Exam 6: Government Influence on Exchange Rates

Which of the following is the most likely reason for revaluation of a currency?

Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economic problems.

If a U.S. firm plans to frequently purchase goods from Hong Kong over the next several years, it does not have to worry about exchange rate risk.

If foreign investors fear that a peg may be broken because of fund outflows from that country, they may attempt to purchase more of that currency before the peg is broken.

​To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities.

Among the reasons for government intervention are:

Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on the local currency of that country.

The Asian crisis is generally believed to have started in Japan.

Which of the following is true regarding the euro?

​The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.

​A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which places ____ pressure on U.S. bond prices.

The Fed's indirect method of intervention is to trade dollars for or against other currencies.

Dollarization refers to the replacement of the local currency with U.S. dollars.

If the Fed ____ interest rates when inflationary expectations remain unchanged, the most likely result is that the value of the dollar will ____ and the economy may ____.

​Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major foreign countries.

Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would:

The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers.

A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating European countries, which encourages more trade and capital flows within Europe.

If a speculator expects that the Fed will intervene heavily by exchanging euros for U.S. dollars in order to affect the exchange rate, she would most likely ____ to capitalize on this intervention.

An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from unemployment problems in other countries.