Question 1

How were exchange rates determined under the gold standard? How did the Bretton Woods system differ from the gold standard?

Accepted Answer

Under the gold standard,exchange rates were determined by the relative amounts of gold in each country's currency.Both the gold standard and Bretton Woods systems were fixed exchange rate systems,but people were able to redeem paper currency for gold domestically only under the gold standard.

Question 2

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.

Accepted Answer

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

Question 3

If speculators believe a currency is soon going to be revalued,they will increase their demand for that currency.

Accepted Answer

A) True 
 B)False  True

Question 4

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar,what is the dollar cost of a Big Mac in Brazil?

Accepted Answer

A)  $0.89 
B)  $2.25 
C)  $4.50 
D)  $8.00 
A)  $0.89 
B)  $2.25 
C)  $4.50 
D)  $8.00

Question 5

If the purchasing power of the dollar is greater than the purchasing power of the euro,purchasing power parity predicts that the exchange rate will

Accepted Answer

A)  increase if the exchange rate is greater than 1 euro per dollar. 
B)  decrease if the exchange rate is less than 1 euro per dollar. 
C)  be equal to the relative purchasing power across the currencies in the long run. 
D)  not fluctuate and stay constant in the long run. 
A)  increase if the exchange rate is greater than 1 euro per dollar. 
B)  decrease if the exchange rate is less than 1 euro per dollar. 
C)  be equal to the relative purchasing power across the currencies in the long run. 
D)  not fluctuate and stay constant in the long run.

Question 6

Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major currency,rather than choosing a floating exchange rate?

Accepted Answer

A)  Pegging allows the country more flexibility in conducting monetary policy. 
B)  Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with significant levels of imports. 
C)  Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of the currency. 
D)  Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business planning. 
A)  Pegging allows the country more flexibility in conducting monetary policy. 
B)  Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with significant levels of imports. 
C)  Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of the currency. 
D)  Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business planning.

Question 7

Why might a developing country choose to peg the value of its currency to the dollar?

Accepted Answer

The dollar is a relatively stable curren

Question 8

Investors in which country accounted for about half of all foreign purchases of U.S.stocks and bonds in 2010?

Accepted Answer

A)  Japan 
B)  the United Kingdom 
C)  China 
D)  Mexico 
A)  Japan 
B)  the United Kingdom 
C)  China 
D)  Mexico

Question 9

Expanding,contracting,and managing the money supply is easier for a central bank under the gold standard.

Accepted Answer

A) True 
 B)False

Question 10

A currency pegged at a value below the market equilibrium exchange rate is

Accepted Answer

A)  overvalued. 
B)  undervalued. 
C)  achieving purchasing power parity. 
D)  None of the above are correct. 
A)  overvalued. 
B)  undervalued. 
C)  achieving purchasing power parity. 
D)  None of the above are correct.

Question 11

The gold standard is an example of

Accepted Answer

A)  a floating exchange rate system. 
B)  a managed float exchange rate system. 
C)  a fixed exchange rate system. 
D)  a flexible exchange rate system. 
E)  the Bretton Woods System. 
A)  a floating exchange rate system. 
B)  a managed float exchange rate system. 
C)  a fixed exchange rate system. 
D)  a flexible exchange rate system. 
E)  the Bretton Woods System.

Question 12

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

Accepted Answer

A)  overvalued; overvalued 
B)  undervalued; overvalued 
C)  undervalued; undervalued 
D)  overvalued; undervalued 
A)  overvalued; overvalued 
B)  undervalued; overvalued 
C)  undervalued; undervalued 
D)  overvalued; undervalued

Question 13

China's exchange rate system from 1994 through 2005 is an example of

Accepted Answer

A)  a floating exchange rate system. 
B)  a managed float exchange rate system. 
C)  a fixed exchange rate system. 
D)  a flexible exchange rate system. 
E)  the Bretton Woods System. 
A)  a floating exchange rate system. 
B)  a managed float exchange rate system. 
C)  a fixed exchange rate system. 
D)  a flexible exchange rate system. 
E)  the Bretton Woods System.

Question 14

Pegging a country's exchange rate to the dollar can be advantageous if

Accepted Answer

A)  the country does not trade much with the United States. 
B)  investors believe the dollar to be more stable than the domestic country's currency. 
C)  a country wishes to conduct independent monetary policy. 
D)  imports are not a significant fraction of the goods the country's consumers buy. 
A)  the country does not trade much with the United States. 
B)  investors believe the dollar to be more stable than the domestic country's currency. 
C)  a country wishes to conduct independent monetary policy. 
D)  imports are not a significant fraction of the goods the country's consumers buy.

