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Chapter 2

Business Administration 4440Q/R/S/T Chapter 2: chapter 2. 2162.doc


Department
Business Administration
Course Code
Business Administration 4440Q/R/S/T
Professor
A
Chapter
2

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Chapter 02 - International Monetary System
Chapter 02
International Monetary System
Multiple Choice Questions
1. The international monetary system can be defined as the institutional framework within
which
A. international payments are made.
B. movement of capital is accommodated.
C. exchange rates among currencies are determined.
D. all of the above
2. Corporations today are operating in an environment in which exchange rate changes may
adversely affect their competitive positions in the marketplace. This situation, in turn, makes
it necessary for many firms to
A. carefully manage their exchange risk exposure.
B. carefully measure their exchange risk exposure.
C. both a) and b)
3. The international monetary system went through several distinct stages of evolution. These
stages are summarized, in alphabetic order, as follows:
(i)- Bimetallism
(ii)- Bretton Woods system
(iii)- Classical gold standard
(iv)- Flexible exchange rate regime
(v)- Interwar period
The chronological order that they actually occurred is:
A. (iii), (i), (iv), (ii), and (v)
B. (i), (iii), (v), (ii), and (iv)
C. (vi), (i), (iii), (ii), and (v)
D. (v), (ii), (i), (iii), and (iv)
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Chapter 02 - International Monetary System
4. In the United States, bimetallism was adopted by the Coinage Act of 1792 and remained a
legal standard until 1873,
A. when Congress dropped the silver dollar from the list of coins to be minted.
B. when Congress dropped the twenty-dollar gold piece from the list of coins to be minted.
C. when gold from the California gold rush drove silver out of circulation.
D. when gold from the California gold rush drove gold out of circulation.
5. The monetary system of bimetallism is unstable. Due to the fluctuation of the commercial
value of the metals,
A. the metal with a commercial value lower than the currency value tends to be used as metal
and is withdrawn from circulation as money (Gresham's Law).
B. the metal with a commercial value higher than the currency value tends to be used as
money (Gresham's Law).
C. the metal with a commercial value higher than the currency value tends to be used as metal
and is withdrawn from circulation as money (Gresham's Law).
D. none of the above
6. In the 1850s the French franc was valued by both gold and silver, under the official French
ratio which equated a gold franc to a silver franc 15½ times as heavy. At the same time, the
gold from newly discovered mines in California poured into the market, depressing the value
of gold. As a result,
A. the franc effectively became a silver currency.
B. the franc effectively became a gold currency.
C. silver became overvalued under the French official ratio.
D. answers a) and c) are correct
7. Gresham's Law states that
A. bad money drives good money out of circulation.
B. good money drives bad money out of circulation.
C. if a country bases its currency on both gold and silver, at an official exchange rate, it will
be the more valuable of the two metals that circulate.
D. none of the above.
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Chapter 02 - International Monetary System
8. Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold
at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market
exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint:
assume that you have $350 available for investment.
A. Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to
£200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to
get $360.
B. Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per pound.
Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce.
C. a) and b) both work
D. None of the above
9. Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold
at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market
exchange rate is $1.60 per pound, how would you take advantage of this situation? Hint:
assume that you have $350 available for investment.
A. Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to
£200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to
get $360.
B. Start with $350. Exchange the dollars for pounds at the current rate of $1.60 per pound.
Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce.
C. a) and b) both work
D. None of the above
10. Suppose that the United States is on a bimetallic standard at $30 to one ounce of gold and
$2 for one ounce of silver. If new silver mines open and flood the market with silver,
A. only the silver currency will circulate.
B. only the gold currency will circulate.
C. no change will take place since citizens could exchange their gold currency for silver
currency at any time.
D. none of the above
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