Exam 30: The International Financial System

Article Summary According to Gautam Kalani, currency strategist at Deutsche Bank, the Chinese yuan is the most overvalued currency in the world. Kalani based his rankings on three valuation metrics, including purchasing power parity. Emerging market currencies dominate the most overvalued list, while many emerging market currencies are undervalued as well. For developed markets, the Swiss franc is the most overvalued currency, running a close second to the Chinese yuan, and the Japanese yen ranks as the world's most undervalued currency. The U.S. dollar falls toward the middle of the spectrum, ranking as slightly overvalued. -Refer to the Article Summary. If, as the article claims, the Japanese yen is the most undervalued currency in the world, how would you expect demand and supply in the foreign exchange markets to respond?

If the U.S. government removes tariffs it had placed on imports from countries that have been accused of deliberately undervaluing their currencies, the price of these imports will ________ and the demand for the undervalued currency will ________.

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

If the GDP deflator in the United States is 114, and the GDP deflator in Ukraine is 142, which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)

Increasing a fixed exchange rate is called a revaluation.

Exchange rates under the Bretton Woods system were determined by relative supplies of gold held by countries within the system.

In 1991, Argentina decided to peg its currency (the Argentinean peso) to the U.S. dollar. To maintain the peg, Argentina had to purchase surplus pesos on the foreign exchange market, depleting its reserves of dollars to such an extent that it eventually had to abandon the peg. Show graphically what this implies about the peg relative to the equilibrium exchange rate in the market for the Argentinean peso.

During the Chinese experience with pegging the yuan to the dollar, the yuan was undervalued. As a result

If a firm in Thailand borrows dollars from a U.S. bank, its interest payments on the loan in bahts will decrease if the baht appreciates against the dollar.

All of the following explain why purchasing power parity does not completely explain long-run fluctuations in exchange rates except

What determined the exchange rates among currencies under the gold standard, and what caused the gold standard to collapse?

Figure 30-10 -Refer to Figure 30-10. Under the Bretton Woods System of exchange rates, if the par exchange rate was $4 per pound in the figure above, then which of the following is true?

According to the theory of purchasing power parity, if the inflation rate in the United States is greater than the inflation rate in Canada, explain what should happen to the exchange rate between the U.S. dollar and the Canadian dollar.

Figure 30-6 -Refer to Figure 30-6. Which of the following would cause the change depicted in the figure above?

China began pegging its currency, the yuan, to the dollar in 1994. Because the yuan was ________ at the pegged exchange rate, the Chinese government increased its reserves of ________ as the government purchased more ________ to maintain the pegged exchange rate.

If, at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar, the rand is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

Expanding, contracting, and managing the money supply is easier for a central bank under the gold standard.

The United States abandoned the Bretton Woods system of exchange rates in