United States in the early 1970s?a. Special drawing rightsb. Swap agreementsc. General arrangements to borrowd. Gold

27. Bilateral agreements between central banks, which provide for an exchange of currencies to help finance temporary balance-of-payments disequilibriums, are referred to as:a. IMF drawingsb. Special drawing rightsc. Buffer stock facilityd. Swap agreements

28. Which organization is largely intended to make long-term reconstruction loans to developing nations?

a. Export-Import Bankb. World Bankc. International Monetary Fundd. United Nations

29. "Owned" international reserves consist of:a. Special drawing rightsb. Oil facilityc. IMF drawingsd. Reciprocal currency arrangements

30. "Borrowed" international reserves consist of:a. IMF drawingsb. Foreign currenciesc. Goldd. Special drawing rights

31. Concerning international lending risk of commercial banks, ____ refers to the probability that part/all of the interest/principal of a loan will not be repaid.a. Country riskb. Credit riskc. Currency riskd. Presidential risk

32. Concerning international lending risk of commercial banks, ____ is closely related to political developments in a borrowing country, especially the government's views concerning international investments and loans.a. Economic riskb. Credit riskc. Country riskd. Currency risk

33. Concerning international lending risk of commercial banks, ____ is associated with possible changes in the exchange value of a nation's currency.

a. Political riskb. Country riskc. Credit riskd. Currency risk

34. To reduce their exposure to developing country debt, lending commercial banks have practiced all of the following except:a. Making outright loan sales to other commercial banksb. Reducing their capital base as a cushion against lossesc. Dealing in debt-for-debt swaps with foreign governmentsd. Dealing in debt/equity swaps with foreign governments

35. To reduce losses on developing country loans, commercial banks sometimes sell their loans, at a discount, to a developing country government for local currency which is then used to finance purchases of ownership shares in developing country industries. This practice is known as:a. Debt forgivenessb. Debt buybackc. Debt-for-debt swapd. Debt/equity swap

36. Concerning international debt, ____ refers to a negotiated reduction in the contractual obligations of the debtor country and includes schemes such as markdowns and write-offs of debt.a. Debt/equity swapb. Debt-for-debt swapc. Debt forgivenessd. Debt sales

37. The exchange of borrowing country debt for an ownership position in the borrowing country is known as:a. Debt forgivenessb. Debt-for-debt swapc. Debt reductiond. Debt/equity swap

38. "Country risk" analysis is concerned with all of the following except:a. Depreciation of the borrowing country's currencyb. Political instability in the borrowing countryc. Economic growth in the borrowing countryd. External debt of the borrowing country

39. Debt reductiona. Refers to any voluntary scheme that lessens the burden on the debtor nationb. May be accomplished through debt reschedulingc. May be achieved through debt/equity swapsd. All of the above

40. Most analysts feel that the financial difficulties in East Asia were triggered bya. Misallocation of investmentb. Unavailability of cheap foreign laborc. Lack of alignment of the exchange rate with the dollard. Surpluses in the trade accounts of the Asian countries

41. A nation may experience debt-servicing problems because ofa. Pursuit of improper macroeconomic policiesb. Inadequate borrowingc. Adverse economic eventsd. Both a and c

42. Swap arrangementsa. Are agreements between governmentsb. Require repayment within a stipulated periodc. Are usually multilateral agreementsd. Are never initiated by telephone

TRUE/FALSE

1. Under a system of fixed exchange rates, international reserves are needed to bridge the gap between monetary receipts and monetary payments.

2. International reserves allow a country to finance disequilibria in its balance-of-payments position.

3. An advantage of international reserves is that they allow countries to sustain temporary balance-of-payments deficits until acceptable adjustment measures can operate to correct the disequilibrium.

4. With floating exchange rates, countries require sizable amounts of international reserves for the stabilization of exchange rates.

5. When exchange rates are fixed by central bankers, the need for international reserves disappears.

6. When exchange rates are fixed by central bankers, international reserves are necessary for financing payments imbalances and the stabilization of exchange rates.

7. There exists a direct relationship between the degree of exchange rate flexibility and the need for international reserves.

8. With floating exchange rates, payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate, and the need for exchange-rate stabilization and international reserves disappears.

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from D0 to D1.

Figure 17.1 Foreign Exchange Market

9. Refer to Figure 17.1. Under a fixed exchange rate system, U.S. monetary authorities would have to supply 8 million pounds in exchange for dollars to keep the exchange rate at $3 per pound.

