Exam 15: The International Financial System

Explain how The Economist's (2016)'Big Mac Index' is related to purchasing power parity. Does the Big Mac Index suggest that purchasing power parity exists? Explain why or why not. _____________________________________________________________________________________________ _____________________________________________________________________________________________

If the Chinese yuan is pegged below the equilibrium exchange rate as expressed in United States (US)dollars per yuan:

How will the exchange rate (foreign currency per dollar)respond to a decrease in the relative rate of productivity growth in Australia in the long run?

The 'destabilising speculation' that followed the Thai government's attempt to peg its currency to the United States (US)dollar resulted in Thailand abandoning its peg. The result was a(n):

Which of the following is not a feature of the current exchange rate system?

Countries abandoned the 'gold standard' during periods of:

What was the General Agreement on Tariffs and Trade (GATT)? What did it accomplish? _____________________________________________________________________________________________ _____________________________________________________________________________________________

According to the 'theory of purchasing power parity', if the inflation rate in the United States of America is greater than the inflation rate in Australia, explain what should happen to the exchange rate between the United States (US)dollar and the Australian dollar. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Suppose the flow of capital from Japan into Australia begins to slow in the coming year. Show how this would affect the value of the dollar in the market for Australian dollars (with the exchange rate defined as yen per dollar). If this occurs, what is the effect on the balance of trade in goods and services? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Australians demand Japanese yen to:

Refer to Figure 15.3 for the following questions. Figure 15.3 -Assume that the Thai government wants to maintain an exchange rate of 0.04 baht per United States (US)dollar, as shown in Figure 15.3. If the Thai economy falls into recession, how will that affect the number of baht the central bank must buy or sell to maintain the peg at 0.04 baht per dollar?

The country's exchange rate system is a(n)_________ system when a country's exchange rate is allowed to vary within a particular target zone against the currencies of other countries.

Suppose that South Korea is attempting to peg its exchange rate to the United States (US)dollar. Speculators think the value of the South Korean won is going to fall. Use a graph to show how this affects the demand for and supply of the won. What will the South Korean central bank have to do in order to maintain the peg? Show how raising interest rates affect the central bank's attempt to maintain the peg.

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

According to purchasing power parity, currencies will generally appreciate in countries whose inflation rates are higher than the rest of the world.

Suppose that China wants to fix its exchange rate for United States (US)dollars below the equilibrium exchange rate, making the yuan undervalued against the US dollar and many other currencies. How does that benefit China? Does it harm anyone in China? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Refer to Figure 15.3 for the following questions. Figure 15.3 -Assume that the Thai government wants to maintain an exchange rate of 0.04 baht per United States (US)dollar, as shown in Figure 15.3. If currency speculators think that the Thai government will soon allow the currency to float, how will that affect the number of baht the central bank must buy or sell to maintain the peg at 0.04 baht per US dollar?

Under the Bretton Woods System, Germany did not want to revalue its currency because the revaluation would:

When countries aim to keep the value of their currency within a range against another currency, their exchange rate system is referred to as:

Because of the emissions testing scandal at Volkswagen, Australians develop an aversion to German cars relative to cars manufactured in Australia. This will, ceteris paribus: