Question 1

Foreign currency prices of the Canadian dollar are currently determined by a managed float exchange rate system.

Accepted Answer

A) True 
 B)False

Question 2

How will the exchange rate (foreign currency per dollar)respond to an increase in preference for imported goods in Canada in the long run?

Accepted Answer

A) Exchange rates will rise. 
B) Exchange rates will fall. 
C) Exchange rates will be unaffected by changes in the relative rate of productivity growth in Canada, both in the short run and in the long run. 
D) The exchange rate will be affected in the short run, but not in the long run. 
A) Exchange rates will rise. 
B) Exchange rates will fall. 
C) Exchange rates will be unaffected by changes in the relative rate of productivity growth in Canada, both in the short run and in the long run. 
D) The exchange rate will be affected in the short run, but not in the long run.

Question 3

South Korea suffered a destabilizing speculation in the late 1990s.This had the effect of ________ for the won.South Korean government tried to counteract this by raising interest rates which should have ________ the won.

Accepted Answer

A) decreasing demand; increased demand for 
B) decreasing the supply; increased supply of 
C) increasing demand; decreased demand for 
D) decreasing the supply; increased demand for 
E) increasing demand; increasing the supply 
A) decreasing demand; increased demand for 
B) decreasing the supply; increased supply of 
C) increasing demand; decreased demand for 
D) decreasing the supply; increased demand for 
E) increasing demand; increasing the supply

Question 4

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

Accepted Answer

A) Exchange rates will rise. 
B) Exchange rates will fall. 
C) Exchange rates will be unaffected by changes in the relative rate of productivity growth in Canada, both in the short run and in the long run. 
D) The exchange rate will be affected in the short run, but not in the long run. 
A) Exchange rates will rise. 
B) Exchange rates will fall. 
C) Exchange rates will be unaffected by changes in the relative rate of productivity growth in Canada, both in the short run and in the long run. 
D) The exchange rate will be affected in the short run, but not in the long run.

Question 5

Fluctuating exchange rates can alter a multinational firm's profits and losses.The Canadian corporation WestJet provides flight services domestically and in the United States.If the Canadian dollar appreciates against the U.S.dollar, then WestJet's revenues from these operations should ________ and its costs from these operations should ________.

Accepted Answer

A) rise; fall 
B) rise; rise 
C) fall; fall 
D) fall; rise 
A) rise; fall 
B) rise; rise 
C) fall; fall 
D) fall; rise

Question 6

Which of the following is most important in explaining exchange rate fluctuations in the short run?

Accepted Answer

A) relative price levels across countries 
B) preferences for domestic and foreign goods 
C) interest rates 
D) relative rates of productivity growth across countries 
E) government debt 
A) relative price levels across countries 
B) preferences for domestic and foreign goods 
C) interest rates 
D) relative rates of productivity growth across countries 
E) government debt

Question 7

If a country sets a pegged exchange rate that is above the equilibrium exchange rate, how can the country maintain the peg?

Accepted Answer

A) by purchasing surplus domestic currency at the pegged rate 
B) by selling surplus domestic currency at the pegged rate 
C) by purchasing surplus domestic currency at the equilibrium exchange rate 
D) by increasing the pegged exchange rate 
E) by increasing capital outflows 
A) by purchasing surplus domestic currency at the pegged rate 
B) by selling surplus domestic currency at the pegged rate 
C) by purchasing surplus domestic currency at the equilibrium exchange rate 
D) by increasing the pegged exchange rate 
E) by increasing capital outflows

Question 8

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

Accepted Answer

A) Some goods and services produced in any country are not traded internationally. 
B) Consumer preferences for goods and services across countries are very similar. 
C) Most countries do not impose barriers to trade. 
D) Most countries have free markets with little, if any, government regulation. 
E) The prices of most internationally traded commodity are set in U.S.dollars. 
A) Some goods and services produced in any country are not traded internationally. 
B) Consumer preferences for goods and services across countries are very similar. 
C) Most countries do not impose barriers to trade. 
D) Most countries have free markets with little, if any, government regulation. 
E) The prices of most internationally traded commodity are set in U.S.dollars.

Question 9

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

Accepted Answer

A) the dollar is undervalued. 
B) the dollar is overvalued. 
C) the real is undervalued. 
D) the dollar is at the value predicted by purchasing power parity. 
E) both B and C are correct. 
A) the dollar is undervalued. 
B) the dollar is overvalued. 
C) the real is undervalued. 
D) the dollar is at the value predicted by purchasing power parity. 
E) both B and C are correct.

Question 10

A Big Mac costs $4.07 in Canada and 8.63 zlotys in Poland.If the exchange rate is 3 zlotys per Canadian dollar, what is the Canadian dollar cost of a Big Mac in Poland?

Accepted Answer

A) $0.47 
B) $2.12 
C) $2.88 
D) $6.36 
E) $12.21 
A) $0.47 
B) $2.12 
C) $2.88 
D) $6.36 
E) $12.21

Question 11

If one U.S.dollar could be exchanged for one Canadian dollar in 1970, and one U.S.dollar can now be exchanged for 1.13 Canadian dollars, which of the following is true?

