International Monetary System and Financial Architecture

Introduction

International finance operates within an institutional environment that determines how currencies are created, exchanged, valued, and supported across borders. This environment is commonly called the international monetary system. It includes exchange-rate arrangements, reserve assets, central banks, international financial institutions, payment systems, capital-account regulations, and crisis-management mechanisms.

The system has never been static. It has moved from metallic standards, to fixed but adjustable exchange rates, and toward a predominantly managed-floating system. Each arrangement attempts to balance three objectives: exchange-rate stability, monetary-policy independence, and international capital mobility. These objectives cannot be fully achieved simultaneously. This tension is often expressed through the “impossible trinity.”

Understanding the international monetary system is essential for financial managers because exchange-rate regimes influence borrowing costs, investment returns, trade competitiveness, hedging decisions, liquidity risk, and the probability of financial crisis.

Learning Objectives

By the end of this chapter, students should be able to:

1. Trace the major stages in the evolution of the international monetary system.
2. Compare fixed, floating, pegged, and managed exchange-rate regimes.
3. Explain the functions and limitations of reserve currencies.
4. Describe the roles of central banks and major international financial institutions.
5. Explain capital controls and assess their advantages and costs.
6. Analyse the causes, transmission, and management of international financial crises.
7. Apply the impossible trinity and reserve-adequacy concepts to practical situations.
8. Evaluate governance, ethical, and regulatory issues in international finance.

1. What Is the International Monetary System?

The international monetary system is the set of rules, institutions, markets, and conventions governing international payments and currency relationships. Its principal functions are:

• facilitating international trade and investment;
• providing mechanisms for exchanging currencies;
• supporting confidence in international payments;
• supplying international liquidity;
• correcting persistent balance-of-payments imbalances; and
• reducing or managing financial instability.

The system includes both formal rules and informal practices. Formal elements include exchange-rate commitments, treaty obligations, central-bank arrangements, and lending facilities. Informal elements include market conventions, the use of dominant currencies in invoicing, and expectations about government policy.

A country’s external accounts are commonly organized through the balance of payments. In simplified form:

Here, CA is the current account, KA is the capital account, FA is the financial account, and EO represents errors and omissions. The identity is an accounting relationship: a deficit in one broad component must be financed by surpluses elsewhere, subject to measurement issues. It does not by itself indicate whether an imbalance is harmful.

The current account records trade in goods and services, primary income, and secondary income. The financial account records cross-border transactions in direct investment, portfolio investment, other investment, and reserve assets. Financial managers use these data to assess external vulnerability and funding conditions.

2. Historical Evolution

2.1 The classical gold standard

Under the classical gold standard, especially from the late nineteenth century until the First World War, national currencies were linked to a specified quantity of gold. Convertibility meant that monetary authorities stood ready to exchange currency for gold at the official parity.

If one currency was defined as a fixed quantity of gold and another currency was defined similarly, their exchange rate followed from the ratio of their gold contents. For example, if one unit of currency A represented 1 gram of gold and one unit of currency B represented 0.2 grams, then one unit of A had a gold value equivalent to five units of B.

The system promoted long-term exchange-rate stability, but adjustment could be costly. Countries experiencing gold outflows often had to contract domestic credit, accept higher interest rates, and tolerate declining output or employment. The system also depended on confidence in convertibility and on the availability of gold reserves.

2.2 The interwar disruption

The First World War weakened the gold standard. Many governments suspended convertibility and financed expenditure through borrowing and money creation. Attempts to restore pre-war parities during the 1920s often created deflationary pressures and misaligned exchange rates. The Great Depression intensified competitive devaluations, trade restrictions, and financial instability.

The interwar experience demonstrated that a fixed exchange rate is not automatically credible. A parity must be consistent with domestic economic conditions, fiscal policy, banking stability, and the political willingness to defend it.

2.3 The Bretton Woods system

The Bretton Woods conference of 1944 established a post-war monetary framework. Currencies were linked to the United States dollar, while the dollar was convertible into gold for official foreign holders at a fixed price. Exchange rates were fixed but adjustable, and countries were permitted to change parities under specified circumstances.

The International Monetary Fund was created to support members facing temporary balance-of-payments problems. The World Bank initially focused on reconstruction and development. Capital controls were widely used, allowing governments to pursue domestic employment and development policies without immediate destabilizing capital flows.

