Question 1

What is the difference between a devaluation and a revaluation of a currency?

Accepted Answer

A devaluation is a reduction in a fixed exchange rate and a revaluation is an increase in a fixed exchange rate.

Question 2

Figure 30-3  
-Refer to Figure 30-3. Which of the following is not true?

Accepted Answer

A)  Thai imports from the United States are cheaper at exchange rates greater than $.03/baht than at the equilibrium exchange rate. 
B)  The baht is overvalued at exchange rates greater than $.03/baht. 
C)  To achieve an exchange rate greater than $.03/baht, the Bank of Thailand must buy surplus dollars with bahts. 
D)  Thai exports to the United States are more expensive at exchange rates greater than $.03/baht than at the equilibrium exchange rate. 
A)  Thai imports from the United States are cheaper at exchange rates greater than $.03/baht than at the equilibrium exchange rate. 
B)  The baht is overvalued at exchange rates greater than $.03/baht. 
C)  To achieve an exchange rate greater than $.03/baht, the Bank of Thailand must buy surplus dollars with bahts. 
D)  Thai exports to the United States are more expensive at exchange rates greater than $.03/baht than at the equilibrium exchange rate. C

Question 3

If the implied exchange rate between Big Mac prices in the United States and the Philippines is 68 pesos per dollar, but the actual exchange rate between the United States and the Philippines is 43 pesos per dollar, which of the following would you expect to see?

Accepted Answer

A)  a depreciation of the dollar 
B)  an increase in the demand for dollars. 
C)  a decrease in the demand for dollars 
D)  an appreciation of the Philippine pesos 
A)  a depreciation of the dollar 
B)  an increase in the demand for dollars. 
C)  a decrease in the demand for dollars 
D)  an appreciation of the Philippine pesos B

Question 4

Although the pegged exchange rate between the yuan and the dollar has undervalued the yuan, China had been reluctant to abandon the peg for fear that abandoning the peg would

Accepted Answer

A)  increase exports and increase the current account deficit. 
B)  reduce capital inflows. 
C)  reduce exports and reduce economic growth. 
D)  increase Chinese holdings of dollars. 
A)  increase exports and increase the current account deficit. 
B)  reduce capital inflows. 
C)  reduce exports and reduce economic growth. 
D)  increase Chinese holdings of dollars.

Question 5

In 1931, the first major country to abandon the gold standard-in order to increase its policy options in face of the Great Depression-was

Accepted Answer

A)  Great Britain. 
B)  the United States. 
C)  Germany. 
D)  France. 
A)  Great Britain. 
B)  the United States. 
C)  Germany. 
D)  France.

Question 6

All of the following actions were taken by the Thai government to help Thailand maintain its peg against the dollar in the 1990s except

Accepted Answer

A)  borrowing dollars from the International Monetary Fund in exchange for baht. 
B)  buying baht on the foreign exchange market to support higher demand for the baht. 
C)  increasing domestic interest rates to attract more foreign investors. 
D)  imposing restrictions on exports to the United States to prevent too many dollars from entering the economy. 
A)  borrowing dollars from the International Monetary Fund in exchange for baht. 
B)  buying baht on the foreign exchange market to support higher demand for the baht. 
C)  increasing domestic interest rates to attract more foreign investors. 
D)  imposing restrictions on exports to the United States to prevent too many dollars from entering the economy.

Question 7

What do reports that the dollar is "overvalued" mean? How will foreign exchange markets respond to this information? Support your answer graphically.

Accepted Answer

If the dollar is "overvalued," that mean

Question 8

Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major currency, rather than choosing a floating exchange rate?

Accepted Answer

A)  Pegging allows the country more flexibility in conducting monetary policy. 
B)  Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with significant levels of imports. 
C)  Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of the currency. 
D)  Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business planning. 
A)  Pegging allows the country more flexibility in conducting monetary policy. 
B)  Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with significant levels of imports. 
C)  Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of the currency. 
D)  Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business planning.

Question 9

Figure 30-1  
-Refer to Figure 30-1. Which of the following would cause the change depicted in the figure above?

