Chapter 11: Cooperation, Conflict and Crisis in the Contemporary International Monetary System

Multiple Choice Questions

1.The determination to set macroeconomic policy independent of foreign considerations has generated a)small current-account imbalances. b)small cross-border capital flows. c)substantial financial stability. d)calm exchange rate movements. e)episodes of financial instability.

Answer: e

2.After 1980, the largest current account deficit in the global economy was held by a)United States. b)Germany. c)Japan. d)United Kingdom. e)China.

Answer: a

3.By 1990, the U.S. current account deficit had declined since its high in 1987 to approximately a)$ 50 billion. b)$ 75 billion. c)$ 100 billion. d)$ 125 billion e)$ 150 billion

Answer: b

4.The current account imbalances in the United States during the Reagan administration were due to a)cutting taxes and military spending. b)raising taxes and military spending. c)cutting taxes and raising military spending. d)raising taxes and cutting military spending. e)cutting taxes and greater exports.

Answer: c

5.A change in fiscal policy will affect the current account so long as a)neither private savings nor investment responds to the change in fiscal policy. b)both private savings and investment responds to the change in fiscal policy. c)private savings does respond but investment does not respond to the change in fiscal policy. d)private savings does not respond but investment does respond to the change in fiscal policy. e)there is an investment boom caused by high interest rates.

Answer: a

6.By the end of the 1980s, American foreign debt to the rest of the world had increased from a)$ 140 billion to more than $ 1 trillion. b)$ 440 billion to more than $ 2 trillion. c)$ 200 billion to more than $ 3 trillion. d)$ 350 billion to more than $ 2 trillion. e)$ 750 billion to more than $ 2 trillion.

Answer: b

7.In order to attract capital flows from current account surplus countries, the United States had to a)maintain relatively low interest rates. b)cut government spending. c)lower taxes. d)maintain relatively high interest rates. e)weaken the value of the dollar.

Answer: d : : - e) 70%.

8.From a postwar low in 1979, by 1985 the dollar had appreciated by about a)10%. b)20%. c)30%. d)50%.

Answer: d

9.During the early 1980s protectionist pressure caused by the strength of the dollar led to policies that sought to a)eliminate Japanese barriers to American imports and ending what was perceived to be unfair Japanese industrial policy. b)eliminate Japanese barriers to American imports and promoting a stronger proimport American industrial policy. c)accept Japanese barriers to American imports and ending what was perceived to be unfair Japanese industrial policy. d)eliminate Japanese barriers to American imports and accepting what was perceived to be unfair Japanese industrial policy. e)eliminate American barriers to Japanese imports and ending what was perceived to be unfair Japanese industrial policy.

Answer: a

10.In 1985, in a compact known as the Plaza accord, the US, German, British, French and Japanese governments agreed to a)increase the value of the dollar against the Japanese yen and the German mark by 10-12 percent. b)reduce the value of the dollar against the Japanese yen and the German mark by 10-12 percent. c)reduce the value of the dollar against the Japanese yen and the German mark by 7-8 percent. d)reduce the value of the dollar against the Japanese yen and the British pound by 7-8 percent. e)increase the value of the dollar against the Japanese yen and the German mark by 7-8 percent.

Answer: b

11.In 1987, at a meeting in Paris, in a compact known as the Louvre accord, the US, German, British, French and Japanese governments agreed to strive to a)stabilize exchange rates at their current values. b)let the dollar to continue to appreciate. c)let the Japanese yen and German mark to continue to appreciate. d)let the dollar to continue to depreciate. e)let the Japanese yen and German mark to continue to depreciate.

Answer: a

12.In the international monetary politics of the 1980s among the advanced industrial countries there were many disagreements because of the impact of domestic politics on macroeconomic policymaking. Essentially, according to Oatley, it came down to a)the US wanting greater openness to American exports while these countries wanted the US to reduce its budget deficits. b)the US wanting countries with trade surpluses to revalue their currency to make their exports more expensive while these countries wanted the US to reduce its budget deficits. c)the US wanting burden of adjustment to be borne by countries with trade surpluses while these countries wanted the US to reduce its budget deficits. d)the US being willing to reduce its budget deficits but Germany was unwilling to lower interest rates. e)the US being willing to reduce its budget deficits but Japan was unwilling to be more open to US agricultural exports.

Answer: c

13.Between 2000 and the peak in 2006, U.S. home prices rose by a)40 %. b)45 %. c)50 %. d)55 %. e)60%.

Answer: e

14.In 2008 under Bush, US current-account deficits, as a share of American national income, were larger than those of the 1980s at a)3 % of GDP at their peak. b)4 % of GDP at their peak. c)5 % of GDP at their peak. d)6 % of GDP at their peak. e)7 % of GDP at their peak.

Answer: d a)increased from $1.4 to $5.2 trillion b)increased from $1.8 to $5.5 trillion c)increased from $2.0 to $6.0 trillion d)increased from $2.2 to $6.0 trillion e)increased from $2.4 to $6.2 trillion

15.Foreign holdings of non-government securities between 1999 and 2007.

Answer: e

16. In the past decade, the country with which the United States has had its largest bilateral trade deficit was a)Mexico. b)Canada. c)Japan. d)China. e)Germany.