The system contained an inherent tension. The world required more international reserves, largely supplied through dollar liabilities, but increasing dollar liabilities eventually weakened confidence in dollar convertibility into gold. This tension is associated with the Triffin dilemma.

In 1971, the United States suspended dollar convertibility into gold. After unsuccessful attempts to redesign the system, major currencies moved toward floating exchange rates during the 1970s.

2.4 The post-Bretton Woods era

The contemporary system is not a single uniform regime. It is a hybrid system in which:

• some economies float their currencies;
• some maintain conventional pegs;
• some use currency boards;
• some adopt another country’s currency;
• some use monetary unions; and
• many intervene in foreign-exchange markets while describing their currencies as floating.

The United States dollar remains the leading reserve and invoicing currency, although the euro, Japanese yen, pound sterling, Swiss franc, and increasingly the Chinese renminbi have important international roles. The system is therefore both market-based and institutionally managed.

3. Exchange-Rate Regimes

An exchange-rate regime is the method by which a government or monetary authority determines the value of its currency relative to other currencies.

3.1 Fixed exchange rates

Under a fixed regime, the monetary authority announces a target exchange rate and commits to maintaining it. If the domestic currency faces depreciation pressure, the central bank may sell foreign reserves and buy domestic currency. If appreciation pressure occurs, it may buy foreign currency and issue domestic currency.

Advantages include reduced exchange-rate uncertainty, greater predictability for traders, and a possible anchor for inflation expectations. Disadvantages include the loss of monetary-policy freedom, the need for substantial reserves, and the possibility of a sudden speculative attack.

A fixed rate is credible only if markets believe that the authority has sufficient reserves, appropriate fiscal policies, and the political willingness to defend the target.

3.2 Floating exchange rates

Under a floating regime, market demand and supply determine the exchange rate. Monetary policy can focus more directly on domestic inflation, output, or employment. Exchange rates can also act as shock absorbers: a fall in export demand may lead to depreciation, which improves external competitiveness.

However, floating rates can be volatile. Exchange-rate movements may reflect changing interest-rate expectations, risk sentiment, commodity prices, political events, and speculative activity. Volatility increases transaction and translation risk for multinational firms.

3.3 Managed floating

A managed float combines market determination with periodic official intervention. Authorities may intervene to limit disorderly movements, accumulate reserves, smooth excessive volatility, or influence competitiveness. The challenge is distinguishing legitimate market stabilization from opaque currency manipulation.

3.4 Intermediate and hard-peg arrangements

A crawling peg changes the official parity gradually according to a predetermined rule. A currency board promises to exchange domestic currency for a foreign anchor currency at a fixed rate and usually imposes strict limits on monetary issuance. Dollarization or euroization involves adopting a foreign currency, eliminating independent domestic currency issuance.

A monetary union, such as the euro area, creates a common currency and central bank for participating countries. It removes intra-union exchange-rate risk but also removes national monetary-policy independence. Fiscal arrangements, banking supervision, and mechanisms for regional adjustment become especially important.

4. The Impossible Trinity

The impossible trinity states that a country cannot simultaneously maintain all three of the following:

1. a fixed exchange rate;
2. free international capital mobility; and
3. an independent monetary policy.

At most, a country can fully achieve two. If a country fixes its exchange rate and permits free capital movement, domestic interest rates must generally follow the anchor country’s interest rates. If it wants monetary independence and free capital movement, it must accept a floating exchange rate. If it wants a fixed exchange rate and monetary independence, it must restrict capital mobility.

The logic can be illustrated using uncovered interest parity, a relationship based on arbitrage and expectations. In simplified form:

Here, i_d is the domestic interest rate, i_f is the foreign interest rate, and E(∆s) is the expected proportional change in the domestic-currency price of foreign currency. The approximation assumes comparable risk, flexible markets, and rational or reasonably informed expectations. It is not a guaranteed forecasting rule.

If the exchange rate is credibly fixed, E(∆s) is approximately zero. Consequently, large and persistent interest-rate differences invite capital flows that place pressure on the peg. Authorities must either change interest rates, restrict capital flows, or abandon the fixed rate.

5. Reserve Currencies and International Liquidity

A reserve currency is held by central banks and governments as part of official foreign-exchange reserves. It is also widely used for trade invoicing, international borrowing, financial contracts, and official intervention.

A successful reserve currency normally requires:

• a large and open economy;
• deep, liquid, and trustworthy financial markets;
• political and legal stability;
• convertibility and relatively few restrictions;
• credible monetary institutions; and
• extensive trade and financial networks.

