Exam 15: The International Financial System

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

Managed float exchange systems were abandoned with the implementation of the gold standard.

Airbus is a passenger aircraft manufacturer based in Europe, but like the rest of the global aerospace industry, conducts is business in U.S.dollars.Suppose Airbus sells an aircraft to Air France, and Air France pays Airbus in U.S.dollars.If the value of the U.S.dollar rises relative to the euro, Airbus's profits in Europe will ________ because it will receive ________ when it converts the dollars it earns from the sale into euros.

If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following exchange rates would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the hryvnia.)

Figure 15.9 Alt text for Figure 15.9: In figure 15.9, a graph illustrates the quantity of euros traded against the exchange rate. Long description for Figure 15.9: The x-axis is labelled, quantity of euros traded in millions per day.The y-axis is labelled, exchange rate, Canadian dollar against the euro.A straight line supply curve, S, slopes up from the bottom left corner to the top right corner.2 straight line demand curves, D1 and D2, slope down from the top left corner to the bottom right corner.Curve D2 is plotted to the right of curve D1.The difference between the curves is indicated by a right pointing arrow.Curve S intersects curves D1 and D2 at points A (500, 1.25)and B (700, 1.50).Point (200, 1.00)is plotted near the bottom of curve S.Point (950, 1.75)is plotted near the top of curve S.Point (500, 1.75)is plotted near the top of curve D2.Points (900, 1.25)and point (1,000, 1.00)are plotted near the bottom of curve D2.Point (200,1.75)is plotted near the top of curve D1.Point (700, 1.00)is plotted near the bottom of curve D1.All points are connected to their corresponding values on the x and y-axes with dotted lines. -Refer to Figure 15.9.The equilibrium exchange rate is originally at A, $1.25/euro.Suppose the European Central Bank pegs its currency at $1.00/euro.Speculators expect that the value of the euro will rise, and this shifts the demand curve for euros to D₂.If the European Central Bank abandons the peg, the equilibrium exchange rate would be

Figure 15.7 Alt text for Figure 15.7: In figure 15.7, a graph illustrates the quantity of dollars traded against the exchange rate. Long description for Figure 15.7: The x-axis is labelled, quantity of dollars traded per day.The y-axis is labelled, exchange rate, peso to Canadian dollar, with values 1.00 and 1.05 dollars marked.A straight line supply curve slopes up from the bottom left corner to the top right corner.2 parallel straight line demand curves, D1 and D2 slope down form the top left corner to the bottom right corner.Curve D2 is plotted to the left of curve D1.The change from curve D1 to curve D2 is indicated by a left pointing arrow.Curve S intersects curve D1 at a point with a y-axis value of 13.5.Curve S intersects curve D2 at a point with a y-axis value of 13.00.Both points of intersections are connected to their corresponding y-axis values with dotted lines.The difference between the y-axis values is indicated with a down pointing arrow. -Refer to Figure 15.7.Which of the following would cause the change depicted in the figure above?

Under the Bretton Woods exchange rate system, the U.S.government agreed to buy or sell gold at a fixed price of ________ per ounce.

Why did the Chinese central bank switch from pegging the value of the yuan to the US to a basket of currencies in 2005?