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Chapter 6: Money and Banking

True or False Questions

1. Private money is a unit of exchange issued by a government agency (such as a treasury


department) or government-controlled financial institution (such as a central bank).

Answer: False
Diff: 2
Topic: Money
Skill: Legal Concepts

2. Reserve currency can consist of any commodity that is easily transferable and
reasonably nonspoilable.

Answer: False
Diff: 3
Topic: Money
Skill: Legal Concepts

3. The value of official money is nominally constant.

Answer: True
Diff: 1
Topic: Money
Skill: Legal Concepts

4. The IMFs unit of account is the SDR.

Answer: True
Diff: 1
Topic: Money
Skill: Legal Concepts

5. The first modern international monetary system was the Special Drawing Right of the
IMF.

Answer: False
Diff: 2
Topic: The International Monetary Fund (IMF)
Skill: Legal Concepts

6. The IMF was created immediately after the collapse of the gold standard system.
Answer: False
Diff: 1
Topic: The International Monetary Fund (IMF)
Skill: Legal Concepts

7. The Board of Governors is the highest authority of the IMF.

Answer: True
Diff: 1
Topic: The International Monetary Fund (IMF)
Skill: Legal Concepts

8. A member state obligates itself upon joining the IMF to observe a code of conduct.

Answer: True
Diff: 1
Topic: IMF Operations
Skill: Legal Concepts

9. The currency exchange system established by the IMF at its inception was known as
the gold bullion standard.

Answer: False
Diff: 2
Topic: Currency Exchange
Skill: Legal Concepts

10. During 1945, the IMFs par value system of currency exchange allowed members to
define the value of their currency by any criteria except gold.

Answer: False
Diff: 2
Topic: Currency Exchange
Skill: Legal Concepts

11. The American interpretation of the term exchange contracts excludes securities
contracts.

Answer: True
Diff: 1
Topic: Currency Exchange
Skill: Legal Concepts

12. The IMF forbids member states from imposing restrictions on the payments or
transfers involving current international transactions.
Answer: True
Diff: 1
Topic: Currency Exchange
Skill: Legal Concepts

13. The IMFs Articles of Agreement requires a member to buy its own currency from
other members who have acquired it as the result of current transactions.

Answer: True
Diff: 1
Topic: Currency Exchange
Skill: Legal Concepts

14. An IMF member is entitled to two credit tranches, each equivalent to 50 percent of its
quota.

Answer: False
Diff: 1
Topic: Currency Support
Skill: Legal Concepts

15. Only members of the IMF can become members of the World Bank.

Answer: True
Diff: 1
Topic: Development Banks
Skill: Legal Concepts

16. The World Bank decides what projects are to be funded by the Global Environment
Facility.

Answer: False
Diff: 2
Topic: Development Banks
Skill: Legal Concepts

17. The World Bank is the worlds oldest international organization involved in monetary
cooperation.

Answer: False
Diff: 1
Topic: The Bank for International Settlements
Skill: Legal Concepts

18. All the shares of the Bank for International Settlements are owned by the World Bank
and the IMF.
Answer: False
Diff: 1
Topic: The Bank for International Settlements
Skill: Legal Concepts

19. The president of the Bank for International Settlements nominates its general
manager.

Answer: True
Diff: 1
Topic: The Bank for International Settlements
Skill: Legal Concepts

20. The Bank for International Settlements does not provide bridging loans.

Answer: False
Diff: 1
Topic: The Bank for International Settlements
Skill: Legal Concepts

21. One of the major reform measures of the Basel III is to improve risk management and
governance of the banking system.

Answer: True
Diff: 1
Topic: The Bank for International Settlements
Skill: Legal Concepts

22. One of the functions of a central bank is regulating the quantity of money in
circulation.

Answer: True
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

23. Bank deposits made by individuals cannot be commingled by the bank for its own
use.

Answer: False
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts
24. Accounts in domestic banks that are maintained and paid in a foreign currency are
commonly free of the monetary control restrictions imposed by their issuing country.