The dollar’s international role provides benefits to the United States, including lower borrowing costs, seigniorage, and financial influence. Seigniorage is the revenue obtained when the cost of producing money is less than its purchasing value. Reserve-currency status also creates responsibilities: policy changes can generate global spillovers through exchange rates, capital flows, and commodity prices.

Reserve currencies create a structural asymmetry. Other countries may accumulate dollar or euro assets to protect against external shocks, while the issuing country can often borrow in its own currency. However, reserve status does not eliminate fiscal constraints, inflation risk, political risk, or the possibility of diversification by foreign holders.

International liquidity includes official reserves, readily available foreign currency, central-bank swap lines, and access to emergency financing. A simple reserve-coverage indicator is:

R denotes usable foreign-exchange reserves and M denotes average monthly imports. The result is measured in months. The indicator is useful for economies with significant import needs, but it ignores capital-flow reversals, external debt maturities, derivative obligations, and exchange-rate changes.

6. Central Banks in the International System

Central banks perform both domestic and international functions. Their core responsibilities commonly include monetary policy, payment-system oversight, financial stability, bank supervision, currency issuance, and management of foreign-exchange reserves.

Monetary policy and spillovers

Changes in a major central bank’s policy rate can affect global bond yields, exchange rates, capital flows, and emerging-market financing conditions. A rate increase in a reserve-currency country may attract funds from other economies, causing depreciation and higher debt-servicing costs in countries with foreign-currency liabilities.

Foreign-exchange intervention

A central bank can influence the exchange rate by buying or selling foreign currency. Intervention may be sterilized or unsterilized. Sterilized intervention offsets the domestic monetary effect through open-market operations; unsterilized intervention changes the domestic monetary base. Sterilization may be difficult or costly when capital flows are large.

Lender of last resort

During a liquidity crisis, a central bank may lend against sound collateral to prevent temporary funding problems from becoming insolvency or systemic crises. In international finance, this function is complicated because a national central bank may not be able to create the foreign currency in which banks or firms are indebted.

Central-bank cooperation

Swap lines allow one central bank to provide another with access to its currency. They can reduce global liquidity stress, but access may be selective and conditional. Cooperation also raises governance questions concerning accountability, moral hazard, and unequal treatment among countries.

7. International Financial Institutions

International Monetary Fund

The IMF supports monetary cooperation, provides balance-of-payments financing, monitors economic developments, and offers technical assistance. IMF programs often involve policy conditions intended to restore external sustainability and repayment capacity. Conditions may include fiscal adjustment, monetary tightening, exchange-rate reform, banking-sector restructuring, or improvements in governance.

The benefits of IMF support include emergency liquidity, policy credibility, and technical expertise. Criticisms include the social costs of adjustment, the possibility that programs are too standardized, and unequal voting power among members. Effective programs must balance macroeconomic stabilization with poverty protection, institutional capacity, and political feasibility.

World Bank Group

The World Bank Group focuses primarily on long-term development, infrastructure, poverty reduction, institutional capacity, and private-sector development. Its role differs from the IMF’s short- and medium-term balance-of-payments support, although the institutions frequently cooperate.

Bank for International Settlements

The BIS serves as a forum for central-bank cooperation, provides banking and financial research, and hosts important standard-setting activities. The Basel framework establishes internationally oriented principles for bank capital, liquidity, supervision, and risk management. Basel standards are influential but require national implementation.

Regional institutions and arrangements

Regional development banks, regional stabilization funds, and monetary arrangements supplement global institutions. They may possess better knowledge of regional conditions and respond more rapidly, but their resources may be smaller and their policy coordination more limited.

8. Capital Controls and Financial Openness

Capital controls are measures that restrict, tax, regulate, or otherwise influence cross-border financial transactions. They may apply to inflows, outflows, specific instruments, maturities, investors, or currencies.

Examples include:

• limits on foreign borrowing by banks;
• minimum holding periods;
• reserve requirements on foreign inflows;
• taxes on short-term capital movements;
• approval requirements for foreign investment; and
• restrictions on residents’ foreign-asset purchases.

Capital-account openness can improve access to funding, diversify investment opportunities, and support technology transfer. It can also expose economies to sudden stops, currency mismatches, asset bubbles, and contagion.

