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)

(a) The combination of fixed exchange rates and the increased interdependencies of economies created a severe constraint on national policy making.

(b) The combination of flexible exchange rates and the increased interdependencies of economies created a severe constraint on national policy making.

(c) Flexible exchange rates would not allow delinking anymore.

(d) Economic policies should have been pursued without constraints.

Q2: What consequences does financial market integration have? (p. 240)

(a) Macroeconomic policy making would be less important.

(b) Exchange rate policies in one country do not have any influence on other countries.

(c) Macroeconomic policies in one country can have a strong influence on other countries as well.

(d) Microeconomic policies in one country can have a strong influence on other countries as well.

Q3: The integration of national financial markets… (p. 240)

(a) did not create new challenges at all.

(b) did not have an effect on macroeconomic policy autonomy.

(c) increased substantially the autonomy of macroeconomic policy making.

(d) reduced the autonomy of macroeconomic policy making.

Q4: Exchange rates became more dependent on … (p. 240)

(a) international financial flows.

(b) national macroeconomic policies.

(c) inflation.

(d) international trade.

Q5: How did the role of central bankers change from the 1970s? (p. 241)

(a) Central banks became dependant on each other.

(b) The euro made central bankers redundant.

(c) The dollar made central bankers redundant.

(d) They enjoyed more power and influence.

Q6: What does ERM mean? (p. 242)

(a) Eurodollar Reversibility Model

(b) European Rate Mechanism

(c) Export Reduction Mechanism

(d) External Reaction Method

Q7: Why would it be rational to have a leader in the international monetary system? (p. 243)

(a) It should exercise armed control over monetary transactions.

(b) It should punish those who violate the rules.

(c) It should create a regional bloc which provides prosperity for the incumbents.

(d) It should provide the key currency and liquidity among other things.

Q8: What consequences does adjustment have in a deficit country? (p. 245)

(a) The country must increase its standard of living or at least the level of employment in order to reduce deficit.

(b) The country must reduce its standard of living or at least the growth rate of its standard of living.

(c) The country should pay back its debt as soon as possible.

(d) The country must not borrow further from international markets due to its increased indebtedness.

Q9: Why is the appreciation of a currency painful for a surplus country? (p. 245)

(a) Because it hurts the country’s import industry.

(b) Because it hurts the country’s consumers.

(c) Because it hurts the country’s political independence.

(d) Because it hurts the country’s export industry.

Q10: Why are reserves important? (p. 246)

(a) Reserves provide deficit.

(b) Reserves enable a deficit country to finance payments disequilibria.

(c) Reserves can guarantee the independence of a government.

(d) Reserves can cause a successful appreciation of the national currency.

Q11: Among other things, why is confidence so necessary in an international monetary system? (p. 247)

(a) Because politicians are always cheating on each other.

(b) Otherwise the stability of the system would be threatened.

(c) Politicians can be easily misled.

(d) Confidence is not important at all.

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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