Answer: True
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

25. The holder of an option contract is obligated to complete its transaction within the
stipulated time.

Answer: False
Diff: 2
Topic: National Monetary Systems
Skill: Legal Concepts

26. In an option contract, if the right is to buy a commodity, the option is known as a call.

Answer: True
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

Multiple Choice Questions

27. Private money differs from official money in that private money ________.

A. cannot be used to pay debts


B. is exclusively used by the government
C. cannot be lent to private individuals
D. can also consist of stocks of rare metal

Answer: D
Diff: 2
Topic: Money
Skill: Legal Concepts

28. Which of the following is true of private money?

A. It can only be used for making payments between private parties who agree in advance
to its use.
B. It cannot consist of any other sort of transferable material but official money.
C. It can be used to pay public debts.
D. It is an example of reserve currency.
Answer: A
Diff: 2
Topic: Money
Skill: Legal Concepts

29. Which of the following is the reserve currency used by the IMF?

A. Ven
B. Special Drawing Right (SDR)
C. European Currency Unit (ECU)
D. World Currency Unit (Wocu)

Answer: B
Diff: 2
Topic: Money
Skill: Legal Concepts

30. The principle that an obligation to pay a particular sum of money is fixed and does
not change even if the purchasing power or foreign exchange rate of the money does
change is known as ________.

A. the choice-of-law rule


B. centrism
C. nominalism
D. the stabilization clause

Answer: C
Diff: 1
Topic: Money
Skill: Legal Concepts

31. The ________ is the money used to define the amount of an obligation.

A. money of payment
B. money of account
C. book value
D. par value

Answer: B
Diff: 1
Topic: Money
Skill: Legal Concepts

32. A(n) ________ clause is a contractual provision that says that the price will be
adjusted according to the inflation rate.
A. stabilization
B. indemnification
C. force majeure
D. maintenance of value

Answer: D
Diff: 1
Topic: Money
Skill: Legal Concepts

33. Which of the following describes a currency basket in monetary transaction?

A. an exchange rate system wherein a currency's value is allowed to fluctuate according


to the foreign exchange market
B. a contractual provision that says that the price will be adjusted according to the
inflation rate
C. a selected group of currencies whose weighted average is used to define the amount of
an obligation
D. a scheme for fixing the exchange rate of a currency by matching its value to the value
of another single currency

Answer: C
Diff: 3
Topic: Money
Skill: Legal Concepts

34. Which of the following is the way in which the IMFs SDR helps in controlling
currency fluctuation?

A. by acting as a basket currency in foreign exchange transactions


B. by substituting as an international currency
C. by imposing nonconvertibility from currency to gold and vice versa
D. by allowing a currency's value to fluctuate according to the foreign exchange market

Answer: A
Diff: 2
Topic: Money
Skill: Legal Concepts

35. Which of the following is true of the IMFs SDR?

A. It cannot be added to the member states foreign currency.


B. Its value is set daily using a set of four major currencies.
C. All the four currencies are given equal weight while determining the value of the SDR.
D. One of the currencies used for calculating the value of SDR is Russian Ruble.
Answer: B
Diff: 2
Topic: Money
Skill: Legal Concepts

36. The gold standard differed from the gold bullion standard in that the gold standard
________.

A. used gold coins of standard specification


B. was highly liquid
C. backed paper currency with gold bullions
D. did not use minted gold coins

Answer: A
Diff: 2
Topic: The International Monetary Fund (IMF)
Skill: Legal Concepts

37. Which of the following meetings was instrumental in the creation of the International
Monetary Fund?

A. the Potsdam Conference


B. the Solvay Conference
C. the Bretton Woods Conference
D. the Second Quebec Conference

Answer: C
Diff: 1
Topic: The International Monetary Fund (IMF)
Skill: Legal Concepts

38. According to economist John Maynard Keynes and U.S. Treasury official Harry
Dexter White, which of the following was one of the conditions that had helped to
produce and prolong the Great Depression of the 1930s?

