THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 579

CHAPTER 20 The International Financial System 547 KEY TERMS anchor currency, p 524 balance of payments, p 522 balance-of-payments crisis, p 532 Bretton Woods system, capital account, p 525 p 523 currency board, p 544 current account, devaluation, p 522 p 527 dollarization, p 544 fixed exchange rate regime, p 524 floating exchange rate regime, p 524 revaluation, foreign exchange interventions, p 518 International Monetary Fund (IMF), p 525 international reserves, p 518 managed float regime (dirty float), p 524 official reserve transactions balance, p 523 reserve currency, p 527 special drawing rights (SDRs), p 530 sterilized foreign exchange intervention, p 520 trade balance, p 522 unsterilized foreign exchange intervention, p 520 World Bank, p 525 World Trade Organization (WTO), p 525 p 525 QUESTIONS You will find the answers to the questions marked with an asterisk in the Textbook Resources section of your MyEconLab If the Bank of Canada buys Canadian dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange rate? *2 If the Bank of Canada buys Canadian dollars in the foreign exchange market but does not sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange rate? For each of the following, identify in which part of the balance-of-payments account it appears (current account, capital account, or method of financing) and whether it is a receipt or a payment a A British subject s purchase of a share of Air Canada stock b A Canadian s purchase of an airline ticket from Air France c The Swiss government s purchase of Canadian treasury bills d A Japanese s purchase of Canadian salmon e $50 million of foreign aid to Honduras f A loan by a Canadian bank to Mexico g A Canadian bank s borrowing of Eurodollars *4 Why does a balance-of-payments deficit for Canada have a different effect on its international reserves than a balance-of-payments deficit for the United States? Under the gold standard, if Britain became more productive relative to Canada, what would happen to the money supply in the two countries? Why would the changes in the money supply help preserve a fixed exchange rate between Canada and Britain? *6 What is the exchange rate between dollars and Swiss francs if one dollar is convertible into 20 ounce of gold and one Swiss franc is convertible into 40 ounce of gold? If a country s par exchange rate was undervalued during the Bretton Woods fixed exchange rate regime, what kind of intervention would that country s central bank be forced to undertake, and what effect would it have on its international reserves and the money supply? *8 How can a large balance-of-payments surplus contribute to the country s inflation rate? If a country wants to keep its exchange rate from changing, it must give up some control over its money supply Is this statement true, false, or uncertain? Explain your answer *10 Why can balance-of-payments deficits force some countries to implement a contractionary monetary policy? 11 Balance-of-payments deficits always cause a country to lose international reserves Is this statement true, false, or uncertain? Explain your answer *12 How can persistent U.S balance-of-payments deficits stimulate world inflation? 13 Inflation is not possible under the gold standard Is this statement true, false, or uncertain? Explain your answer *14 Why is it that in a pure flexible exchange rate system, the foreign exchange market has no direct effects on the money supply? Does this mean that the foreign exchange market has no effect on monetary policy? 15 The abandonment of fixed exchange rates after 1973 has meant that countries have pursued more independent monetary policies Is this statement true, false, or uncertain? Explain your answer