INTERNATIONAL BANKING RESERVES, DEBT, AND RISK
1.Which of the following assets makes use of the basket valuation technique?
a. Swap agreements
b. Oil facility
c. Buffer stock facility
d. Special drawing rights
2. Swap agreements are generally conducted by the:
a. Federal Reserve with foreign central banks
b. Federal Reserve with foreign commercial banks
c. U.S. Treasury with foreign central banks
d. U.S. Treasury with foreign commercial banks
3. Which of the following is a main central bank function of the International Monetary Fund?
a. The conduct of open market operations
b. The issuance of gold certificates
c. The provision of monetary policy for member nations
d. The granting of loans to member nations
4. The Federal Reserve's swap network represents:
a. Efforts to stabilize only the value of the dollar
b. Efforts to stabilize only the value of foreign currencies
c. Long-term borrowing among countries
d. Short-term borrowing among countries
5. International trade and investment are most frequently financed by the U.S. dollar and the:
a. Japanese yen
b. British pound
c. Australian dollar
d. Swiss franc
6. The purpose of international reserves is to finance:
a. Short-term surpluses in the balance of payments
b. Long-term surpluses in the balance of payments
c. Short-term deficits in the balance of payments
d. Long-term deficits in the balance of payments
7. The currencies generally referred to as "reserve currencies" are the:
a. Japanese yen and U.S. dollar
b. Swiss franc and Japanese yen
c. British pound and U.S. dollar
d. Swiss franc and British pound
8. Which of the following does not represent a form of international liquidity?
a. IMF reserve positions
b. General arrangements to borrow
c. U.S. government securities
d. Reciprocal currency arrangements
9. Which of the following is not considered an "owned" reserve?
a. National currencies
b. Gold
c. Special drawing rights
d. Oil facility
10. Which of the following is not considered a "borrowed" reserve?
a. Special drawing rights
b. Oil facility
c. IMF drawings
d. Reciprocal currency arrangement
11. Eurodollars are:
a. Dollar-denominated deposits in overseas banks
b. European currencies used to finance transactions in the United States
c. Dollars that U.S. residents spend in Europe
d. European currencies used to finance imports from the United States
12. Which of the following is not a characteristic of the Eurodollar market? It:
a. Is mainly located in the United Kingdom and continental Europe
b. Operates as a financial intermediary, bringing together lenders and borrowers
c. Deals in interest-bearing time deposits and loans to governments
d. Grew in response to the deregulation of interest rate ceilings on U.S. savings accounts
13. Which of the following assets was (were) created in 1970 to provide additional international liquidity, in the belief that increasing world trade requires more liquidity for larger expected payments imbalances?
a. Eurodollar market
b. Special drawing rights
c. Reciprocal currency arrangements
d. General arrangements to borrow
14. Which of the following constitute(s) the largest component of the world's international reserves?
a. Gold
b. Special drawing rights
c. IMF drawings
d. Foreign currencies
15. With an international gold standard, if a country ended up with a deficit from the balances on its current and capital accounts, it would:
a. Import gold to settle the balance
b. Export gold to settle the balance
c. Officially decrease the price of gold
d. Officially increase the price of gold
16. Which of the following is not a condition of the international gold standard? That a nation must:
a. Convert gold into paper currency, and vice versa, at a stipulated rate
b. Permit gold to be freely imported and exported
c. Tolerate wide fluctuations in its exchange rate
d. Define its monetary unit in terms of a stipulated amount of gold
17. All of the following exchange-rate systems require international reserves to finance balance-of-payments disequilibriums except:
a. Pegged or fixed exchange rates
b. Managed floating exchange rates
c. Adjustable pegged exchange rates
d. Freely floating exchange rates
18. A dollar shortage would indicate that the dollar is:
a. Undervalued in international markets
b. Overvalued in international markets
c. Overvalued in terms of gold
d. Overvalued in terms of special drawing rights
19. The U.S. gold outflow that began in the late 1940s and continued through the 1960s was due in part to:
a. Crawling pegged exchange rates
b. Freely floating exchange rates
c. An undervalued dollar
d. An overvalued dollar
20. The U.S. dollar glut of the 1960s was due in part to:
a. An undervalued dollar
b. An overvalued dollar
c. Freely floating exchange rates
d. Crawling pegged exchange rates
21. For developing countries such as Mexico and Brazil, severe economic problems in the 1980s were caused by:
a. A fall in the world demand for products produced by developing countries
b. High prices of basic raw materials and other commodities
c. Low real interest rates in the United States
d. High levels of income and imports for the United States
22. In response to the international debt problem, the United States set up a special fund in 1986 to help make up for lost oil revenues. Under the plan, the United States would make more money available as world oil prices fell. This plan was designed to help:
a. Argentina
b. Saudi Arabia
c. Mexico
d. Brazil
23. Which indicator of international debt burden schedules interest and principal payments on long-term debt as a percent of export earnings?