10. Refer to Figure 17.1. If the exchange rate was allowed to rise to $4 per pound, U.S. monetary authorities would have to supply 6 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

11. Refer to Figure 17.1. Under a floating exchange rate system, the exchange rate would rise to $4 and U.S. monetary authorities would have to supply 4 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

12. To the extent that adjustments in prices, interest rates, and income levels promote balance-of-payments equilibrium, the demand for international reserves decreases.

13. The greater a nation's propensity to apply tariffs and quotas to key sectors, the greater will be the need for international reserves.

14. The demand for international reserves is negatively related to the level of world prices and income.

15. The demand for international reserves tend to increase with the level of world income and trade activity.

16. If a nation with a balance-of-payments deficit is willing and able to initiate quick actions to increase export receipts and decrease import payments, the amount of international reserves needed will be relatively large.

17. The supply of international reserves consists of owned reserves and borrowed reserves.

18. Foreign currencies constitute the smallest component of the world's international reserves.

19. Gold constitutes the largest component of the world's international reserves.

20. The U.S. dollar has been considered a reserve (key) currency because trading nations have been willing to hold it as an international reserve asset.

21. The U.S. dollar, Japanese yen, British pound, and Mexican peso are the major reserve currencies of the international monetary system.

22. By the 1990s, the British pound had replaced the U.S. dollar as the world's key currency.

23. A goal of the International Monetary Fund is to make short-term loans to member nations so as to allow them to correct balance of payments disequilibriums without resorting to measures that would destroy national prosperity.

24. When granting loans to financially troubled nations, the International Monetary Fund requires some degree of conditionality, meaning that the borrowing nation must agree to implement economic policies as mandated by the IMF.

25. The International Monetary Fund has sometimes demanded that financially-troubled nations, that borrow from the IMF, undergo austerity programs including slashing of public spending and private consumption.

26. The main purpose of the International Monetary Fund is to grant long-term loans to developing nations to help them finance the development of infrastructure such as roads, dams, and bridges.

27. Gold is currently the most widely used asset in the international monetary system.

28. In 1974 the United States revoked a 41-year ban on U.S. citizen's ownership of gold.

29. In 1975 the official price of gold was abolished as the unit of account for the international monetary system. As a result, gold was demonetized as an international reserve asset.

30. In the 1970s, the major industrial countries abandoned the managed-floating exchange rate system and adopted a system of fixed exchange rates tied to the price of gold.

31. Created by the International Monetary Fund, special drawing rights (SDRs) are unconditional rights to draw currencies of other nations, thus enabling countries to finance their current-account deficits.

32. The value of the SDR is tied to a currency basket consisting of the U.S. dollar, German mark, Japanese yen, French franc, and British pound.

33. The SDR has replaced the dollar, yen, and mark as the key asset of the international financial system.

34. Because the value of the SDR is tied directly to the value of the U.S. dollar, a 10 percent dollar depreciation would result in a 10 percent decrease in the SDR's value.

35. A main purpose of the International Monetary Fund is to make loans of foreign currencies to member countries which are experiencing current-account surpluses.

36. When a deficit nation borrows from the International Monetary Fund, it purchases with its currency the foreign currency required to help finance the payments deficit.

37. The so-called General Arrangements to Borrow provide a permanent increase in the supply of international reserves.

38. Swap arrangements are bilateral agreements between central banks to allow countries to temporarily borrow funds to ease current-account deficits and discourage speculative capital flows.

39. IMF drawings, swap arrangements, buffer stock facility, and compensatory financing for exports are classified as owned reserves rather than borrowed reserves.

40. Concerning international lending risk, credit risk refers to the probability that part or all of the interest rate or principal of a loan will not be repaid.

41. Concerning international lending risk, country risk refers to the risk that part or all of the interest or principal of a loan will not be repaid.

42. Concerning international lending risk, currency risk is the risk of asset losses due to changing currency values.

43. A country with a high debt/export ratio and a high debt service/export ratio would likely be considered as an attractive place in which to invest by foreign residents.

44. A debt buyback is a debt-reduction technique in which a government of a debtor nation buys loans from commercial banks at a discount.

45. Under a debt-for-debt swap, a commercial bank sells its loans at a discount to a developing country government for local currency which it then uses to finance an equity investment in the debtor country.

46. A debt-equity swap results in a trade surplus nation forgiving the loans made to a trade-deficit nation.

47. Eurocurrencies are deposits, denominated and payable in dollars and other foreign currencies, in banks outside the United States, primarily in London, the market's center.

SHORT ANSWER

1. Why do countries hold international reserves?

2. How can a bank reduce its exposure to the debt of developing nations?

ESSAY

1. Describe the eurocurrency market.

2. Are international reserve needs different for different exchange rate regimes?