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Fin 370 Exam 2 Questions and Answers (100% Pass)
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the rules of the game (classic gold standard) under the gold standard, a country's money supply was limited to the amount of gold held by its central bank; each country set the rate at which its currency unit (paper or coin) could be converted to a given weight of gold (fixed exchange rate)...

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  • October 22, 2024
  • 49
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • fin 370 exam 2 questions and answers 100 pass

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  • Fin 370

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Fin 370 Exam 2 Questions and
Answers (100% Pass)
the rules of the game (classic gold standard)


✓ under the gold standard, a country's money supply was limited to the

amount of gold held by its central bank; each country set the rate at

which its currency unit (paper or coin) could be converted to a given

weight of gold (fixed exchange rate)




defending a fixed exchange rate


✓ under the gold standard, a country was responsible for preserving the

exchange value of the country's currency by being willing and able to

exchange its currency for gold reserves upon the demand of a foreign

central bank




interwar years and WWII


✓ currencies were allowed to fluctuate over farily wide ranges in terms of

gold and in relation to each other; theoretically, supply and demand

for a country's exports caused moderate changes in an exchange rate

about a central equilibrium value; unfortunately, such flexible rates did

not work in an equilibriating manner




Master01 | October, 2024/2025 | Latest update

, 1|Page | © copyright 2024/2025 | Grade A+

selling short


✓ a speculation technique in which an individual speculators sell an

asset, such as a currency, to another party for delivery at a future date,

however, the speculator does not yet own the asset and expects the

price of the asset to fall before the dat which which the speculator

must purchase the asset in the open market for delivery; this was

practiced in the interwar years and WWII, which caused weak

currencies to fall further in value than warranted by real economic

factors, and ther reverse happened with strong currencies




Bretton Woods


✓ agreement made by the Allied powers at the end of WWII; the fixed

exchange rate regime of 1945-73, which failed. It created two new

insitutions: the IMF and the World Bank. In this system the U.S. dollar was

the main reserve currency held by central banks and was the key to

the web of exchange rate values. Eventually the overhang of dollars

held by foreigners forced the US to devalue the dollar because the US

was no longer able to guarantee the conversion of dollars into its

diminishing store of gold




IMF (International Monetary Fund)




Master01 | October, 2024/2025 | Latest update

, 1|Page | © copyright 2024/2025 | Grade A+

✓ the IMF was created by the Bretton Woods Agreement in order to aid

countries with balance of payments and exchange rate problems;

remains as the primary source of similar statistics for the balance of

payments and economic performance worldwide




World Bank (international bank for reconstruction and development, IBRD)


✓ formed by the Bretton Woods Agreement to help fund postwar

reconstruction and has since supported general economic

development




fixed rate of exchange


✓ the govt determines a set exchange rate




technical float (floating rate of exchange)


✓ the govt does not set the currency's value or intervene in the

marketplace, allowing the supply and demand of the market for its

currency to determine the exchange value




advantages and disadvantages of fixed exchange rates




Master01 | October, 2024/2025 | Latest update

, 1|Page | © copyright 2024/2025 | Grade A+

✓ advantages: stability in prices, higher international trade, no inflation

✓ disadvantages: central banks must maintain large quantities of

international reserves, fixed rates may be maintained at rates that are

inconsistent with economic fundamentals




flexible exchange rates


✓ allow the exchange rate to change as a nation's economy changes

and as its trade relationships and balances evolve




de facto, de jure, ex post


✓ the de facto system is a country's actual exchange rate practices. this

may or may not match the de jure system, which is the official system;

today the IMF classifies currencies on the basis of ex post analysis -

observed behavior, not on official govt policy pronouncements




hard pegs


✓ countries that give up their own sovereignty over monetary policy,

instead adopting other countries' currencies




soft pegs




Master01 | October, 2024/2025 | Latest update

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