Question 1

Why did the United States abandon the gold standard in the 1930s?

Accepted Answer

A)  The government wanted to rapidly expand the money supply in response to the Great Depression. 
B)  The government wanted to move away from a floating exchange rate system to a fixed exchange rate system. 
C)  The Treasury Department in the United States found it was cheaper to print paper money instead of gold coins. 
D)  New sources of gold were discovered, so the price of gold plummeted, dramatically reducing the value of the dollar. 
A)  The government wanted to rapidly expand the money supply in response to the Great Depression. 
B)  The government wanted to move away from a floating exchange rate system to a fixed exchange rate system. 
C)  The Treasury Department in the United States found it was cheaper to print paper money instead of gold coins. 
D)  New sources of gold were discovered, so the price of gold plummeted, dramatically reducing the value of the dollar.

Question 2

A decrease in a fixed exchange rate from $1.75 per pound to $1.60 per pound is called a(n) ________ of the pound.

Accepted Answer

A)  devaluation 
B)  depreciation 
C)  appreciation 
D)  revaluation 
A)  devaluation 
B)  depreciation 
C)  appreciation 
D)  revaluation

Question 3

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory. In January 2017, The Economist reported that the average price of a Big Mac in the United States was $4.93. In Switzerland, the average price of a Big Mac at that time was 6.50 Swiss francs. If the exchange rate between the dollar and the Swiss franc was 0.93 Swiss francs per dollar, explain how it would be profitable to buy Big Macs in the United States instead of in Switzerland.

Accepted Answer

If a Big Mac costs 6.50 Swiss francs in

Question 4

You are made better off in which of the following situations?

Accepted Answer

A)  you borrow 10,000 pesos, you earn income in dollars, the dollar depreciates against the peso, you must pay back the loan in pesos 
B)  you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars 
C)  you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars 
D)  you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos 
A)  you borrow 10,000 pesos, you earn income in dollars, the dollar depreciates against the peso, you must pay back the loan in pesos 
B)  you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars 
C)  you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars 
D)  you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos

Question 5

When foreign investors in Thailand began to realize that Thailand could not maintain its peg to the dollar indefinitely, they began to sell off their investments in Thailand and exchange the baht they received for dollars. This reduction in investment by foreigners is termed

Accepted Answer

A)  foreign direct investment. 
B)  capital flight. 
C)  capital inflow. 
D)  stabilizing capitalization. 
A)  foreign direct investment. 
B)  capital flight. 
C)  capital inflow. 
D)  stabilizing capitalization.

Question 6

If the purchasing power of the dollar is greater than the purchasing power of the euro, purchasing power parity predicts that the exchange rate will

Accepted Answer

A)  increase if the exchange rate is greater than 1 euro per dollar. 
B)  decrease if the exchange rate is less than 1 euro per dollar. 
C)  be equal to the relative purchasing power across the currencies in the long run. 
D)  not fluctuate and stay constant in the long run. 
A)  increase if the exchange rate is greater than 1 euro per dollar. 
B)  decrease if the exchange rate is less than 1 euro per dollar. 
C)  be equal to the relative purchasing power across the currencies in the long run. 
D)  not fluctuate and stay constant in the long run.

Question 7

Why do countries peg their currencies, and what problems can result from pegging?

Accepted Answer

Countries peg their currencies to make p

Question 8

Destabilizing speculation refers to

Accepted Answer

A)  actions taken by the International Monetary Fund that increase lending to countries who have pegged their currencies against the dollar. 
B)  actions taken by currency traders to sell a currency that is undervalued. 
C)  actions taken by investors who sell a country's currency in anticipation of buying it back later at a lower price. 
D)  any depreciation of a country's currency as a result of long-run adjustments to purchasing power parity. 
A)  actions taken by the International Monetary Fund that increase lending to countries who have pegged their currencies against the dollar. 
B)  actions taken by currency traders to sell a currency that is undervalued. 
C)  actions taken by investors who sell a country's currency in anticipation of buying it back later at a lower price. 
D)  any depreciation of a country's currency as a result of long-run adjustments to purchasing power parity.

