Question

Question: A significant increase in inflation in a country causes, a. investors to sell domestic assets...

Question:

A significant increase in inflation in a country causes,

a. investors to sell domestic assets

b. foreign exchange market pressure to depreciate the domestic currency

c. currency traders to sell the domestic currency

d. all of the above

Question 2

Capital flight from a domestic country tends to cause,

  1. a. selling of the domestic country's currency
  2. b. weakening of the domestic country's currency
  3. c. greater difficulty of domestic borrowers in repaying debt denominated in a foreign currency
  4. d. all of the above

Question 3

A gold standard used for currency exchange is a type of fixed exchange rate.

  1. True
  2. False

Question 4

During the Great Depression, the U.S. (i) was able to maintain the gold standard, (ii) allowed free flow of capital into and out of the U.S., and (iii) maintained domestic monetary policy independence and lowered interest rates to help stimulate the domestic economy.

  1. True
  2. False

Question 5

In the 1950s and 1960s,

  1. a. currencies around the world were pegged to the British pound, which was pegged to gold
  2. b. the British pound was the reserve currency in the international financial system
  3. c. both A and B
  4. d. neither A nor B

Question 6

Towards the end of the Bretton Woods currency system era,

  1. a. the U.S. was able to back the dollar with plenty of gold holdings
  2. b. there was net flow of financial capital out of the U.S.
  3. c. both A and B
  4. d. neither A nor B

Question 7

Member countries of the International Monetary Fund (IMF) cannot automatically borrow from the IMF in times of difficulty.

  1. True
  2. False

Question 8

A member country of the International Monetary Fund (IMF) can borrow a large amount from the IMF, but to do so it must make a commitment to make changes in its economic policies.

  1. True
  2. False

Question 9

Under the Bretton Woods system, the U.S. would raise global (financial) liquidity in order to enhance international confidence in the strength of U.S. dollar.

  1. True
  2. False

Question 10

A disadvantage of a gold standard is that the health of a country's economic system depends on its supply of gold.

  1. True
  2. False

Question 11

Under a currency gold standard, a country's currency could (in principle) be exchanged for the pegged (par value) of gold.

  1. True
  2. False

Homework Answers

Answer #1

1) A significant increase in inflation leads to decrease in the value of domestic currency in the foreign exchange market. There is inverse relationship between inflation rate and rate of interest hence as price level rises, interest rate on domestic assets decreses.

The correct option is b

2) Capital flight is the phase when assets or investmng flows out of the country due to economic factors like political instability or currency devaluation etc.

the correct option is d

3) the gold standard is a fixed exchange rate where a country sets the value of its currency at some fixed value of gold.

The correct option is True

4) During the Great Depression, US experienced very low levels of production with high unemployment rate and inflation hiked. The monetary policy was ineffective leading to liquidity trap.

The correct option is False

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