Question

1. Under the gold standard, all except one of the following are true. Which is not true?

Paper currency was convertible into gold at a fixed rate.

A balance-of-payments deficit would result in a loss of gold.

A balance-of-payments surplus would result in an inflow in gold.

The money supply of any country was largely determined by flows of gold.

A surplus country experienced a rise in its money supply and a drop in its price level.

2. Under fixed exchange rates, a central bank

adjusts the money supply automatically and immediately to changes in the demand and supply of foreign exchange

need hold no reserves of foreign exchange

enforces the fixed exchange rate by refusing to buy or sell foreign exchange whenever changes occur in demand or supply

may find its reserves fluctuating as demand and supply conditions change

has no authority to buy or sell foreign exchange

3. Under a floating rate system, exchange rates are determined by supply and demand in the foreign exchange market without government intervention.

true/false

4. When is a balance of payments account out of balance?

5. When faced with a continual excess demand for foreign exchange, which of the following options can the government choose to eliminate the disequilibrium situation?

increase the peg or devalue

engage in fiscal policy and raise the country's income level

engage in monetary policy and lower interest rates

increase the inflation rate

decrease the peg or revalue

Answer 1

1. A surplus country experienced a rise in its money supply and a drop in its price level.

Explanation: This statement is not related to gold standard. Otherwise all other statements are true.

2. may find its reserves fluctuating as demand and supply conditions change

Explanation: In fixed exchange rate system, government has to buy or sell foreign currency in order to maintain the fixed exchange rate. Thus, the reserves keep fluctuating as demand and supply conditions are changed.

3. True.

Explanaion: Under floating exchange rate, government do not intervene and exchange rate is determined by the free play of market forces.

4. BOP is out of balance when the revenues are less than the expenditures, it goes out of balance.

5. increase the peg or devalue

Explanation: It is because when demand for foreign exchange increases, demand for foreign currency increases, which means people are buying from the foreign as foreign goods are cheaper, so government will devalue its currency and make domestic goods cheaper to control the situation.