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.
1. 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?
3. 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?
5. 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
1
and Swiss francs if one dollar is convertible into 20
ounce of gold and one Swiss franc is convertible
1
into 40
ounce of gold?
7. 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?
9. 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.