Question 9

All of the following are considered among the four most important determinants in explaining exchange rate fluctuations in the long run except

Accepted Answer

A)  tariffs and quotas. 
B)  preferences for domestic and foreign goods. 
C)  interest rates. 
D)  relative rates of productivity growth across countries. 
A)  tariffs and quotas. 
B)  preferences for domestic and foreign goods. 
C)  interest rates. 
D)  relative rates of productivity growth across countries.

Question 10

The three most important financial centers in the world today are New York, London, and Tokyo.

Accepted Answer

A) True 
 B)False

Question 11

Figure 30-4  
-Refer to Figure 30-4. The equilibrium exchange rate is at A, $3/pound. Suppose the British government pegs its currency at $4/pound. Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D2. After the shift

Accepted Answer

A)  there is a shortage of pounds equal to 600 million. 
B)  there is a surplus of pounds equal to 400 million. 
C)  there is a shortage of pounds equal to 400 million. 
D)  there is a surplus of pounds equal to 600 million. 
E)  there is a shortage of pounds equal to 200 million. 
A)  there is a shortage of pounds equal to 600 million. 
B)  there is a surplus of pounds equal to 400 million. 
C)  there is a shortage of pounds equal to 400 million. 
D)  there is a surplus of pounds equal to 600 million. 
E)  there is a shortage of pounds equal to 200 million.

Question 12

Compared to a situation in which there is no change in the value of the dollar relative to the peso, in which of the following situations would you be worse off?

Accepted Answer

A)  you borrow 10,000 pesos, you earn income in dollars, the dollar appreciates against the peso, you must pay back the loan in pesos 
B)  you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars 
C)  you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars 
D)  you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos 
A)  you borrow 10,000 pesos, you earn income in dollars, the dollar appreciates against the peso, you must pay back the loan in pesos 
B)  you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars 
C)  you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars 
D)  you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos

Question 13

If the purchasing power of a dollar is greater than the purchasing power of the yen, purchasing power parity would predict that

Accepted Answer

A)  in the short run, exchange rates will move to equalize the purchasing power of the dollar and the yen. 
B)  in the long run, exchange rates will move to equalize the purchasing power of the dollar and the yen. 
C)  in the long run, interest rates will move to equalize the purchasing power of the dollar and the yen. 
D)  in the short run, interest rates will move to equalize the purchasing power of the dollar and the yen. 
A)  in the short run, exchange rates will move to equalize the purchasing power of the dollar and the yen. 
B)  in the long run, exchange rates will move to equalize the purchasing power of the dollar and the yen. 
C)  in the long run, interest rates will move to equalize the purchasing power of the dollar and the yen. 
D)  in the short run, interest rates will move to equalize the purchasing power of the dollar and the yen.

Question 14

During the Chinese experience with pegging the yuan to the dollar, the yuan was ________. As a result, there was a ________ of dollars on the market, and the Chinese government had to purchase dollars to maintain the peg.

Accepted Answer

A)  overvalued; shortage 
B)  undervalued; surplus 
C)  overvalued; surplus 
D)  undervalued; shortage 
A)  overvalued; shortage 
B)  undervalued; surplus 
C)  overvalued; surplus 
D)  undervalued; shortage

Question 15

A Big Mac costs $4.93 in the United States and 9.6 zlotys in Poland. If the exchange rate is 3 zlotys per dollar, purchasing power parity predicts that

Accepted Answer

A)  the dollar is undervalued. 
B)  the dollar is overvalued. 
C)  the zloty is overvalued. 
D)  both the zloty and dollar are undervalued. 
A)  the dollar is undervalued. 
B)  the dollar is overvalued. 
C)  the zloty is overvalued. 
D)  both the zloty and dollar are undervalued.

Question 16

The Bulgarian currency, the lev, is pegged to the euro at a rate of 1.96 leva (leva is the plural of lev) to the euro. At the pegged exchange rate, how many euros would be exchanged for one lev?

