Exam 15: The International Financial System

Limits on the flow of foreign exchange and financial investment across countries are called:

Refer to Figure 15.1 for the following questions. Figure 15.1 -Suppose the above graph in Figure 15.1 represents the market for the British pound under the Bretton Woods System. If the par exchange rate was set at 2 United States dollars and the situation persisted:

The anchoring feature of the Bretton Woods System was the:

When countries agree to keep the exchange rates between their countries at an unchanging rate, the exchange rate system is called a:

In order to maintain an undervalued yuan to encourage a trade surplus, the Chinese government must buy United States dollars and increase the supply of yuan.

The 'purchasing power parity theory' of exchange rate determination states that:

Under the Bretton Woods System, the par rate per British pound was defined as a fixed number of United States (US)dollars per pound. If this were set above its equilibrium value, then:

Explain how a floating exchange rate can cause problems for countries that have a substantial number of foreign loans denominated in United States (US)dollars. How might a fixed exchange rate pegged to the US dollar help the country avoid these problems? _____________________________________________________________________________________________ _____________________________________________________________________________________________

'Purchasing power parity' is the theory that in the long run, exchange rates move to equalise:

Refer to Figure 15.1 for the following questions. Figure 15.1 -Suppose the graph in Figure 15.1 represents the market for the British pound under the Bretton Woods System. If the par exchange rate was set at 4 United States dollars:

If a currency's par rate (defined as United States (US)dollars per unit of foreign currency)was ________ the equilibrium rate and this persisted, then under the Bretton Woods System, the country would be allowed a currency ________.

Suppose the price of a mobile phone in Australia is $400 and 30 000 yen in Japan. If the current exchange rate is 100 yen to the dollar, then purchasing power parity theory would predict that in the long run:

Under the Bretton Woods System, central banks were committed to selling ________ in exchange for their own currencies.

The East Asian exchange rate crisis of the late 1990s resulted in a greater number of countries with pegged exchange rates.

A 'floating exchange rate system' is one in which:

a. Suppose that the current equilibrium exchange rate between the US dollar and Philippine peso is $0.20 per peso and the Philippine government pegged the peso to the US dollar at the rate of $0.25 per peso. Draw the market demand and supply curve of pesos for US dollars. b. Suppose that currency traders think that the government will soon allow the peso to float. Show on the diagram how this affects the demand and supply curves. c. How would the events in b. affect the number of pesos that the Philippine central bank must buy or sell? _____________________________________________________________________________________________ _____________________________________________________________________________________________

If prices rise slower in the United States of America (USA)than in Australia, then:

A 'pegged exchange rate' is one in which:

An example of a 'fixed exchange rate system' is:

Which of the following statements about capital markets is true?