Accepted Answer

A) The U.S.dollar lost value against the Canadian dollar. 
B) The Canadian dollar lost value against the U.S.dollar. 
C) The Canadian dollar gained value against the U.S.dollar. 
D) Inflation has been higher in the US than in Canada. 
E) Both A and C are true. 
A) The U.S.dollar lost value against the Canadian dollar. 
B) The Canadian dollar lost value against the U.S.dollar. 
C) The Canadian dollar gained value against the U.S.dollar. 
D) Inflation has been higher in the US than in Canada. 
E) Both A and C are true.

Question 12

Thailand's experience with pegging the baht to the U.S.dollar failed because the baht was ________ relative to the U.S.dollar, and China's experience with pegging the yuan to the U.S.dollar has run into difficulties because the yuan has been ________ relative to the U.S.dollar.

Accepted Answer

A) overvalued; overvalued 
B) undervalued; overvalued 
C) undervalued; undervalued 
D) overvalued; undervalued 
E) overvalued; appropriately valued 
A) overvalued; overvalued 
B) undervalued; overvalued 
C) undervalued; undervalued 
D) overvalued; undervalued 
E) overvalued; appropriately valued

Question 13

In 1991, Argentina decided to peg its currency (the Argentinean peso)to the U.S.dollar.Most of Argentina's trading, however, was with Brazil and Europe, not the United States.What result would pegging the Argentinean peso to the U.S.dollar have on the cost of imports from and exports to Brazil and Europe?

Accepted Answer

If Argentina pegs its currency to the do

Question 14

In the late 1990s, firms in Thailand that had borrowed dollars while the baht was pegged to the dollar faced interest payments that were ________ than they had planned while the Thai government continued trying to defend the peg, because the baht had been pegged ________ the equilibrium exchange rate for the baht.

Accepted Answer

A) higher; above 
B) higher; below 
C) lower; above 
D) lower; below 
A) higher; above 
B) higher; below 
C) lower; above 
D) lower; below

Question 15

If the value of a country's currency is determined only by the demand and supply for that country's currency, the country is said to have a

Accepted Answer

A) floating exchange rate. 
B) fixed exchange rate. 
C) gold standard. 
D) managed float. 
E) bretton woods exchange rate. 
A) floating exchange rate. 
B) fixed exchange rate. 
C) gold standard. 
D) managed float. 
E) bretton woods exchange rate.

Question 16

Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?

Accepted Answer

A) borrowing dollars from the International Monetary Fund in exchange for baht 
B) buying baht on the foreign exchange market to support higher demand for the baht 
C) increasing domestic interest rates to attract more foreign investors 
D) foreigners selling off of new investments in Thailand 
A) borrowing dollars from the International Monetary Fund in exchange for baht 
B) buying baht on the foreign exchange market to support higher demand for the baht 
C) increasing domestic interest rates to attract more foreign investors 
D) foreigners selling off of new investments in Thailand

Question 17

Table 15.1   Source: "The Big Mac Index," Economist, July 28, 2011.
-Refer to Table 15.1.Fill in the missing values in the above table.Assume the Big Mac is selling for $4.07 in Canada.Explain whether the Canadian dollar is overvalued or undervalued relative to each of the other currencies and predict what will happen in the future to each exchange rate.

Accepted Answer

To calculate the implied exchange rate,

Question 18

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.If the average price of a Big Mac in Canada was $4.07.In Japan, the average price of a Big Mac was 320 yen.What is the "implied exchange rate" between the yen and the Canadian dollar?

Accepted Answer

A) 0.013 yen per Canadian dollar 
B) 0.99 yen per Canadian dollar 
C) 78.62 yen per Canadian dollar 
D) 127.18 yen per Canadian dollar 
E) 130.24 yen per Canadian dollar 
A) 0.013 yen per Canadian dollar 
B) 0.99 yen per Canadian dollar 
C) 78.62 yen per Canadian dollar 
D) 127.18 yen per Canadian dollar 
E) 130.24 yen per Canadian dollar

Question 19

Pegging a country's exchange rate to a major currency can be advantageous in all of the following situations, except

Accepted Answer

A) if the country has extensive trade with the home of the major currency. 
B) if investors believe the major currency to be more stable than the domestic country's currency. 
C) if a country wishes to conduct independent monetary policy. 
D) if imports are a significant fraction of the goods the country's consumers buy. 
E) if potential foreign investors are deterred by potential changes in the currency's value. 
A) if the country has extensive trade with the home of the major currency. 
B) if investors believe the major currency to be more stable than the domestic country's currency. 
C) if a country wishes to conduct independent monetary policy. 
D) if imports are a significant fraction of the goods the country's consumers buy. 
E) if potential foreign investors are deterred by potential changes in the currency's value.

