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Exam 17: International Banking: Reserves, Debt, and Risk

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Question 1

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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

E) B) and C)
F) None of the above

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Question 2

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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.

A) True
B) False

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Question 3

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Why do countries hold international reserves?

The greater a nation's propensity to apply tariffs and quotas to key sectors, the greater will be the need for international reserves.

Which of the following is $\underline { \text { not } }$ a condition of the international gold standard? That a nation must:

To the extent that adjustments in prices, interest rates, and income levels promote balance-of-payments equilibrium, the demand for international reserves decreases.

Which of the following is $\underline { \text { not } }$ considered an "owned" reserve?

The U.S. gold $\underline { \text { outflow } }$ that began in the late 1940s and continued through the 1960s was due in part to:

Eurodollars are:

The diagram below 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. Figure 17.1 Foreign Exchange Market -In the market for British Pounds the demand is represented by D₀ and supply by S₀. If the exchange rate is fixed at $3 and the demand for pounds increases to D1, US monetary authorities will need to

In 1974 the United States revoked a 41-year ban on U.S. citizen's ownership of gold.

Gold is currently the most widely used asset in the international monetary system.

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.

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.

"Owned" international reserves consist of:

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.

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.

The diagram below 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. Figure 17.1 Foreign Exchange Market -Refer to Figure 17.1. 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.

The Federal Reserve's swap network represents:

Describe the eurocurrency market.