A. the shortage of production of gold in the U.S.


B. the lack of a standard for determining the value of national currencies
C. the dereliction of the code of conduct by IMF member states
D. the lack of demand for the gold in national treasuries

Answer: B
Diff: 3
Topic: The International Monetary Fund (IMF)
Skill: Legal Concepts

39. IMFs Articles of Agreement establishes ________.


A. gold bullion as a standard of foreign exchange
B. gold coins as a the primary source of foreign exchange
C. SDR as the international form of currency
D. a system for currency support

Answer: D
Diff: 2
Topic: The International Monetary Fund (IMF)
Skill: Legal Concepts

40. Which of the following parts of the IMF gives the final approval for the quota a state
seeking to join the IMF should pay?

A. member states having at least 85 per cent of the total vote share
B. all the member nations of the IMF
C. the IMF Board of Governors
D. the IMF Executive Board

Answer: C
Diff: 1
Topic: The International Monetary Fund (IMF)
Skill: Legal Concepts

41. The currency exchange mechanism established in 1945 by the Articles of Agreement
of the IMF was called the ________.

A. gravity model of trade


B. par value system
C. gold exchange standard
D. gold bullion standard

Answer: B
Diff: 1
Topic: Currency Exchange
Skill: Legal Concepts

42. According to the par value system, every member of the IMF, on joining the Fund,
________.

A. had to implement the U.S. dollar as its international reserve currency


B. had to adopt the gold exchange rate system of monetary exchange
C. had to declare a value at which its currency could be converted into gold
D. had to define the value of their currency by any criteria except gold

Answer: C
Diff: 3
Topic: Currency Exchange
Skill: Legal Concepts

43. Which of the following was the major change made in the Second Amendment to the
IMFs Articles of Agreement in 1976?

A. It allows members to define the value of their currency by any criteria except gold.
B. It implements the U.S. dollar as its international reserve currency.
C. It establishes the IMFs SDR as an international currency.
D. It prohibits members from pegging their currency to a currency basket.

Answer: A
Diff: 3
Topic: Currency Exchange
Skill: Legal Concepts

44. The IMF Agreement grants to the ________ of the Fund the authority to interpret the
provisions of the Agreement.

A. Board of Governors
B. Executive Board
C. members
D. Central Council

Answer: B
Diff: 1
Topic: Currency Exchange
Skill: Legal Concepts

45. Which of the following is a principal argument against the enforcement of Article
VIII, Section 2(b), of the IMFs Articles of Agreement?

A. that it depends unduly on the gold exchange rate system of monetary exchange
B. that it places a lot of importance on the gold reserves that a country owns
C. that it downplays the importance of interdependence of member nations
D. that it is at odds with a longstanding choice of law rule

Answer: D
Diff: 2
Topic: Currency Exchange
Skill: Legal Concepts

46. Which of the following sections of the IMF Articles of Agreement requires a member
to buy its own currency from other members who have acquired it as the result of current
transactions?
A. Section 2(a) of Article VIII
B. Section 2(b) of Article VIII
C. Section 5 of Article VIII
D. Section 4 of Article VIII

Answer: D
Diff: 1
Topic: Currency Exchange
Skill: Legal Concepts

47. The IMFs _______ consists of that share of a member states quota that it did not
contribute in its own currency.

A. Standby Arrangement
B. Extended Fund Facility
C. reserve tranche
D. credit tranche

Answer: C
Diff: 1
Topic: Currency Support
Skill: Legal Concepts

48. Which of the following is true of the IMFs credit tranche?

A. Each credit tranche is equivalent to 50 percent of the members quota.


B. A member is entitled to four credit tranches.
C. A credit tranche cannot be used to make balance-of-payments.
D. All credit tranches are subject to similar rules or conditions.

Answer: B
Diff: 3
Topic: Currency Support
Skill: Legal Concepts

49. Which of the following IMF facilities essentially acts as bridging loans provided to
member states while the IMF deliberates about whether to provide other funds to the
particular member state?