Question 20

Under pressure from Japan, the United States and Europe, China announced it switched from pegging the yuan against the dollar to linking the value of the yuan to a 'basket' of currencies.The result of this change was

Accepted Answer

A) the value of the yuan increased slightly relative to the dollar. 
B) the value of the yuan has become very responsive to changes in demand and supply in the foreign currency market. 
C) the value of the yuan has increased dramatically and is beginning to remove the trade imbalance between the United States and China. 
D) the value of the yuan has decreased dramatically and has further spurred Chinese exports. 
E) the value of the yuan is now determined solely by market forces. 
A) the value of the yuan increased slightly relative to the dollar. 
B) the value of the yuan has become very responsive to changes in demand and supply in the foreign currency market. 
C) the value of the yuan has increased dramatically and is beginning to remove the trade imbalance between the United States and China. 
D) the value of the yuan has decreased dramatically and has further spurred Chinese exports. 
E) the value of the yuan is now determined solely by market forces.

Foreign currency prices of the Canadian dollar are currently determined by a managed float exchange rate system.

How will the exchange rate (foreign currency per dollar)respond to an increase in preference for imported goods in Canada in the long run?

South Korea suffered a destabilizing speculation in the late 1990s.This had the effect of for the won.South Korean government tried to counteract this by raising interest rates which should have the won.

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

Which of the following is most important in explaining exchange rate fluctuations in the short run?

If a country sets a pegged exchange rate that is above the equilibrium exchange rate, how can the country maintain the peg?

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

A Big Mac costs $4.07 in Canada and 8.63 zlotys in Poland.If the exchange rate is 3 zlotys per Canadian dollar, what is the Canadian dollar cost of a Big Mac in Poland?

If one U.S.dollar could be exchanged for one Canadian dollar in 1970, and one U.S.dollar can now be exchanged for 1.13 Canadian dollars, which of the following is true?

Thailand's experience with pegging the baht to the U.S.dollar failed because the baht was relative to the U.S.dollar, and China's experience with pegging the yuan to the U.S.dollar has run into difficulties because the yuan has been relative to the U.S.dollar.

In the late 1990s, firms in Thailand that had borrowed dollars while the baht was pegged to the dollar faced interest payments that were than they had planned while the Thai government continued trying to defend the peg, because the baht had been pegged the equilibrium exchange rate for the baht.

If the value of a country's currency is determined only by the demand and supply for that country's currency, the country is said to have a

Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.If the average price of a Big Mac in Canada was $4.07.In Japan, the average price of a Big Mac was 320 yen.What is the "implied exchange rate" between the yen and the Canadian dollar?

Pegging a country's exchange rate to a major currency can be advantageous in all of the following situations, except

Under pressure from Japan, the United States and Europe, China announced it switched from pegging the yuan against the dollar to linking the value of the yuan to a 'basket' of currencies.The result of this change was

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: The Interaction of Supply and Demand

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, The Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Bank of Canada

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Bank of Canada Policy

Macroeconomics in an Open Economy

Filters

Exam 15: The International Financial System

Foreign currency prices of the Canadian dollar are currently determined by a managed float exchange rate system.

How will the exchange rate (foreign currency per dollar)respond to an increase in preference for imported goods in Canada in the long run?

South Korea suffered a destabilizing speculation in the late 1990s.This had the effect of ________ for the won.South Korean government tried to counteract this by raising interest rates which should have ________ the won.

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

Which of the following is most important in explaining exchange rate fluctuations in the short run?

If a country sets a pegged exchange rate that is above the equilibrium exchange rate, how can the country maintain the peg?

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

A Big Mac costs $4.07 in Canada and 8.63 zlotys in Poland.If the exchange rate is 3 zlotys per Canadian dollar, what is the Canadian dollar cost of a Big Mac in Poland?

If one U.S.dollar could be exchanged for one Canadian dollar in 1970, and one U.S.dollar can now be exchanged for 1.13 Canadian dollars, which of the following is true?

Thailand's experience with pegging the baht to the U.S.dollar failed because the baht was ________ relative to the U.S.dollar, and China's experience with pegging the yuan to the U.S.dollar has run into difficulties because the yuan has been ________ relative to the U.S.dollar.

If the value of a country's currency is determined only by the demand and supply for that country's currency, the country is said to have a

Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.If the average price of a Big Mac in Canada was $4.07.In Japan, the average price of a Big Mac was 320 yen.What is the "implied exchange rate" between the yen and the Canadian dollar?

Pegging a country's exchange rate to a major currency can be advantageous in all of the following situations, except

Under pressure from Japan, the United States and Europe, China announced it switched from pegging the yuan against the dollar to linking the value of the yuan to a 'basket' of currencies.The result of this change was

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: The Interaction of Supply and Demand

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, The Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Bank of Canada

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Bank of Canada Policy

Macroeconomics in an Open Economy

Filters

South Korea suffered a destabilizing speculation in the late 1990s.This had the effect of for the won.South Korean government tried to counteract this by raising interest rates which should have the won.

Thailand's experience with pegging the baht to the U.S.dollar failed because the baht was relative to the U.S.dollar, and China's experience with pegging the yuan to the U.S.dollar has run into difficulties because the yuan has been relative to the U.S.dollar.