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Multiple Choice Quiz
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1
Suppose the United States and Great Britain are on the gold standard and the price of gold in the U.S. is fixed at $100 per ounce and the price of gold in Britain is fixed at £50. What exchange rate must prevail between the dollar and the pound?
A)£1 = $2
B)£2 = $1
C)£1 = $0.50
2
Gresham’s Law states that:
A)Exchange Rates between currencies must equal the ratio of the price of gold in the two countries.
B)Good money drives bad money out of circulation.
C)Bad money drives bad good out of circulation.
D)The Price-Specie Flow mechanism will automatically adjust exchange rates to their correct level.
3
The key arguments in favor of flexible exchange rates rests on
A)Easier external adjustments.
B)National Policy autonomy
C)a) and b) are correct.
D)None of the above.
4
Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation?
A)Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360.
B)Start with £350. Buy 17.5 ounces of gold at £20 per ounce. Convert the gold to dollars at $35 per ounce. Exchange the dollars for pounds at the current market exchange rate is $1.80 per pound.
C)Both of the above are correct
D)None of the above are correct
5
The single European currency is called the
A)Eurodollar
B)Euro
C)EMU, or European Monetary Unit
D)SDR
6
Following the advent of a single European currency,
A)National currencies such as the French frank and German mark are no longer independent currencies. Indeed, the euro is the sole legal tender in these countries.
B)European countries still produce their national currencies, but the exchange rates are fixed to the euro.
C)Countries must now buy their currencies from the German central bank.
D)None of the above
7
The euro is
A)The common currency of Europe
B)An imaginary market basket of 12 European currencies
C)An index of the value of 12 European currencies relative to the U.S. dollar
D)Pegged to the U.S. dollar at a fixed exchange rate of parity
8
One advantage of monetary union
A)Loss of national monetary and exchange-rate political independence.
B)Transition of asymmetric macro-economic shocks.
C)Reduced transactions costs and the elimination of exchange-rate uncertainty.
D)Enhanced control of interest rates in the member countries.
9
A Fixed Exchange rate regime
A)Forces a country to give up free international flows of capital
B)Can eliminate exchange rate uncertainty.
C)Forces a country to abandon independent monetary policy.
D)Is the model provided by the U.S. Federal Reserve.
10
The dominant world currency since the end of World War I has been
A)The U.S. dollar
B)The Canadian dollar
C)The British pound
D)The euro





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