Exercise 2. A)Multiple choice questions (only one correct answer exists).

A) Multiple choice questions (only one correct answer exists).

Q1: What did economists believe in the 1970s? (p. 239) (b) The combination of flexible exchange rates and the increased interdependencies of economies created a severe constraint on national policy making.

Q2: What consequences does financial market integration have? (p. 240) (c) Macroeconomic policies in one country can have a strong influence on other countries as well.

Q3: The integration of national financial markets… (p. 240) (d) reduced the autonomy of macroeconomic policy making.

Q4: Exchange rates became more dependent on … (p. 240) (a) international financial flows.

Q5: How did the role of central bankers change from the 1970s? (p. 241) (d) They enjoyed more power and influence.

Q6: What does ERM mean? (p. 242) (b) European Rate Mechanism

Q7: Why would it be rational to have a leader in the international monetary system? (p. 243) (d) It should provide the key currency and liquidity among other things.

Q8: What consequences does adjustment have in a deficit country? (p. 245) (b) The country must reduce its standard of living or at least the growth rate of its standard of living

Q9: Why is the appreciation of a currency painful for a surplus country? (p. 245) (d) Because it hurts the country’s export industry.

Q10: Why are reserves important? (p. 246) (b) Reserves enable a deficit country to finance payments disequilibria.

Q11: Among other things, why is confidence so necessary in an international monetary system? (p. 247) (b) Otherwise the stability of the system would be threatened.

B) In the following, you will find several statements. Decide whether these statements are correct or not.

Q1: From the early seventies onwards, the fixed exchange rate system was changed to a flexible regime. (C

Q2: Although economists expected a larger degree of autonomy in national macroeconomic policies due to flexible exchange rates, it could not be realised because of the intensive integration of global financial markets. C

Q3: Exchange rate volatility decreased substantially throughout the 1970s.I

Q4: The increased economic interdependence of countries reduced governments’ ability to pursue full-employment policies. C

Q5: The European Rate Mechanism was part of the so-called European Monetary and Economic Federation. I

Q6: According to Gilpin, due to the severe political differences, a well-functioning monetary system would require strong leadership provided by a nation or a group of nations. C

Q7: The leader of such a system should play the role of the lender of last resort, that is, it must not provide financial assistance to countries experiencing severe financial problems, because moral hazard would become embedded in the system. I

Q8: The Japanese resisted an appreciation of the yen until the mid-80s. C

Q9: The gold standard was one of the less stable financial systems in history I

Q10: Confidence-building is mostly costless. I

topic 9.

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