Answer: d

17. According to Oatley, governments’ reluctance to alter macroeconomic policies in order to reduce current-account imbalances ultimately sparked a) the decision to return to fixed exchange rates. b) the decision to use floating exchange rates. c) the great financial crisis of 2007-2009. d) a glut of US manufacturing exports. e) China’s policy of pegging the renminbi (RMB) to the dollar.

Answer: c

18.The ability to borrow large volumes at low interest rates credit conditions that typically generate a)asset bubbles. b)trade bubbles. c)tax bubbles. d)cash hoarding in advanced industrial countries. e)manufacturing unemployment in advanced industrial countries.

Answer: a

19.In the immediate aftermath of the 2008 crisis, many observers predicted that the dollar’s role as the international monetary system’s primary reserve currency a)was likely to be numbered. b)should be replaced by the euro. c)would stay resilient. d)would fall by 10% e)would rise by 10%.

Answer: a a)reduced economic conflict caused by the control of inflation. b)mortgage-backed securities with different risks. c)global savings gluts. d)political conflict sparked by large and persistent global imbalances. e)wide spread tax cuts.

20. International monetary politics during the last 40 years have been characterized by a recurring pattern of.

Answer: d

21.The financial crisis of 2007-2009 acquired a global dimension a)because Asian financial institutions purchased mortgage-backed securities in large quantities. b)in spite of debt-service problems caused by leveraged buying. c)because of government budget deficit politics in advanced countries. d)because Great Britain, Ireland, and Spain experienced their own real estate bubble bursts. e)because European financial institutions purchased mortgage-backed securities in large quantities often with borrowed money.

Answer: d

22. The U.S. government’s Toxic Asset Relief Program (TARP) in 2008 to purchase risky assets from the largest banks authorized more than a)$300 billion. b)$500 billion. c)$700 billion. d)$1.0 trillion. e)$2.0 trillion.

Answer: c

23.Since the late 1970s, European governments have desired more stable intra-European exchange rates a)in spite of the fact that exchange-rate costs are relatively inexpensive for most EU countries. b)because the cost of floating in the EU is so high that European governments are more willing to sacrifice domestic autonomy. c)because European governments are less willing to sacrifice domestic autonomy. d)because EU governments were equally committed to fighting inflation. e)because EU governments were required to maintain balanced budgets.

Answer: b

24.Under the EMS system, the burden of maintaining fixed exchange rates fell principally upon a)countries with high inflation. b)countries with low inflation. c)counties with budget surpluses. d)countries with low interest rates. e)countries with low tax rates.

Answer: a

25.Developments in the contemporary international monetary system are driven primarily by a)German fear of inflation. b)why all EU countries are not members of the euro zone. c)distributive conflict over who should bear the costs of adjustment. d)levels of the VAT tax. e)China’s emergence as a fundamentally important creditor country. Answer: c

True-False Questions

1. Governments recently have found themselves in fundamentally different types of distributive conflicts than those that brought down the Bretton Woods system in the early 1970s.

Answer: False

2. The 1970s had seen relatively small current-account imbalances in the major industrial countries generally adjust quickly.

Answer: True

3. Capital flows from Japan and Germany financed the US current-account deficits in the 1980s.

Answer: True

4. In a compact known as the Plaza Accord in 1985, Germany, Britain, France, Italy and the United States consented to intervene in the foreign exchange markets whenever it appeared that the market was pushing the dollar up.

Answer: False

5. The conflict over who would adjust - the United States or Germany- sparked massive turbulence in global equity markets.

Answer: True

6. The dollar’s resilience as the international monetary system’s primary reserve currency may have as much to do with the shortcomings of the existing alternatives as with the inherent strength of the dollar.

Answer: True

7. For the first 10 years of monetary union, the Bundesbank’s ability to shape EMU institutions appeared not to have secured Germany’s interests.

Answer: False

8.Financial institutions that held mortgage-backed securities in large amounts suffered large losses in the 2007-2009 real estate crisis.

Answer: True

9.The EMS exchange rates were so small that European governments had no problem in sacrificing domestic autonomy to stabilize exchange rates.

Answer: False

10. China’s emergence as a creditor country has placed an emerging market economy in the center of the international monetary system for the first time in its history

Answer: True

Essay/Discussion Questions

1. Explain and discuss the divergent macroeconomic policies of the U.S., Japan and Germany in the 1980s.

2. Discuss the issues and countries involved in the Plaza and Louvre Accords in mid 1980s. Were they successful?

3. Discuss and analyze why foreign government holdings of American government debt increased by 2.5 trillion between 1999 and 2008.

4. Discuss and explain the evolution of current-account imbalances between 1996 and 2010. How were they different than similar problems in the 1980s?

5. Why did the U.S. international investment position stabilize after 2004 in spite of continued heavy borrowing?

6. Explain and discuss US Congressional contentions that China’s policy of pegging the renminbi to the dollar constituted an unfair trade practice.

7. Explain how the Bush Jr. administration attributed global imbalances to a “global savings glut”. What were the Chinese and European rebuttals?

8.Explain how governments’ reluctance to alter macroeconomic policies facilitated the development of the financial weaknesses that ultimately sparked the great financial crisis of 2007–2009.

9.How did governments and central banks respond to prevent the total collapse of the world financial system in 2007-2009?

10. Explain why there has been more cooperation than conflict in EU’s exchange-rate system since the late 1970s. What are the prospects for the EMU?