Question 1

Today, no country fixes its currency to gold.

Accepted Answer

A) True 
 B)False  True

Question 2

For a country which has a relatively high rate of inflation and wants some form of pegged exchange rate, which of the following exchange rate regimes is the best choice?

Accepted Answer

A) Fully fixed exchange rate 
B) Adjustable peg 
C) Crawling peg 
D) Fully convertible 
A) Fully fixed exchange rate 
B) Adjustable peg 
C) Crawling peg 
D) Fully convertible C

Question 3

Under which of the following policies does the government enter the foreign exchange market and buy or sell foreign currency in order to influence the exchange rate of the domestic currency?

Accepted Answer

A) Exchange controls 
B) Capital controls 
C) Official intervention 
D) Adjustable peg 
A) Exchange controls 
B) Capital controls 
C) Official intervention 
D) Adjustable peg C

Question 4

Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. Which of the following interventions will stem the pressures for depreciation of the pound?

Accepted Answer

A) The government of Britain should sell pounds and buy dollars. 
B) The government of Britain should do nothing as a fixed rate will not change. 
C) The government of Britain should buy pounds and sell dollars. 
D) The government of Britain should increase the country's money supply. 
A) The government of Britain should sell pounds and buy dollars. 
B) The government of Britain should do nothing as a fixed rate will not change. 
C) The government of Britain should buy pounds and sell dollars. 
D) The government of Britain should increase the country's money supply.

Question 5

If a country with a relatively high inflation rate maintains a pegged exchange rate against the currency of a relatively low inflation country:

Accepted Answer

A) its currency will depreciate. 
B) its exports will become more competitive in international market. 
C) its currency will sell at a discount. 
D) its exports will become less competitive in the international market. 
A) its currency will depreciate. 
B) its exports will become more competitive in international market. 
C) its currency will sell at a discount. 
D) its exports will become less competitive in the international market.

Question 6

Which of the following is currently a main function of the International Monetary Fund (IMF)?

Accepted Answer

A) To loan reserves to countries that are attempting to finance temporary payments deficits 
B) To loan money to developing countries to allow them to carry out programs that will improve the standard of living 
C) To house the world's gold supply 
D) To set bilateral exchange rate values 
A) To loan reserves to countries that are attempting to finance temporary payments deficits 
B) To loan money to developing countries to allow them to carry out programs that will improve the standard of living 
C) To house the world's gold supply 
D) To set bilateral exchange rate values

Question 7

Government can change domestic interest rates to influence short-term capital flows and thereby defend a fixed exchange rate.

Accepted Answer

A) True 
 B)False

Question 8

Faced with increasing outflows of gold in the late 1960's and early 1970s, the United States:

Accepted Answer

A) used contractionary fiscal policies to rid the nation of deficits. 
B) decreased the dollar price of gold. 
C) suspended the convertibility of dollars into gold. 
D) encouraged other countries to increase their domestic interest rates. 
A) used contractionary fiscal policies to rid the nation of deficits. 
B) decreased the dollar price of gold. 
C) suspended the convertibility of dollars into gold. 
D) encouraged other countries to increase their domestic interest rates.

Question 9

The Bretton Woods conference led to the creation of the International Monetary Fund (IMF).

Accepted Answer

A) True 
 B)False

Question 10

Which of the following best describes a situation in which a country buys domestic currency in order to defend a pegged exchange rate, and also uses a policy in the domestic economy in to prevent the domestic money supply from changing?

Accepted Answer

A) Official intervention 
B) Sterilized intervention 
C) Maintaining a crawling peg 
D) Deficit without tears 
A) Official intervention 
B) Sterilized intervention 
C) Maintaining a crawling peg 
D) Deficit without tears

Question 11

Which of the following mechanisms cannot be adopted by a country to defend a fixed exchange rate?

Accepted Answer

A) The government can buy or sell foreign currency in order to influence the actual exchange rate. 
B) The government can allow the currency to self-adjust and the resulting market rate will be equal to the intended rate in the fixed exchange rate regime. 
C) The government can impose a form of exchange control. 
D) The government can alter domestic interest rates in order to influence short-term capital flows. 
A) The government can buy or sell foreign currency in order to influence the actual exchange rate. 
B) The government can allow the currency to self-adjust and the resulting market rate will be equal to the intended rate in the fixed exchange rate regime. 
C) The government can impose a form of exchange control. 
D) The government can alter domestic interest rates in order to influence short-term capital flows.

Question 12

The government policy dictating that all foreign exchange proceeds must be turned over to the country's monetary authority is referred to as capital controls.

Accepted Answer

A) True 
 B)False

Question 13

Which one of the following is NOT a way for a country to defend its fixed exchange rate?

Accepted Answer

A) Promote real appreciation of the country's currency 
B) Intervene in the foreign exchange market 
C) Alter domestic interest rates 
D) Impose some form of exchange control 
A) Promote real appreciation of the country's currency 
B) Intervene in the foreign exchange market 
C) Alter domestic interest rates 
D) Impose some form of exchange control

Question 14

The pre-1914 gold standard imposed pressure to adjust mostly on countries that experienced:

Accepted Answer

A) seasonal fluctuations in export sales. 
B) persistent increases in the countries' holdings of official international reserves. 
C) official settlements balance deficits. 
D) trade surpluses. 
A) seasonal fluctuations in export sales. 
B) persistent increases in the countries' holdings of official international reserves. 
C) official settlements balance deficits. 
D) trade surpluses.

