The International Financial System
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1. One potential problem that could be caused by the tremendous growth of the international financial system in recent years is

a. lower standards of living around the world.
b. that a disturbance in one financial market can spread more quickly to other countries.
c. that the additional transactions will make the international financial markets less efficient.
d. that economic growth will be likely to slow down in many countries.

2. In 1944,

a. the Bretton Woods Accord was signed.
b. the major economies of the world agreed to switch to a floating exchange rate system.
c. the Eurodollar was created.
d. the British pound was declared the official reserve currency.

3. When a country revalues its currency under the fixed exchange rate system,

a. it would take more units of that currency to buy a dollar.
b. they could anticipate an increase in net exports.
c. that country would probably experience an increase in output an employment following the revaluation.
d. the value of that country's currency would increase relative to the dollar.

4. In the early 1970s,

a. the United States began redeeming dollars for gold.
b. the price of gold fell from $42 to $35 per ounce.
c. the U.S. revalued the dollar.
d. most countries abandoned fixed exchange rates.

5. Under the present international monetary system,

a. exchange rates fluctuate freely without government intervention.
b. although central banks are allowed to intervene, they have done so only rarely.
c. supply and demand are the primary forces that determine exchange rates, but central banks may intervene if they believe currency values are over- or undervalued.
d. it is illegal for central banks of major countries to coordinate their intervention activities.

6. Which of the following would be likely to cause an increase in the exchange rate (in yen per dollar)?

a. Japanese interest rates rise relative to U.S. interest rates.
b. Japanese incomes rise relative to U.S. incomes.
c. There is an increase in U.S. income.
d. There is an increase in U.S. prices relative to the dollar prices for Japanese goods.

7. Which of the following statements about international financial markets is true?

a. Forward contracts have a maturity of one year or less and are designed to decrease interest rate risk.
b. The premiums for purchasing options are usually quite small.
c. Foreign exchange futures, options, forward agreements, and swaps have been used less under the managed float exchange rate system.
d. Forward contracts and swaps are usually arranged by banks, and these markets in foreign currencies are now larger than the foreign exchange futures market.

8. Under the managed float exchange rate system,

a. the dollar is the official reserve currency.
b. the dollar is demanded in international financial markets because of its stability.
c. the dollar no longer serves as a store of value.
d. the prices of very few commodities contracts are quoted in terms of dollars.

9. Special drawing rights (SDRs)

a. were created by the World Bank.
b. are backed by other reserve assets.
c. are used by central banks to make payments to other countries who are members of the IMF.
d. are distributed equally to all countries that are members of the IMF.

10. Which of the following raises funds to make development loans to the world's poorest countries?

a. World Bank
b. International Monetary Fund (IMF)
c. Bank for International Settlements (BIS)
d. International Finance Corporation

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