Quiz #11

• 1. A return to a fixed exchange rate system would
• provide the basis for more instability in the international financial markets and undermine the capacity of the national government to control inflation more easily without having to increase unemployment.
• provide the capacity for national governments to resist hedge fund attacks on the currency and permit more effective trade contracts to be signed.
• provide the basis for more stability in the international financial markets and allow national governments to control inflation more easily without having to increase unemployment
• 2. The crucial difference between a monetary system based on the gold standard world and a fiat currency monetary is
• that under the former system, the national government could not use net spending to achieve full employment.
• that under the former system, the national government had to issue debt to cover spending above taxation.
• that under the former system, excessive national government spending led to inflation.
• 3. In a fiat monetary system, the concept of debt monetisation is inapplicable because
• the central bank can set whatever interest rate it likes subject to its inflation targets.
• the central bank has to manage bank reserves if it wants to target a positive interest rate.
• the central bank is independent from the treasury and doesn't have to defend the exchange rate any longer.
• 4. Under the gold standard, a country with a chronic balance of payments deficit would face
• an exchange rate collapse.
• constant domestic recession.
• constant inflationary pressures.
• 5. Under a fiat monetary system, the absence of convertibility means
• that the government can motivate people to exchange goods and services in return for public spending by fining anyone of working age who walks down the street.
• there is no reason for people to hold currency as a hedge against gold price falls.
• that the currency is only convertible into government bonds rather than gold.

Quiz #11 answers

• 1. A return to a fixed exchange rate system would

Answer: provide the basis for more instability in the international financial markets and undermine the capacity of the national government to control inflation more easily without having to increase unemployment.

Explanation: Please read Gold standard and fixed exchange rates - myths that still prevail or post a comment for further discussion.

• 2. The crucial difference between a monetary system based on the gold standard world and a fiat currency monetary is

Answer: that under the former system, the national government had to issue debt to cover spending above taxation.

Explanation: Please read Gold standard and fixed exchange rates - myths that still prevail or post a comment for further discussion.

• 3. In a fiat monetary system, the concept of debt monetisation is inapplicable because

Answer: the central bank has to manage bank reserves if it wants to target a positive interest rate.

Explanation: Please read Gold standard and fixed exchange rates - myths that still prevail or post a comment for further discussion.

• 4. Under the gold standard, a country with a chronic balance of payments deficit would face

Answer: constant domestic recession.

Explanation: Please read Gold standard and fixed exchange rates - myths that still prevail or post a comment for further discussion.

• 5. Under a fiat monetary system, the absence of convertibility means

Answer: that the government can motivate people to exchange goods and services in return for public spending by fining anyone of working age who walks down the street.

Explanation: Please read Gold standard and fixed exchange rates - myths that still prevail or post a comment for further discussion.