a. Debt service ratio
b. Debt-to-export ratio
c. Ratio of external debt to gross domestic product
d. Ratio of external debt to gross national product
24. Which term best describes the process in which the International Monetary Fund provides loans to countries facing balance-of-payments difficulties provided that they initiate programs holding promise of correcting these difficulties?
a. Conditionality
b. Debt service
c. Reciprocal currency arrangement
d. Swap agreement
25. All of the following are major goals of the International Monetary Fund except:
a. Promoting international cooperation among member countries
b. Fostering a multilateral system of international payments
c. Making long-term development and reconstruction loans
d. Promoting exchange-rate stability and the elimination of exchange restrictions
26. Which international reserve asset was officially phased out of the international monetary system by the United States in the early 1970s?
a. Special drawing rights
b. Swap agreements
c. General arrangements to borrow
d. Gold
27. Bilateral agreements between central banks, which provide for an exchange of currencies to help finance temporary balance-of-payments disequilibriums, are referred to as:
a. IMF drawings
b. Special drawing rights
c. Buffer stock facility
d. Swap agreements
28. Which organization is largely intended to make long-term reconstruction loans to developing nations?
a. Export-Import Bank
b. World Bank
c. International Monetary Fund
d. United Nations
29. "Owned" international reserves consist of:
a. Special drawing rights
b. Oil facility
c. IMF drawings
d. Reciprocal currency arrangements
30. "Borrowed" international reserves consist of:
a. IMF drawings
b. Foreign currencies
c. Gold
d. Special drawing rights
31. Concerning international lending risk of commercial banks, __________ refers to the probability that part/all of the interest/principal of a loan will not be repaid.
a. Country risk
b. Credit risk
c. Currency risk
d. Presidential risk
32. Concerning international lending risk of commercial banks, __________ is closely related to political developments in a borrowing country, especially the government's views concerning international investments and loans.
a. Economic risk
b. Credit risk
c. Country risk
d. Currency risk
33. Concerning international lending risk of commercial banks, __________ is associated with possible changes in the exchange value of a nation's currency.
a. Political risk
b. Country risk
c. Credit risk
d. Currency risk
34. To reduce their exposure to developing country debt, lending commercial banks have practiced all of the following except:
a. Making outright loan sales to other commercial banks
b. Reducing their capital base as a cushion against losses
c. Dealing in debt-for-debt swaps with foreign governments
d. Dealing in debt/equity swaps with foreign governments
35. To reduce losses on developing country loans, commercial banks sometimes sell their loans, at a discount, to a developing country government for local currency which is then used to finance purchases of ownership shares in developing country industries. This practice is known as:
a. Debt forgiveness
b. Debt buyback
c. Debt-for-debt swap
d. Debt/equity swap
36. Concerning international debt, __________ refers to a negotiated reduction in the contractual obligations of the debtor country and includes schemes such as markdowns and writeoffs of debt.
a. Debt/equity swap
b. Debt-for-debt swap
c. Debt forgiveness
d. Debt sales
37. The exchange of borrowing country debt for an ownership position in the borrowing country is known as:
a. Debt forgiveness
b. Debt-for-debt swap
c. Debt reduction
d. Debt/equity swap
38. "Country risk" analysis is concerned with all of the following except:
a. Depreciation of the borrowing country's currency
b. Political instability in the borrowing country
c. Economic growth in the borrowing country
d. External debt of the borrowing country
TRUE-FALSE QUESTIONS
1. Under a system of fixed exchange rates, international reserves are needed to bridge the gap between monetary receipts and monetary payments.
2. International reserves allow a country to finance disequilibria in its balance-of-payments position.
3. An advantage of international reserves is that they allow countries to sustain temporary balance-of-payments deficits until acceptable adjustment measures can operate to correct the disequilibrium.
4. With floating exchange rates, countries require sizable amounts of international reserves for the stabilization of exchange rates.
5. When exchange rates are fixed by central bankers, the need for international reserves disappears.
6. When exchange rates are fixed by central bankers, international reserves are necessary for financing payments imbalances and the stabilization of exchange rates.
7. There exists a direct relationship between the degree of exchange rate flexibility and the need for international reserves.
8. With floating exchange rates, payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate, and the need for exchange-rate stabilization and international reserves disappears.
The next three questions pertain to Figure 18.11, which represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from D0 to D1.