A. the Concessional IMF Facility


B. the Standby Arrangement
C. the reserve tranche
D. the credit tranche

Answer: B
Diff: 1
Topic: Currency Support
Skill: Legal Concepts

50. The Concessional IMF Facility is designed ________.

A. to help countries address short-term balance-of-payments problems


B. for providing bridging loans to member states while the IMF deliberates about whether
to provide other funds to the particular member state
C. for low-income member countries with protracted balance-of-payment problems
D. to help a country deal with a temporary depletion of its foreign exchange reserves due
to a natural disaster

Answer: C
Diff: 3
Topic: Currency Support
Skill: Legal Concepts

51. Which of the following facilitates come under Special IMF Facilities?

A. reserve tranche
B. Special Arrangements
C. Concessional IMF Facility
D. Contingent Credit Lines

Answer: D
Diff: 1
Topic: Currency Support
Skill: Legal Concepts

52. Only countries that are parties to the Climate Change Convention or the ________ are
eligible to receive funds from the Global Environment Facility (GEF).

A. Basel Convention
B. Convention on Biological Diversity
C. Kyoto Protocol
D. Bretton Woods Conference

Answer: B
Diff: 1
Topic: Development Banks
Skill: Legal Concepts

53. Which of the following is true of the International Fund for Agricultural Development
(IFAD)?
A. It is considered to be the developmental arm of the IMF.
B. It is primarily concerned with funding projects concerning global environmental
problems.
C. Its membership is limited to the members of the Global Environmental Facility.
D. Its membership is open to any member of the UN.

Answer: D
Diff: 3
Topic: Development Banks
Skill: Legal Concepts

54. Which of the following is a relation between the World Bank and the Global
Environment Facility (GEF)?

A. The World Bank is responsible for managing the Trust Fund of the GEF.
B. The World Bank determines what projects will be funded by the GEF.
C. The GEF only funds nations that are members of the World Bank.
D. The GEF is considered as the primary developmental arm of the World Bank.

Answer: A
Diff: 3
Topic: Development Banks
Skill: Legal Concepts

55. The ________ is an intergovernmental organization, headquartered in Basel, which


functions as a bank for the worlds central banks.

A. International Monetary Fund


B. World Bank
C. Bank for International Settlements
D. World Trade Organization

Answer: C
Diff: 1
Topic: The Bank for International Settlements
Skill: Legal Concepts

56. Which of the following is an example of a central bank that is owned by a national
government?

A. the Bank of England


B. the Central American Monetary Union
C. the World Bank
D. the Arab Monetary Fund

Answer: A
Diff: 2
Topic: National Monetary Systems
Skill: Legal Concepts

57. Which of the following organizations issues bank notes and coins and regulates the
quantity of money in circulation?

A. the World Bank


B. the International Monetary Fund
C. A commercial bank
D. A central bank

Answer: D
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

58. Accounts in domestic banks that are maintained and paid in a foreign currency are
generally known as ________.

A. checking accounts
B. asset accounts
C. Eurocurrency deposits
D. recurring deposits

Answer: C
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

59. Which of the following is the most commonly used short-term liquid instrument for
trading in the interbank market?

A. a certificate of deposit
B. a deed
C. a letter of credit
D. a check

Answer: A
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

60. A(n) ________ is a promissory note issued by a bank in which the bank promises to
repay money it has received, plus interest, at a certain time.
A. letter of credit
B. certificate of deposit
C. option contract
D. allonge

Answer: B
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

61. When a bank acts as an agent of another bank, especially in carrying a deposit
balance for the latter, then that bank will be referred to as a ________.

A. commercial bank
B. central bank
C. reserve bank
D. correspondent bank

Answer: D
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

62. Which of the following is true of a futures contract?

A. They are not standardized contracts.


B. They are transferable contracts.
C. They require immediate delivery of the commodity.
D. They require immediate payment of the price.