Accepted Answer

A)  U.S. productivity rises relative to European productivity. 
B)  Europeans decrease their preferences for U.S. goods relative to European goods. 
C)  The European Union increases its quotas on U.S.-produced wine. 
D)  an increase in the price level of U.S. goods relative to European goods 
A)  U.S. productivity rises relative to European productivity. 
B)  Europeans decrease their preferences for U.S. goods relative to European goods. 
C)  The European Union increases its quotas on U.S.-produced wine. 
D)  an increase in the price level of U.S. goods relative to European goods

Question 10

Figure 30-3  
-Refer to Figure 30-3. At what level should the Thai government peg its currency to the dollar to make Thai exports cheaper to the United States?

Accepted Answer

A)  greater than $.03/baht 
B)  less than $.03/baht 
C)  equal to $.03/baht 
D)  $1/baht 
A)  greater than $.03/baht 
B)  less than $.03/baht 
C)  equal to $.03/baht 
D)  $1/baht

Question 11

How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar?

Accepted Answer

A)  Because the yuan was undervalued at the pegged exchange rate, the level of Chinese exports remained higher than they would have been if the exchange rate was allowed to float freely. 
B)  Because the yuan was overvalued at the pegged exchange rate, competing firms from other countries feared that abandoning the peg would lead to an increase in Chinese exports. 
C)  Competitors feared that the declining value of the dollar would continue to make Chinese goods more expensive. 
D)  Because China's population is so large relative to other countries, the pegged exchange rate made the goods of foreign competing firms much less expensive than domestic Chinese goods. 
A)  Because the yuan was undervalued at the pegged exchange rate, the level of Chinese exports remained higher than they would have been if the exchange rate was allowed to float freely. 
B)  Because the yuan was overvalued at the pegged exchange rate, competing firms from other countries feared that abandoning the peg would lead to an increase in Chinese exports. 
C)  Competitors feared that the declining value of the dollar would continue to make Chinese goods more expensive. 
D)  Because China's population is so large relative to other countries, the pegged exchange rate made the goods of foreign competing firms much less expensive than domestic Chinese goods.

Question 12

If a country sets a pegged exchange rate that is below the equilibrium exchange rate, how can the country maintain the peg?

Accepted Answer

A)  by purchasing surplus domestic currency at the pegged rate 
B)  by selling surplus domestic currency at the pegged rate 
C)  by purchasing surplus domestic currency at the equilibrium exchange rate 
D)  by decreasing the pegged exchange rate 
A)  by purchasing surplus domestic currency at the pegged rate 
B)  by selling surplus domestic currency at the pegged rate 
C)  by purchasing surplus domestic currency at the equilibrium exchange rate 
D)  by decreasing the pegged exchange rate

Question 13

If the equilibrium exchange rate exceeds the par exchange rate in the market for pounds, the pound is overvalued.

Accepted Answer

A) True 
 B)False

Question 14

Figure 30-7  
-Refer to Figure 30-7. At what level should the Indian government peg its currency to the dollar to make U.S. imports cheaper in India?

Accepted Answer

A)  greater than $.02/rupee 
B)  less than $.02/rupee 
C)  equal to $.02/rupee 
D)  $1/rupee 
A)  greater than $.02/rupee 
B)  less than $.02/rupee 
C)  equal to $.02/rupee 
D)  $1/rupee

Question 15

If relative purchasing power between the United States and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"?

Accepted Answer

A)  if the actual exchange rate between the dollar and the Argentinean peso is 3.22 pesos per dollar 
B)  if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar 
C)  if the actual exchange rate between the dollar and the Argentinean peso is 0.22 pesos per dollar 
D)  if the actual exchange rate between the dollar and the Argentinean peso is 3 pesos per dollar 
A)  if the actual exchange rate between the dollar and the Argentinean peso is 3.22 pesos per dollar 
B)  if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar 
C)  if the actual exchange rate between the dollar and the Argentinean peso is 0.22 pesos per dollar 
D)  if the actual exchange rate between the dollar and the Argentinean peso is 3 pesos per dollar

Question 16

If a country sets a pegged exchange rate that is above the equilibrium exchange rate, how can the country maintain the peg?

