Which of the following statements is true when a national currency can be undervalued?

Answer the following questions and then press 'Submit' to get your score.

Question 1

Which of the following is not seen as an advantage of the gold standard?

a) For a given stock of gold, a rise in real money supply can only occur if the price level declines.

b) Inflation is unlikely to emerge as a significant problem.

c) No country needs to serve at the centre of this fixed exchange rate system.

d) The monetary mechanism has credibility.

Question 2

With the decision to let sterling float in September 1931, the gold standard came to an end. The decision to let sterling float was taken because...

a) ...silver was significantly overvalued with respect to gold at the official parity.

b) ...silver was significantly undervalued with respect to gold at the official parity.

c) ...sterling's parity was not properly aligned with its price level and was undervalued.

d) ...British official liabilities exceeded Britain's gold reserves.

Question 3

The Bretton Woods System is referred to as the "gold exchange standard" because...

a) ...gold was the fundamental standard of value based on the ability of the US to maintain the parity of $35 per ounce.

b) ...it replaced sterling which had been the silver exchange standard.

c) ...all central banks exchanged their foreign exchange reserves for gold to become members of the system.

d) ...gold could be exchanged between countries, all other capital was controlled.

Question 4

The fatal flaw of the Bretton Woods system was that...

a) ...sterling was overvalued and the French franc was undervalued leading to a loss of gold reserves by Great Britain.

b) ...the growth of the global economy brought with it a demand for dollars to be held as international reserves that exceeded the US gold reserves.

c) ...the World Bank was underfunded by member central banks.

d) ...it was too weak to survive simultaneous speculative attacks on the Italian and UK currencies in 1992.

Question 5

The functions of the International Monetary Fund include all of the following except...

a) ...to provide emergency loans to countries facing balance of payments problems.

b) ...to monitor macroeconomic developments continuously in member countries.

c) ...to serve as the world central bank.

d) ...to provide a line of credit for each member country.

Question 6

The following three aspects of a monetary system are jointly incompatible: monetary policy independence; (A)_______ exchange rates; and (B)_______ .

a) (A) floating; (B) capital controls

b) (A) floating; (B) free capital mobility

c) (A) fixed; (B) capital controls

d) (A) fixed; (B) free capital mobility

Question 7

Special drawing rights are not...

a) ...a credit line allocated by the IMF to member countries according to each country's quota.

b) ...backed by US dollars.

c) ...the IMF's unit of account.

d) ...a basket of four currencies.

Question 8

What is meant by the "band of fluctuation"?

a) The maximum level of price deviation allowed by governments before intervening.

b) The variance of the gold parity within a year.

c) The degree by which gold quantities fluctuates due to sales and purchases.

d) Small deviations from the bilateral rate of gold parity in which it is not worth to ship gold abroad for trade.

Question 9

Countries that had both gold and silver as their medium of exchange - as system called Bimetallism - not seldom faced troubles which were supposed to be tackled by Gresham's Law. What does Gresham's Law state?

a) Silver and gold have a fixed parity.

b) It abandoned bimetallism

c) Metals that become more valuable than the official rate stop circulating.

d) No more than two metals are allowed to be used as currencies.

Question 10

Gold was often physically shipped abroad to pay for current account imbalances which affected the real domestic money supply. What is one consequence of this?

a) Outflow of gold to pay for excess import reduces the domestic price level.

b) Countries that sell much of their gold tend to be poorer.

c) Monetary policy is not independent anymore.

d) The interest rate decreases.

What happens when a currency is undervalued?

What factors may cause a country's currency to become overvalued?

What is the effect of an undervalued currency in international trade?

Why Undervalue currency?