Question 15

Fixed exchange rates are likely to be changed at some point over time.

Accepted Answer

A) True 
 B)False

Question 16

A parallel or black market often arises as a result of which of the following?

Accepted Answer

A) Floating exchange rate regimes 
B) Official intervention 
C) Exchange controls 
D) High domestic interest rates 
A) Floating exchange rate regimes 
B) Official intervention 
C) Exchange controls 
D) High domestic interest rates

Question 17

Suppose the Japanese government pegs the yen to the U.S. dollar. What could the Japanese central bank do to prevent depreciation of the yen against the dollar in the foreign exchange market?

Accepted Answer

A) It would lower interest rates to discourage exports to the United States. 
B) It would increase its official reserve holdings by buying dollars in the foreign exchange market. 
C) It would print new currency notes and exchange them for other currencies in the foreign exchange market. 
D) It would buy yen and sell dollars in the foreign exchange market. 
A) It would lower interest rates to discourage exports to the United States. 
B) It would increase its official reserve holdings by buying dollars in the foreign exchange market. 
C) It would print new currency notes and exchange them for other currencies in the foreign exchange market. 
D) It would buy yen and sell dollars in the foreign exchange market.

Question 18

The current world exchange rate system is usually described as an adjustable peg system.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following activities does the International Monetary Fund engage in?

Accepted Answer

A) Creation of special drawing rights 
B) Regulation of large international banks 
C) Provision of financial services to large international banks 
D) Promotion of international trade by lowering tariffs and nontariff barriers 
A) Creation of special drawing rights 
B) Regulation of large international banks 
C) Provision of financial services to large international banks 
D) Promotion of international trade by lowering tariffs and nontariff barriers

Question 20

Which of the following terms describes an exchange rate regime in which the government intervenes in the foreign exchange market in order to influence the market determined exchange rate?

Accepted Answer

A) Fully convertible 
B) Currency control 
C) Managed float 
D) Clean float 
A) Fully convertible 
B) Currency control 
C) Managed float 
D) Clean float

Exam 20: Government Policies Toward the Foreign Exchange Market

Today, no country fixes its currency to gold.

For a country which has a relatively high rate of inflation and wants some form of pegged exchange rate, which of the following exchange rate regimes is the best choice?

Under which of the following policies does the government enter the foreign exchange market and buy or sell foreign currency in order to influence the exchange rate of the domestic currency?

If a country with a relatively high inflation rate maintains a pegged exchange rate against the currency of a relatively low inflation country:

Which of the following is currently a main function of the International Monetary Fund (IMF)?

Government can change domestic interest rates to influence short-term capital flows and thereby defend a fixed exchange rate.

Faced with increasing outflows of gold in the late 1960's and early 1970s, the United States:

The Bretton Woods conference led to the creation of the International Monetary Fund (IMF).

Which of the following best describes a situation in which a country buys domestic currency in order to defend a pegged exchange rate, and also uses a policy in the domestic economy in to prevent the domestic money supply from changing?

Which of the following mechanisms cannot be adopted by a country to defend a fixed exchange rate?

The government policy dictating that all foreign exchange proceeds must be turned over to the country's monetary authority is referred to as capital controls.

Which one of the following is NOT a way for a country to defend its fixed exchange rate?

The pre-1914 gold standard imposed pressure to adjust mostly on countries that experienced:

Fixed exchange rates are likely to be changed at some point over time.

A parallel or black market often arises as a result of which of the following?

Suppose the Japanese government pegs the yen to the U.S. dollar. What could the Japanese central bank do to prevent depreciation of the yen against the dollar in the foreign exchange market?

The current world exchange rate system is usually described as an adjustable peg system.

Which of the following activities does the International Monetary Fund engage in?

Which of the following terms describes an exchange rate regime in which the government intervenes in the foreign exchange market in order to influence the market determined exchange rate?

International Economics Is Different

The Basic Theory Using Demand and Supply

Why Everybody Trades: Comparative Advantage

Trade: Factor Availability and Factor Proportions Are Key

Who Gains and Who Loses From Trade

Scale Economies, Imperfect Competition, and Trade

Growth and Trade Part II: Trade Policy

Analysis of a Tariff

Nontariff Barriers to Imports

Arguments for and Against Protection

Pushing Exports

Trade Blocs and Trade Blocks

Trade and the Environment

Trade Policies for Developing Countries

Multinationals and Migration: International Factor Movements

Payments Among Nations

The Foreign Exchange Market

Forward Exchange and International Financial Investment

What Determines Exchange Rates

International Lending and Financial Crises

How Does the Open Macroeconomy Work

Internal and External Balance With Fixed Exchange Rates

Floating Exchange Rates and Internal Balance

National and Global Choices: Floating Rates and the Alternatives

Filters