Accepted Answer

A)  by purchasing surplus domestic currency at the pegged rate 
B)  by selling surplus domestic currency at the pegged rate 
C)  by purchasing surplus domestic currency at the equilibrium exchange rate 
D)  by increasing the pegged exchange rate 
A)  by purchasing surplus domestic currency at the pegged rate 
B)  by selling surplus domestic currency at the pegged rate 
C)  by purchasing surplus domestic currency at the equilibrium exchange rate 
D)  by increasing the pegged exchange rate

Question 17

Adoption of the euro as both a medium of exchange and unit of account in the EU countries serves to increase competition among European firms and decrease individual countries' monetary policy options when confronted by recessions and booms.

Accepted Answer

A) True 
 B)False

Question 18

The three most important international financial centers today are

Accepted Answer

A)  New York, Los Angeles, and London. 
B)  London, Tokyo, and Beijing. 
C)  San Francisco, Paris, and Mexico City. 
D)  Tokyo, London, and New York. 
A)  New York, Los Angeles, and London. 
B)  London, Tokyo, and Beijing. 
C)  San Francisco, Paris, and Mexico City. 
D)  Tokyo, London, and New York.

Question 19

The exchange rate system agreed to in 1944, in which the U.S. government agreed to buy or sell gold at a fixed price of $35 per ounce, is referred to as

Accepted Answer

A)  the gold standard. 
B)  the Bretton Woods System. 
C)  a floating currency standard. 
D)  a flexible exchange rate system. 
A)  the gold standard. 
B)  the Bretton Woods System. 
C)  a floating currency standard. 
D)  a flexible exchange rate system.

Question 20

Fluctuating exchange rates can alter a multinational firm's profits and losses. The U.S. automobile manufacturer Tesla produces vehicles in the United States and sells them in Norway. (Norway is Tesla's largest overseas market.) If the dollar appreciates against the Norwegian krone, then Tesla's revenues from these operations should ________ and its profits from these operations should ________.

Accepted Answer

A)  rise; fall 
B)  rise; rise 
C)  fall; fall 
D)  fall; rise 
A)  rise; fall 
B)  rise; rise 
C)  fall; fall 
D)  fall; rise

Exam 30: The International Financial System

What is the difference between a devaluation and a revaluation of a currency?

Figure 30-3 -Refer to Figure 30-3. Which of the following is not true?

If the implied exchange rate between Big Mac prices in the United States and the Philippines is 68 pesos per dollar, but the actual exchange rate between the United States and the Philippines is 43 pesos per dollar, which of the following would you expect to see?

Although the pegged exchange rate between the yuan and the dollar has undervalued the yuan, China had been reluctant to abandon the peg for fear that abandoning the peg would

In 1931, the first major country to abandon the gold standard-in order to increase its policy options in face of the Great Depression-was

All of the following actions were taken by the Thai government to help Thailand maintain its peg against the dollar in the 1990s except

What do reports that the dollar is "overvalued" mean? How will foreign exchange markets respond to this information? Support your answer graphically.

Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major currency, rather than choosing a floating exchange rate?

Figure 30-1 -Refer to Figure 30-1. Which of the following would cause the change depicted in the figure above?

Figure 30-3 -Refer to Figure 30-3. At what level should the Thai government peg its currency to the dollar to make Thai exports cheaper to the United States?

How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar?

If a country sets a pegged exchange rate that is below the equilibrium exchange rate, how can the country maintain the peg?

If the equilibrium exchange rate exceeds the par exchange rate in the market for pounds, the pound is overvalued.

Figure 30-7 -Refer to Figure 30-7. At what level should the Indian government peg its currency to the dollar to make U.S. imports cheaper in India?

If relative purchasing power between the United States and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"?

If a country sets a pegged exchange rate that is above the equilibrium exchange rate, how can the country maintain the peg?

Adoption of the euro as both a medium of exchange and unit of account in the EU countries serves to increase competition among European firms and decrease individual countries' monetary policy options when confronted by recessions and booms.

The three most important international financial centers today are

The exchange rate system agreed to in 1944, in which the U.S. government agreed to buy or sell gold at a fixed price of $35 per ounce, is referred to as

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