IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history
Under the Bretton Woods adjustable peg, a member country runs a persistent balance of payments deficit and its reserves are falling. Which response is consistent with the system's rules?
A deficit country could devalue its currency with IMF agreement because the persistent deficit signalled fundamental disequilibrium. Devaluation cheapens exports and raises import prices, helping restore balance, whereas floating or revaluing were not consistent with the adjustable peg.
- ADevalue its currency after IMF agreement, citing fundamental disequilibriumCorrect
- BAllow the currency to float until the deficit disappears
- CLeave the dollar peg and switch to a gold-only standard
- DImpose a permanent ban on all imports
- Revalue its currency upward to attract capital
Explanation
The rules allowed a change of parity in fundamental disequilibrium, with IMF consent for larger changes. Devaluation makes exports cheaper and imports dearer, helping correct a deficit. Revaluation would worsen it, and floating was outside the system's design.
Did you get it right without looking?
One question tells you little. A timed set on Recent macroeconomic history shows your real accuracy, how long you take and where you lose marks.
More Recent macroeconomic history questions
- The collapse of Lehman Brothers in September 2008 is best described as a turning point because it:
- Several Asian economies had borrowed abroad in US dollars but earned revenues in domestic currency. When their currencies depreciated sharpl…
- During the 1997-98 Asian crisis, a country with a fixed exchange rate faced heavy capital outflows. If its central bank raised domestic inte…
- Which combination of macroeconomic features best defines 'stagflation' as experienced by many economies in the mid-1970s?
- Under a flexible inflation targeting regime, actual inflation rises above the target because of a temporary global oil price shock, while ou…
- Money supply grows at 9% a year, real output grows at 3% a year, and velocity of circulation is falling at 2% a year. Using the growth form …