Answer: B
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

63. Which of the following describes a spot contract?

A. a contract that creates the rightbut not the obligationto buy or sell a specific
amount of a commodity at a fixed price within an agreed-upon period of time
B. a contract in which a commodity is presently sold and the price is presently paid but
delivery is, by agreement, delayed to a later date
C. a contract for the immediate sale and delivery of a commodity, such as a currency
D. a promise to buy or sell a commodity for a specified price, with both delivery and
payment to be made at a specified future date

Answer: C
Diff: 2
Topic: National Monetary Systems
Skill: Legal Concepts

64. In which of the following contracts is the delivery delayed, though the commodity is
sold and paid for?

A. a forward contract
B. an option contract
C. a spot contract
D. a future contract

Answer: A
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

65. A(n) ________ contract creates the rightbut not the obligationto buy or sell a
specific amount of a commodity at a fixed price within an agreed-upon period of time.

A. forward
B. spot
C. future
D. option

Answer: D
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

66. In an option contract, if the right is to make a sale, the option is known as a
________.

A. spread eagle
B. straddle
C. call
D. put

Answer: D
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

67. Which of the following terms refers to the nearly simultaneous purchase of a
commodity (such as a currency) in one market and its sale in another to profit from the
price differential?
A. allonge
B. expropriation
C. arbitrage
D. condonation

Answer: C
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

68. A(n) ________ is a three-party instrument on which the drawer makes an


unconditional order to a drawee to pay a named payee.

A. allonge
B. bill of exchange
C. letter of credit
D. certificate of deposit

Answer: B
Diff: 1
Topic: National Monetary Systems
Skill: Legal Concepts

Essay Questions

69. What are the different types of monies that are required in an international
transaction?

Answer: In international transactions, the parties must designate the money that the buyer
has to deliver. Two types of monies have to be selected. First is the money of account.
This is the money that expresses the amount of obligation owed. Second is the money of
payment. This is the money that the buyer must use to pay for the items purchased. In
most situations, the money chosen for both will be the same, but it does not have to be.
Diff: 1
Topic: Money
Skill: Legal Concepts

70. Discuss the use of the IMFs SDR in international transactions?

Answer: The SDR is an international reserve asset that member countries can add to their
foreign currency and gold reserves and use for payments requiring foreign exchange. Its
value is set daily using a basket of four major currencies: the euro, Japanese yen, pound
sterling, and U.S. dollar. Originally, the SDR was created to permit governments to
discharge their international obligations. However, because the IMF publishes daily
quotations on the exchange value of the SDR, the SDR has become widely accepted as a
private currency basket. Today, private banks commonly accept deposits denominated in
SDRs; and loans, especially those made by governments dealing with the IMF, are
denominated in SDRs.
Diff: 2
Topic: Money
Skill: Legal Concepts

71. Describe the significance of IMF quotas.

Answer: To become a member of the IMF, a state must contribute a certain sum of money
(expressed in SDRs) called a quota subscription. The quota is based on the relative size of
a member states economy, and it serves various purposes. First, members quotas make
up a pool of funds on which the IMF can draw to lend to a particular member having
financial difficulties. Second, quotas determine how much a contributing member can
borrow from the IMF and how much it will receive in periodic allocations of SDRs.
Third, quotas determine the members voting power in the IMF. Those who contribute the
most to the IMF are given the greatest say in setting its policies.
Diff: 2
Topic: The International Monetary Fund (IMF)
Skill: Legal Concepts

72. What is the basic code of conduct that member nations are obligated to follow upon
joining the IMF?

Answer: A member state obligates itself upon joining the IMF to observe a code of
conduct. This code requires the state to (1) keep other members informed of its
arrangements for determining the value of its money relative to the money of other states,
(2) refrain from placing restrictions on the exchange of its money, and (3) pursue
economic policies that will increase in a constructive and orderly way both its own
national wealth and that of all the IMF member states.
Diff: 2
Topic: IMF Operations
Skill: Legal Concepts

73. Describe the standby arrangement facility provided by the IMF.

Answer: Standby arrangements are designed to help countries address short-term


balance-of-payments problems. Standbys have provided the greatest amount of IMF
resources. These facilities are in essence bridging loans provided to member states while
the IMF deliberates about whether to provide other funds to the particular member state.
Typically, they are granted for 1224 months and repayment is normally expected within
two to four years. Surcharges apply to high access levels.
Diff: 2
Topic: Currency Support
Skill: Legal Concepts
74. Explain the IMFs conditionality requirement.

