Name: __________________________ Date: _____________

1. Suppose that the British pound is pegged to gold at 6 per ounce, whereas one ounce of gold is worth FF12. Under the gold standard, any misalignment of the exchange rate will be automatically corrected by cross border flows of gold. Calculate the possible savings for buying FF1,000, if the British pound becomes undervalued and trades for FF1.80. (Assume zero shipping costs). (Hint: Gold is first purchased using the devalued British pound from the Bank of England, then shipped to France and sold for FF1,000 to the Bank of France). 55.56 65.56 75.56 85.56

A) B) C) D)

2. A country's international transactions can be grouped into the following three main types: A) current account, medium term account, and long term account B) current account, long term account, and capital account C) current account, capital account, and official reserve account D) capital account, official reserve account, trade account

3. A) B) C) D)

After the U.S. dollar, which of the following are the most actively traded currencies? yen, pound, and Canadian dollar yen, pound, and Euro mark, pound, and Hong Kong dollar mark, pound, and Swiss franc

4. The international monetary system can be defined as the institutional framework within which: A) international payments are made B) movements of capital are accommodated C) exchange rates among currencies are determined D) all of the above

Page 1

5. Currently, international reserve assets are comprised of: A) gold, platinum, foreign exchanges, and special drawing rights (SDRs) B) gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF) C) gold, diamonds, foreign exchanges, and special drawing rights (SDRs) D) reserve positions in the International Monetary Fund (IMF), only

6. A) B) C) D)

A "good" (or ideal) international monetary system should provide: liquidity, elasticity, and flexibility elasticity, sensitivity, and reliability liquidity, adjustments, and confidence none of the above

7. Under the Bretton Woods system A) there was an explicit set of rules about the conduct of international monetary policies B) each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary C) the U.S. dollar was the only currency that was fully convertible to gold D) all of the above

Assume that the balance-of-payments accounts for a country are recorded correctly. The results are: balance on the current account = BCA = $130 billion balance on the capital account = BKA = -$86 billion balance on the reserves account = BRA = ?

8. A) B) C) D)

The balance on the reserves account (BRA), under the pure flexible exchange regime is: -$44 billion $44 billion $216 billion none of the above

9. A) B) C) D)

The balance on the reserves account (BRA), under the fixed exchange regime is: -$44 billion $44 billion $216 billion none of the above

Page 2

10. Country A can produce 10 yards of textiles and 6 pounds of food per unit of input. Country B can produce 8 yards of textiles and 5 pounds of food per unit of input. A) Country A is relatively more efficient than Country B in the production of textiles B) Country B is relatively more efficient than Country A in the production of food C) Country A has an absolute advantage over Country B in the production of food and textiles D) All of the above

11. A) B) C) D)

Current account includes: (i), (ii), and (iii) (ii), (iii), and (vii) (iv), (v), and (vii) (i), (v), and (vi)

12. The theory of comparative advantage: A) Claims that economic well-being is enhanced if each country's citizens produce only a single product B) Claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for exchange rate differences in order to standardize the prices charged all countries C) Claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production D) Claims that no country has an absolute advantage over another country in the production of any good or service.

13. Balance of payment A) is defined as the statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping B) provides detailed information concerning the demand and supply of a country's currency C) can be used to evaluate the performance of a country in international economic competition D) all of the above

14. A) B) C) D)

An example of a political risk is Expropriation of assets Adverse change in tax rules The opposition party being elected a and b

Page 3

15. A) B) C) D)

Privatization refers to process of: Having government operate businesses for the betterment of the public sector Government allowing the operation of privately owned business Prohibiting government operated enterprises A country divesting itself of the ownership and operation of a business venture by turning it over to the free market system

16. Special Drawing Rights (SDR) is: A) an artificial international reserve allotted to the members of the International Monetary Fund (IMF), who can then use it for transactions among themselves or with the IMF B) a "portfolio" of currencies, and its value tends to be more stable than the currencies that it is comprised of C) used in addition to gold and foreign exchanges, to make international payments D) all of the above

17. The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: (i)- Bimetallism (ii)- Bretton Woods system (iii)- Classical gold standard (iv)- Flexible exchange rate regime (v)- Interwar period The (chronological) order that they actually occurred is: (iii), (i), (iv), (ii), and (v) (i), (iii), (v), (ii), and (iv) (vi), (i), (iii), (ii), and (v) (v), (ii), (i), (iii), and (iv)

A) B) C) D)

18. A) B) C) D)

What major dimension sets apart international finance from domestic finance? Foreign exchange and political risks Market imperfections Expanded opportunity set all of the above

19. The Exchange Rate Mechanism (ERM) is: A) the procedure by which ERM member countries collectively manage their exchange rates B) based on a "parity-grid" system, which is a system of par values among ERM countries C) a and b D) none of the above

Page 4

20. A) B) C) D)

An "international" gold standard can be said to exist when gold alone is assured of unrestricted coinage there is two-way convertibility between gold and national currencies at a stable ratio gold may be freely exported or imported all of the above

Page 5

Answer Key

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

A C B D B C D D A D B C D D D D B D C D

Page 6