Foreign Exchange Market
9. Refer to Figure 18.1. Under a fixed exchange rate system, U.S. monetary authorities would have to supply 8 million pounds in exchange for dollars to keep the exchange rate at $3 per pound.
10. Refer to Figure 18.1. If the exchange rate was allowed to rise to $4 per pound, U.S. monetary authorities would have to supply 6 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.
11. Refer to Figure 18.1. Under a floating exchange rate system, the exchange rate would rise to $4 and U.S. monetary authorities would have to supply 4 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.
12. To the extent that adjustments in prices, interest rates, and income levels promote balance-of-payments equilibrium, the demand for international reserves decreases.
13. The greater a nation's propensity to apply tariffs and quotas to key sectors, the greater will be the need for international reserves.
14. The demand for international reserves is negatively related to the level of world prices and income.
15. The demand for international reserves tend to increase with the level of world income and trade activity.
16. If a nation with a balance-of-payments deficit is willing and able to initiate quick actions to increase export receipts and decrease import payments, the amount of international reserves needed will be relatively large.
17. The supply of international reserves consists of owned reserves and borrowed reserves.
18. Foreign currencies constitute the smallest component of the world's international reserves.
19. Gold constitutes the largest component of the world's international reserves.
20. The U.S. dollar has been considered a reserve (key) currency because trading nations have been willing to hold it as an international reserve asset.
21. The U.S. dollar, Japanese yen, British pound, and Mexican peso are the major reserve currencies of the international monetary system.
22. By the 1990s, the British pound had replaced the U.S. dollar as the world's key currency.
23. A goal of the International Monetary Fund is to make short-term loans to member nations so as to allow them to correct balance of payments disequilibriums without resorting to measures that would destroy national prosperity.
24. When granting loans to financially troubled nations, the International Monetary Fund requires some degree of conditionality, meaning that the borrowing nation must agree to implement economic policies as mandated by the IMF.
25. The International Monetary Fund has sometimes demanded that financially-troubled nations, that borrow from the IMF, undergo austerity programs including slashing of public spending and private consumption.
26. The main purpose of the International Monetary Fund is to grant long-term loans to developing nations to help them finance the development of infrastructure such as roads, dams, and bridges.
27. Gold is currently the most widely used asset in the international monetary system.
28. In 1974 the United States revoked a 41-year ban on U.S. citizen's ownership of gold.
29. In 1975 the official price of gold was abolished as the unit of account for the international monetary system. As a result, gold was demonetized as an international reserve asset.
30. In the 1970s, the major industrial countries abandoned the managed-floating exchange rate system and adopted a system of fixed exchange rates tied to the price of gold.
31. Created by the International Monetary Fund, special drawing rights (SDRs) are unconditional rights to draw currencies of other nations, thus enabling countries to finance their current-account deficits.
32. The value of the SDR is tied to a currency basket consisting of the U.S. dollar, German mark, Japanese yen, French franc, and British pound.
33. The SDR has replaced the dollar, yen, and mark as the key asset of the international financial system.
34. Because the value of the SDR is tied directly to the value of the U.S. dollar, a 10 percent dollar depreciation would result in a 10 percent decrease in the SDR's value.
35. A main purpose of the International Monetary Fund is to make loans of foreign currencies to member countries which are experiencing current-account surpluses.
36. When a deficit nation borrows from the International Monetary Fund, it purchases with its currency the foreign currency required to help finance the payments deficit.
37. The so-called General Arrangements to Borrow provide a permanent increase in the supply of international reserves.
38. Swap arrangements are bilateral agreements between central banks to allow countries to temporarily borrow funds to ease current-account deficits and discourage speculative capital flows.
39. IMF drawings, swap arrangements, buffer stock facility, and compensatory financing for exports are classified as owned reserves rather than borrowed reserves.
40. Concerning international lending risk, credit risk refers to the probability that part or all of the interest rate or principal of a loan will not be repaid.
41. Concerning international lending risk, country risk refers to the risk that part or all of the interest or principal of a loan will not be repaid.
42. Concerning international lending risk, currency risk is the risk of asset losses due to changing currency values.
43. A country with a high debt/export ratio and a high debt service/export ratio would likely be considered as an attractive place in which to invest by foreign residents.
44. A debt buyback is a debt-reduction technique in which a government of a debtor nation buys loans from commercial banks at a discount.
45. Under a debt-for-debt swap, a commercial bank sells its loans at a discount to a developing country government for local currency which it then uses to finance an equity investment in the debtor country.
46. A debt-equity swap results in a trade surplus nation forgiving the loans made to a trade-deficit nation.
47. Eurocurrencies are deposits, denominated and payable in dollars and other foreign currencies, in banks outside the United States, primarily in London, the market's center.