Answer: The use of IMFs resources is limited by the policies set out in the Articles of
Agreement and the policies adopted under them. This requirement is known as IMF
conditionality. The essence of conditionality is that access to the IMFs credit tranches
and other credit facilities is linked to a members progress in implementing policies to
restore balance-of-payments viability and sustainable economic growth. It is based not on
a rigid set of operational rules but on a general set of guidelines. The guidelines that the
Executive Board adopted in 2002 provide four guiding principles: national ownership of
the reform program, parsimony and clarity in the application of program-related
conditions, tailoring of programs to the members circumstances, and effective
coordination between the IMF and other multilateral institutions.
Diff: 2
Topic: Currency Support
Skill: Legal Concepts

75. What is the role of the International Development Agency (IDA) and the International
Finance Corporation (IFC) in connection with the World Bank?

Answer: The IDA and the IFC are subsidiaries of the World Bank. The World Bank
provides development financing to the national governments and political subdivisions of
its member states. The IDA provides less restrictive financing for less developed
countries, and the IFC provides loans to private enterprises. Together, the World Bank,
the IDA, and the IFC are the worlds largest providers of development assistance to
developing countries and countries in transition.
Diff: 2
Topic: Development Banks
Skill: Legal Concepts

76. Explain the role of the Bank for International Settlements as the central banks bank?

Answer: One of the BISs main functions is to serve as a bank for the worlds central
banks. It does so by helping some 140 central banks manage and invest their monetary
reserves. Most of these funds are placed in the worlds money market in the form of
commercial bank deposits and short-term negotiable instruments (such as certificates of
deposit). Beyond placing surplus funds in the international marketplace, the BIS
occasionally make liquid resources available to central banks. Such transactions include
swaps of currency for gold, credits advanced against a pledge of gold or marketable
short-term securities, and, less frequently, unsecured credits and standby credits. The
bank also carries on exchange transactions in foreign currency and gold both with the
central banks and with the markets.
Diff: 1
Topic: The Bank for International Settlements
Skill: Legal Concepts
77. Explain a future contract.

Answer: A future contract (or future) is simply a promise to buy or sell a commodity
(e.g., a currency) for a specified price, with both delivery and payment to be made at a
specified future date. Because there is a market in futures (they are sold on commodity
exchanges), such contracts are both standardized and transferable. Trading in futures,
however, seldom results in the physical delivery of the commodity. More often, the
obligations of the parties are extinguished by offsetting transactions that produce a net
profit or loss. Futures are used primarily as a way to transfer price risks from suppliers,
processors, and distributors (called hedgers when they become parties to these hedging
contracts) to those who are more willing to take the risk (called speculators).
Diff: 3
Topic: National Monetary Systems
Skill: Legal Concepts

78. How does a bank transfer money internationally?

Answer: A bank transfers money internationally by setting up a correspondent bank


relationship with a foreign bank and depositing funds to its own account in that bank.
When a customer goes to his or her own bank and asks to transfer money overseas, the
bank accepts the customers money at its domestic office, and then arranges for the
correspondent bank to disburse funds in the foreign country to whomever the customer
has designated. This may be done by instruction, in which case the domestic bank directs
its correspondent to pay funds directly to a particular payee, or by the use of a bill of
exchange that is drawn on the domestic banks account at the foreign correspondent bank.
In the latter case, the bill of exchange is given to the customer, who in turn sends it to the
payee. The payee then cashes it at the correspondent bank. The actual physical delivery
of currency internationally is seldom done. When required, it is arranged for by central
banks and is commonly managed by the BIS.
Diff: 3
Topic: National Monetary Systems
Skill: Legal Concepts