Accepted Answer

A)  0.51 
B)  1.00 
C)  1.96 
D)  3.84 
A)  0.51 
B)  1.00 
C)  1.96 
D)  3.84

Question 17

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

Accepted Answer

A)  the dollar will appreciate as the demand for dollars falls in the long run. 
B)  the dollar will appreciate in the long run as the demand for the dollars rises. 
C)  the dollar will depreciate as the demand for dollars falls in the long run. 
D)  the dollar will depreciate as the supply of dollars rises in the long run. 
A)  the dollar will appreciate as the demand for dollars falls in the long run. 
B)  the dollar will appreciate in the long run as the demand for the dollars rises. 
C)  the dollar will depreciate as the demand for dollars falls in the long run. 
D)  the dollar will depreciate as the supply of dollars rises in the long run.

Question 18

From the nineteenth century until the 1930s, the United states most consistently adhered to

Accepted Answer

A)  the gold standard. 
B)  the Bretton Woods system. 
C)  a freely-floating exchange rate. 
D)  a managed-float exchange rate system. 
A)  the gold standard. 
B)  the Bretton Woods system. 
C)  a freely-floating exchange rate. 
D)  a managed-float exchange rate system.

Question 19

What is the connection between the gold held at the Fort Knox Bullion Depository in Kentucky and the U.S. money supply?

Accepted Answer

Although under the gold standard all U.S

Question 20

If purchasing power parity tells us that if the exchange rate is a pound for a dollar, then the price of a haircut in London should cost the same as a haircut in New York.

Accepted Answer

A) True 
 B)False

Exam 30: The International Financial System

Why did the United States abandon the gold standard in the 1930s?

A decrease in a fixed exchange rate from $1.75 per pound to $1.60 per pound is called a(n) ________ of the pound.

You are made better off in which of the following situations?

When foreign investors in Thailand began to realize that Thailand could not maintain its peg to the dollar indefinitely, they began to sell off their investments in Thailand and exchange the baht they received for dollars. This reduction in investment by foreigners is termed

If the purchasing power of the dollar is greater than the purchasing power of the euro, purchasing power parity predicts that the exchange rate will

Why do countries peg their currencies, and what problems can result from pegging?

Destabilizing speculation refers to

All of the following are considered among the four most important determinants in explaining exchange rate fluctuations in the long run except

The three most important financial centers in the world today are New York, London, and Tokyo.

Figure 30-4 -Refer to Figure 30-4. The equilibrium exchange rate is at A, $3/pound. Suppose the British government pegs its currency at $4/pound. Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D2. After the shift

Compared to a situation in which there is no change in the value of the dollar relative to the peso, in which of the following situations would you be worse off?

If the purchasing power of a dollar is greater than the purchasing power of the yen, purchasing power parity would predict that

During the Chinese experience with pegging the yuan to the dollar, the yuan was ________. As a result, there was a ________ of dollars on the market, and the Chinese government had to purchase dollars to maintain the peg.

A Big Mac costs $4.93 in the United States and 9.6 zlotys in Poland. If the exchange rate is 3 zlotys per dollar, purchasing power parity predicts that

The Bulgarian currency, the lev, is pegged to the euro at a rate of 1.96 leva (leva is the plural of lev) to the euro. At the pegged exchange rate, how many euros would be exchanged for one lev?

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

From the nineteenth century until the 1930s, the United states most consistently adhered to

What is the connection between the gold held at the Fort Knox Bullion Depository in Kentucky and the U.S. money supply?

If purchasing power parity tells us that if the exchange rate is a pound for a dollar, then the price of a haircut in London should cost the same as a haircut in New York.

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

Filters

Figure 30-4 -Refer to Figure 30-4. The equilibrium exchange rate is at A, $3/pound. Suppose the British government pegs its currency at $4/pound. Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D₂. After the shift

During the Chinese experience with pegging the yuan to the dollar, the yuan was . As a result, there was a of dollars on the market, and the Chinese government had to purchase dollars to maintain the peg.