Controls may be justified when financial markets are shallow, prudential regulation is weak, or inflows are temporarily excessive. Nevertheless, poorly designed controls can encourage evasion, reduce investment, create corruption opportunities, and fragment financial markets. The best practice is usually not a permanent substitute for sound macroeconomic management. Controls should be transparent, targeted, proportionate, legally grounded, and regularly reviewed.

A useful distinction is between macroprudential regulation and traditional capital controls. Macroprudential tools address systemic risk—for example, limits on loan-to-value ratios or foreign-currency exposures—whereas capital controls primarily target the cross-border movement of funds. In practice, some measures have both characteristics.

9. International Financial Crises

An international financial crisis occurs when loss of confidence, funding disruption, asset-price collapse, or currency instability threatens financial institutions and the broader economy. Crises often combine several mechanisms.

Common causes

1. Currency mismatch: borrowers earn revenue in domestic currency but owe debt in foreign currency.
2. Maturity mismatch: institutions fund long-term assets with short-term liabilities.
3. Excessive leverage: small asset-price declines erode capital.
4. Asset bubbles: prices become disconnected from sustainable income or productivity.
5. Weak regulation: risks are hidden through opaque institutions or instruments.
6. Sudden stops: foreign capital rapidly reverses direction.
7. Fiscal or monetary inconsistency: policy undermines confidence in a peg or debt path.
8. Contagion: investors withdraw from countries perceived as similar to a crisis country.

A typical crisis sequence

A simplified sequence is: rapid credit expansion → asset-price boom → increased foreign borrowing → adverse shock → capital outflow → currency depreciation → increased local-currency value of foreign debt → insolvencies → banking and fiscal stress.

The relationship between foreign-currency debt and depreciation can be expressed conceptually. If debt of amount D is denominated in foreign currency and the domestic-currency price of foreign currency is s, then the domestic-currency value is:

V_d is domestic-currency debt value. This is an identity under the assumption that D is measured in foreign-currency units and s is domestic currency per foreign-currency unit. A depreciation raises s and therefore increases the domestic-currency burden, unless the borrower has matching foreign-currency assets or revenues.

Crisis management

Authorities may use emergency liquidity, deposit guarantees, bank recapitalization, debt restructuring, temporary capital measures, exchange-rate adjustment, fiscal support, or international financing. The appropriate response depends on whether the problem is liquidity, insolvency, or both.

Liquidity support can prevent unnecessary failures, but unconditional rescue may create moral hazard. Resolution frameworks should therefore protect essential payment functions while imposing losses on shareholders and, where appropriate, unsecured creditors. Public support should be transparent, temporary, and subject to accountability.

10. Applied Case: The Asian Financial Crisis

Background

The Asian financial crisis of 1997–1998 affected Thailand, Indonesia, South Korea, and several neighboring economies. Before the crisis, many economies experienced rapid growth, substantial capital inflows, fixed or tightly managed exchange rates, and significant foreign-currency borrowing.

Problem

Investors became concerned about weak financial institutions, excessive property lending, inadequate transparency, and the sustainability of exchange-rate commitments. When confidence declined, capital flowed out rapidly. Thailand was unable to maintain its exchange-rate arrangement and allowed the baht to depreciate in July 1997.

Analysis

Depreciation increased the domestic-currency value of foreign-currency debts. Corporate and banking-sector balance sheets deteriorated, causing further credit contraction and capital flight. The crisis revealed that apparently strong fiscal positions do not guarantee financial stability when private-sector foreign borrowing and maturity mismatch are large.

The crisis also illustrated the impossible trinity. Several countries attempted to combine exchange-rate stability with relatively open capital markets, while retaining monetary conditions inconsistent with the anchor currency. Once capital outflows began, defending the exchange rate required reserves and higher interest rates, but higher rates weakened already fragile borrowers.

Approach and outcome

International assistance, including IMF-supported programs, was combined with interest-rate adjustments, financial-sector restructuring, fiscal measures, corporate reforms, and exchange-rate flexibility. The adjustment was economically and socially costly, and the design and sequencing of programs remain debated. Over time, affected economies strengthened reserve holdings, regulation, bank capitalization, and external-debt management.

Learning points

• Exchange-rate stability can conceal private-sector currency risk.
• Reserve adequacy must consider short-term external liabilities, not only imports.
• Financial liberalization requires effective supervision.
• Transparency and credible data reduce uncertainty.
• Crisis programs must address social consequences as well as macroeconomic indicators.

