International Finance
Examination 2

These questions are from the test bank. Some questions have multiple parts.

1. What is the gold standard?

(a) What are two benefits of the gold standard?

(b) What are two problems of the gold standard?

2. Three countries, Croatia, Bosnia, and Serbia set the exchange rate of gold to currencies as:

10 grams of gold = 100 Croatian Kuna

10 grams of gold = 50 Bosnian Konvertible Marks

10 grams of gold = 150 Serbian Dinar

(a) What are the exchange rates?

(b) Are these exchange rates fixed?

(c) If Bosnia wants a 50 million KM money supply, how much gold must the government (or central bank) hold?

3. What is the Bretton Woods System?

(a) What was the exchange are between the U.S. dollar and gold?

(b) How did the other countries establish their exchange rate?

(c) Why did the countries leave the Bretton Woods System?

4. What is the International Monetary Fund (IMF)?

(a) How does a country join the IMF?

(b) What is the source of funding for the IMF?

(c) What are Special Drawing Rights (SDRs)?

(d) Please explain whether SDRs are money.

5. What is the World Bank?

(a) Which system creates the World Bank and the International Monetary Fund (IMF)?

(b) What happened to the system that created the World Bank and the IMF?

6. What is a free float (or clean float)?

(a) What is a managed float (or dirty float)?

7. What is a pegged (or fixed) exchange rate?

(a) Which country pegs their currency?

(b) What happens if a government refuses to support its pegged exchange rate?

8. What is dollarization?

(a) Which country implemented this system?

(b) What are one problem and one benefit of dollarization?

9. If a country has a fixed rate regime and it has a balance-of-payments deficit, please explain what the country must do to maintain this exchange rate?

(a) What happens if the government runs out of reserves and will not allow the official exchange rate to change?

(b) What happens if the government runs out of reserves and will allow the official exchange rate to change?

10. If a country has a fixed rate regime, and it has a balance-of-payments surplus, please explain what the country must do to maintain this exchange rate?

11. If a country has a flexible exchange rate regime and it has a balance-of-payments deficit, please explain what the country must do to maintain this exchange rate?

(a) What is the J-curve Effect? Please graph it.

12. If a country has a flexible exchange rate regime, and it has a balance-of-payments surplus, please explain what the country must do to maintain this exchange rate?

13. If a country has a managed float exchange rate regime, and it has a balance-of-payments deficit, please explain what the country must do to maintain this exchange rate?

(a) What must the central bank do?

(b) What happens to interest rates?

(c) Which balance-of-payments account is impacted, and why?

14. If a country has a managed float exchange rate regime, and it has a balance-of-payments surplus, please explain what the country must do to maintain this exchange rate?

(a) What does the central bank have to do?

(b) What happens to interest rates?

(c) Which balance-of-payments account is impacted and why?

15. What is capital flight?

(a) Why is capital flight disruptive to a country?

(b) Identify four methods an investor could use to remove his financial capital from a country experiencing a crisis?

16. How does the supply of currency in one foreign exchange market relate to the demand of currency in another market?

(a) How do imports and exports relate to the currency exchange market?

(b) What is the difference between a spot and derivatives market?

(c) Why is the currency exchange market the largest market in the world?

17. This is an example of an intermarket arbitrage. A trader at Citibank has 500,000 KM. He sees the following exchange rates:

Citibank: euro 1 /2 KM

National Westminster: kunas 100 / 1 euro

Deutsche Bank: kunas 46 / 1 KM

(a) Appraise whether an investor could earn profits by examining the cross rate?

(b) Evaluate the profit the Citibank trader could make? Make sure you specify which currency?

18. Please draw the international market for U.S. dollars with a supply and demand function for U.S. dollars. What happens if the 2008 Financial Crisis caused Mexicans to decrease their demand for U.S. products, because their incomes are lower? Please show graphically and explain in words. Make sure you are clear which currency appreciates and which one depreciates.

19. Please draw the international market for U.S. dollars. What happens if the Federal Reserve System injects a massive quantity of U.S. dollars onto the foreign exchange markets. Please show graphically and explain in words. Make sure you are clear which currency appreciates and which one depreciates.

20. Please draw the international market for U.S. dollars. China, Russia, and South Korea hold a large amount of U.S. dollars and are afraid the dollar will collapse. What happens if these countries reduce their holdings of U.S. dollars? Please show graphically and explain in words. Make sure you are clear which currency appreciates and which one depreciates.

21. Please draw the international market for the Uzbek som. The Uzbek government established a fixed exchange rate between the Uzbek som and the U.S. dollar.

(a) Please describe in words and show graphically, if people have less demand for this currency?

(b) Explain the Uzbek government's choice to maintain this exchange rate?

(c) Identify the problem if the Uzbek government devalues the som.

(d) If the Uzbek government maintains a fixed exchange rate, appraise the Uzbek's government choices, given the Rule of Incompatible Trinity.