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Multiple Choice Quiz
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1

Which of the following is an argument against a fixed exchange rate system?
A)Fiscal policy is more effective in countries with fixed exchange rate systems.
B)Fixed exchange rate systems may be more difficult to maintain in the face of speculative behavior.
C)Countries with fixed exchange rate systems may be more vulnerable to external shocks.
D)all of the above
E)b and c
2

The idea that cyclical fluctuations in the exchange rate may be greater under a flexible exchange rate system is known as
A)the unmanageable inflation hypothesis.
B)destabilizing speculation.
C)the vicious circle hypothesis.
D)a dirty floating situation.
3

Since microeconomic theory suggests that fixing prices at levels not set by the market leads to resource misallocation, some economists argue in favor of
A)flexible exchange rate systems.
B)fixed exchange rate systems.
C)destabilizing speculation.
D)interventionist government policy.
4

The informal "dollarization" occurring in Iraq during reconstruction
A)will make monetary policy more effective.
B)will make it harder for borrowers to service their hard-currency debt due to currency depreciation.
C)refers to the inflow of smaller denomination U.S. currency into Iraq.
D)b and c.
5

When there are speculative attacks on weaker currencies,
A)it becomes harder to maintain a fixed exchange rate system.
B)it becomes harder to maintain a flexible exchange rate system.
C)destabilizing speculation becomes stabilizing speculation.
D)a country is said to be "leaning into the wind."
6

Which of the following is not an advantage of a currency board?
A)currency convertibility is ensured
B)higher rates of trade and investment due to increased confidence
C)inflation is less likely due to enforced fiscal discipline
D)all of the above
7

Currency boards
A)must issue domestic currency exchangeable at a fixed rate.
B)can monetize government budget deficits.
C)can change the monetary base using open market operations.
D)all of the above.
8

A system in which the exchange rate is allowed to vary within a narrow band around a fixed level, and in which that fixed level is periodically adjusted, is known as
A)leaning with the wind.
B)leaning against the wind.
C)a crawling peg.
D)none of the above.
9

Which of the following is not an example of a hybrid between the fixed and flexible exchange rate systems?
A)wider bands
B)the crawling peg
C)the managed float
D)all of the above are hybrids
10

If a country's currency is depreciating and that country's central bank intervenes to intensify this depreciation, the central bank is said to be
A)leaning with the wind.
B)leaning against the wind.
C)conducting exchange rate protection.
D)stabilizing speculation.





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