11. Governance, Ethics, and Regulation

International finance raises distributional and ethical issues. Decisions by central banks and international institutions can affect employment, public services, household wealth, and access to credit across countries. A technically coherent stabilization program may still be socially harmful if adjustment costs fall disproportionately on low-income groups.

Good governance requires clear mandates, independent but accountable institutions, transparent data, consistent rules, and effective oversight. International institutions should explain program assumptions, disclose risks, and evaluate outcomes rather than measuring success only by repayment or short-term market confidence.

Financial institutions also have responsibilities concerning suitability, disclosure, sanctions compliance, anti-money-laundering controls, and responsible foreign-currency lending. Selling foreign-currency loans to borrowers without foreign-currency income can transfer substantial exchange-rate risk to households and small firms.

Technology has increased the speed of cross-border payments and capital movement. Digital payment systems, algorithmic trading, and digital assets can improve efficiency but may accelerate runs, complicate supervision, and create new operational and cyber risks. Artificial intelligence can support stress testing, anomaly detection, and surveillance, but models require reliable data, human oversight, explainability, and controls against bias and manipulation.

12. Professional Application and Best Practices

Financial managers operating internationally should:

1. Identify the exchange-rate regime in each relevant jurisdiction.
2. Distinguish transaction, translation, and economic exposure.
3. Match foreign-currency assets and liabilities where feasible.
4. Monitor reserve adequacy, external debt, capital flows, and central-bank policy.
5. Stress-test depreciation, interest-rate, refinancing, and capital-control scenarios.
6. Use hedging instruments only after understanding their liquidity and counterparty risks.
7. Avoid assuming that a fixed exchange rate will remain fixed.
8. Review legal restrictions on remittances, borrowing, dividends, and hedging.
9. Evaluate sovereign, banking, and convertibility risk separately.
10. Maintain contingency funding and crisis communication plans.

A sound international financial decision considers not only expected return, but also currency convertibility, funding liquidity, political risk, regulatory change, and the possibility of correlated losses during a crisis.

Chapter Summary

The international monetary system is the institutional and market framework governing cross-border payments, currencies, reserves, and financial stability. It evolved from the classical gold standard through the disrupted interwar period and Bretton Woods to today’s hybrid system of floating, fixed, pegged, and union-based arrangements.

Exchange-rate regimes involve trade-offs among stability, monetary independence, and capital mobility. The impossible trinity explains why a country cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. Reserve currencies supply liquidity and reduce transaction costs, but they also create global spillovers and structural asymmetries.

Central banks manage monetary policy, reserves, payment systems, and financial stability, while the IMF, World Bank, BIS, and regional institutions provide financing, development support, standards, and cooperation. Capital controls can reduce vulnerabilities but may create distortions if poorly designed. International crises commonly involve leverage, currency and maturity mismatch, sudden stops, contagion, and weak regulation. Effective crisis management requires distinguishing liquidity from insolvency, protecting essential functions, and maintaining accountability.

For financial managers, the central lesson is that exchange-rate and financing decisions must be assessed within the broader institutional architecture. Regime credibility, reserve capacity, regulation, governance, and crisis policy all influence international risk.

Key Terms

International monetary system: The rules, institutions, markets, and practices governing international monetary relations.

Exchange-rate regime: The method used to determine or manage a currency’s value.

Gold standard: A system linking currency value to a specified quantity of gold.

Bretton Woods system: The post-1944 fixed-but-adjustable exchange-rate framework centered on the dollar.

Fixed exchange rate: An exchange rate maintained near an announced parity.

Floating exchange rate: An exchange rate primarily determined by market forces.

Managed float: A market-based rate subject to periodic official intervention.

Reserve currency: A currency held by official institutions and widely used internationally.

International liquidity: Readily available resources used to meet external payment needs.

Seigniorage: Revenue arising when money’s value exceeds its production cost.

Impossible trinity: The incompatibility of a fixed rate, free capital mobility, and independent monetary policy.

Capital controls: Measures restricting or influencing cross-border financial flows.

Currency mismatch: A difference between the currency of income or assets and the currency of liabilities.

Maturity mismatch: Funding long-term assets with liabilities that mature sooner.

Sudden stop: An abrupt reversal or cessation of capital inflows.

Contagion: Transmission of financial stress across markets or countries.

Lender of last resort: An institution providing emergency liquidity to prevent systemic collapse.

Macroprudential policy: Regulation intended to limit risks to the financial system as a whole.

Balance of payments: A systematic record of a country’s economic transactions with the rest of the world.

