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Money, Banking, and Financial Markets Practice Test: The International Financial System
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The international financial system (IFS) is made up of a variety of assets, institutions, and markets that facilitate the flow of capital for finance and international trade. The IFS includes: Bank and nonbank financial institutions Financial markets that determine and trade the prices of these assets Nonmarket activities, such as private equity transactions Legal agreements Exchange rate systems Financial instruments  The IFS also provides a payment mechanism and offers facilities for borrowing and disposing of surplus funds. The IFS has evolved to mirror changes in the world economy,... Show more
Money, Banking, and Financial Markets Practice Test: The International Financial System
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25 Questions

1. If a central bank does not want to allow the domestic currency to depreciate, it will ________ international reserves by purchasing its currency, thereby ________ the monetary base and increasing the risk of higher unemployment.
2. Everything else held constant, if a central bank makes an unsterilized purchase of foreign assets, then the domestic money supply will ________ and the domestic currency will ________.
3. An advantage of an international lender of last resort is its ability to prevent ________, in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of ________ if creditors expect to be protected if a crisis occurs.
4. If a central bank does not want to see its currency rise in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby weakening its currency.
5. Policymakers in a country with a balance of payments surplus may not want to see their countryʹs currency appreciate because this would
6. A central bankʹs attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of its currency leads to ________ international reserves which ________ the monetary base.
7. Under a fixed exchange rate regime, if a central bank must intervene to purchase the domestic currency by selling foreign assets, then, like an open market sale, this action ________ the monetary base and the money supply, causing the interest rate on domestic assets to ________.
8. Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will decrease and the domestic currency will ________.
9. Of the following, the one that appears in the current account of the balance of payments is
10. Critics of the IMF contend that its lending in the Mexican crisis, which was used to bail out foreign ________, set the stage for the ________ crisis because these ________ expected to be bailed out if things went wrong.
11. An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.
12. Under the Bretton Woods system, the United States was designated as the
13. Which of the following is not a disadvantage of controls on capital outflows?
14. The account that shows international transactions involving financial transactions (stocks, bonds, bank loans, etc.) is called the
15. When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called
16. Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is, above par, the central bank must intervene to sell the ________ currency by purchasing________ assets.
17. Capital ________ are American purchases of foreign assets, and capital ________ are foreign purchases of American assets.
18. Under a fixed exchange rate regime, if the domestic currency is initially ________, that is,________ par, the central bank must intervene to purchase the domestic currency by selling foreign assets.
19. If the current account balance shows a surplus, and the capital account also shows a surplus, then the official reserve transactions balance
20. Under a fixed exchange rate regime, a country that depletes its international reserves in an attempt to keep its currency from ________ will be forced to ________ its currency.
21. Because sterilized interventions mean offsetting open market operations, there is no impact on the monetary base and the money supply, and therefore a sterilized intervention
22. Everything else held constant, if a central bank makes an unsterilized sale of foreign assets, then the domestic money supply will ________ and the domestic currency will ________.
23. The Bretton Woods system broke down in the early 1970s for all but one of the following reasons:
24. An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for ________ traded goods to what is found in the ________ country.
25. If a central bank does not want to see its currency ________ in value, it may pursue contractionary monetary policy to raise the domestic interest rate, thereby ________ its currency.

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