Review Questions

Short Answer Questions

1. What are the principal functions of the international monetary system?
2. Distinguish a fixed exchange rate from a managed float.
3. What is a reserve currency, and why is the dollar widely used as one?
4. Define capital controls and give two examples.
5. What is meant by currency mismatch?

Long Answer Questions

1. Trace the evolution from the classical gold standard to the contemporary international monetary system.
2. Explain the impossible trinity and apply it to a country defending a fixed exchange rate.
3. Compare the benefits and limitations of floating and fixed exchange-rate regimes.
4. Discuss the roles of the IMF, World Bank, and BIS in the international financial architecture.
5. Explain how foreign-currency borrowing can transform an exchange-rate depreciation into a banking crisis.

Analytical / Application Questions

1. A country fixes its currency to the dollar, permits unrestricted capital movement, and attempts to lower domestic interest rates substantially below U.S. rates. Analyse the likely market pressures and identify the policy choices available under the impossible trinity.
2. A firm earns revenue in domestic currency but has substantial dollar debt. Evaluate the effects of a 20% domestic-currency depreciation and recommend risk-management actions.
3. An emerging economy receives large short-term inflows that generate property-price inflation. Assess whether temporary capital controls, macroprudential measures, or both should be used. State the governance safeguards required.

Multiple Choice Questions with Answers

Question 1

Which combination is described by the impossible trinity?

A. Fixed exchange rate, free capital mobility, and independent monetary policy

B. Floating exchange rate, capital controls, and fiscal policy

C. Currency union, trade openness, and balanced budgets

D. Gold reserves, low inflation, and banking supervision

Correct Answer: A. Fixed exchange rate, free capital mobility, and independent monetary policy

Question 2

What is the primary function of a reserve currency?

A. To eliminate all exchange-rate risk

B. To serve as an official store of international value and means of payment

C. To guarantee fiscal discipline in every country

D. To prevent capital from crossing borders

Correct Answer: B. To serve as an official store of international value and means of payment

Question 3

Under a fixed exchange-rate regime, depreciation pressure is commonly resisted by a central bank that:

A. Sells foreign reserves and buys domestic currency

B. Buys foreign reserves and sells domestic currency

C. Reduces reserve requirements only

D. Suspends all payment systems

Correct Answer: A. Sells foreign reserves and buys domestic currency

Question 4

If foreign-currency debt is D and the domestic-currency price of foreign currency is s, which expression gives its domestic-currency value?

A. D ÷ s

B. s − D

C. s × D

D. s + D

Correct Answer: C. s × D

Question 5

Which institution is primarily associated with balance-of-payments financing and monetary cooperation?

A. World Trade Organization

B. International Monetary Fund

C. Bank for International Settlements

D. International Labour Organization

Correct Answer: B. International Monetary Fund

Question 6

A sudden stop is best described as:

A. A permanent fall in import demand

B. An abrupt reversal or cessation of capital inflows

C. A planned currency revaluation

D. A central bank’s routine policy meeting

Correct Answer: B. An abrupt reversal or cessation of capital inflows

Question 7

Which feature is most characteristic of a currency board?

A. Unlimited discretionary money creation

B. A commitment to exchange domestic currency at a fixed rate, with monetary issuance constrained

C. A requirement that the currency float freely

D. A prohibition on holding foreign reserves

Correct Answer: B. A commitment to exchange domestic currency at a fixed rate, with monetary issuance constrained

Question 8

Which policy is primarily macroprudential?

A. A limit on loan-to-value ratios to reduce systemic housing risk

B. A tariff on imported clothing

C. A reduction in corporate income tax

D. A fixed exchange-rate announcement without intervention

Correct Answer: A. A limit on loan-to-value ratios to reduce systemic housing risk

Question 9

If a country has usable reserves of 60 billion units and average monthly imports of 15 billion units, its reserve-import coverage is:

A. 0.25 months

B. 4 months

C. 45 months

D. 900 months

Correct Answer: B. 4 months

Question 10

Why can depreciation severely damage a firm with foreign-currency debt and domestic-currency revenue?

A. Depreciation reduces the domestic-currency value of foreign debt

B. Depreciation increases the domestic-currency value of foreign debt while revenue may not rise proportionately

C. Depreciation automatically lowers interest rates on foreign debt

D. Depreciation eliminates refinancing risk

Correct Answer: B. Depreciation increases the domestic-currency value of foreign debt while revenue may not rise proportionately