Question 15

Although the pegged exchange rate between the yuan and the dollar has undervalued the yuan,China has been reluctant to abandon the peg for fear that abandoning the peg would

Accepted Answer

A)  increase exports and increase the current account deficit. 
B)  reduce capital inflows. 
C)  reduce exports and reduce economic growth. 
D)  increase Chinese holdings of dollars. 
A)  increase exports and increase the current account deficit. 
B)  reduce capital inflows. 
C)  reduce exports and reduce economic growth. 
D)  increase Chinese holdings of dollars.

Question 16

The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory.In July 2011,the Economist reported that the average price of a Big Mac in the United States was $4.07.In Mexico,the average price of a Big Mac at that time was 32 pesos.If the exchange rate between the dollar and the peso was 13.60 pesos per dollar,explain how it would be profitable to buy Big Macs in Mexico instead of in the United States.

Accepted Answer

If a Big Mac costs $4.07 in the United S

Question 17

Which of the following is a drawback to having a common currency across countries,as in the European Union?

Accepted Answer

A)  A common currency increases barriers to trade across countries, reducing opportunities for economic growth. 
B)  With a common currency, individual countries are no longer able to run independent monetary policies. 
C)  Having a common currency implies that the prices of goods across countries must always be the same, regardless of consumer preferences for goods across countries. 
D)  None of the above is a drawback to a common currency. 
A)  A common currency increases barriers to trade across countries, reducing opportunities for economic growth. 
B)  With a common currency, individual countries are no longer able to run independent monetary policies. 
C)  Having a common currency implies that the prices of goods across countries must always be the same, regardless of consumer preferences for goods across countries. 
D)  None of the above is a drawback to a common currency.

Question 18

Figure 30-2  
-Refer to Figure 30-2.Which of the following would cause the change depicted in the figure above?

Accepted Answer

A)  Lack of investment in infrastructure causes U.S. productivity to fall relative to Chinese productivity. 
B)  Tainted cat food from China causes U.S. consumers to decrease their preferences for Chinese goods relative to U.S. goods. 
C)  A new trade agreement with China results in the United States removing all tariffs on clothing imported from China. 
D)  An expansionary monetary policy causes an increase in the price level of U.S. goods relative to Chinese goods. 
A)  Lack of investment in infrastructure causes U.S. productivity to fall relative to Chinese productivity. 
B)  Tainted cat food from China causes U.S. consumers to decrease their preferences for Chinese goods relative to U.S. goods. 
C)  A new trade agreement with China results in the United States removing all tariffs on clothing imported from China. 
D)  An expansionary monetary policy causes an increase in the price level of U.S. goods relative to Chinese goods.

Question 19

If the GDP deflator in the United States is 114,and the GDP deflator in Ukraine is 142,which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)

Accepted Answer

A)  The demand for the dollar will rise since the dollar is undervalued. 
B)  The demand for the dollar will fall since the dollar is overvalued. 
C)  The supply of the dollar will fall since the dollar is undervalued. 
D)  No prediction regarding changes in the demand or supply of the dollar can be made without information on the exchange rate between the United States and Ukraine. 
A)  The demand for the dollar will rise since the dollar is undervalued. 
B)  The demand for the dollar will fall since the dollar is overvalued. 
C)  The supply of the dollar will fall since the dollar is undervalued. 
D)  No prediction regarding changes in the demand or supply of the dollar can be made without information on the exchange rate between the United States and Ukraine.

Question 20

Figure 30-3  
-Refer to Figure 30-3.At what level should the Thai government peg its currency to the dollar to make Thai exports cheaper to the United States?

Accepted Answer

A)  greater than $.03/baht 
B)  less than $.03/baht 
C)  equal to $.03/baht 
D)  $1/baht 
A)  greater than $.03/baht 
B)  less than $.03/baht 
C)  equal to $.03/baht 
D)  $1/baht

Exam 30: The International Financial System

How were exchange rates determined under the gold standard? How did the Bretton Woods system differ from the gold standard?

If speculators believe a currency is soon going to be revalued,they will increase their demand for that currency.

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar,what is the dollar cost of a Big Mac in Brazil?

If the purchasing power of the dollar is greater than the purchasing power of the euro,purchasing power parity predicts that the exchange rate will

Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major currency,rather than choosing a floating exchange rate?

Why might a developing country choose to peg the value of its currency to the dollar?

Investors in which country accounted for about half of all foreign purchases of U.S.stocks and bonds in 2010?

Expanding,contracting,and managing the money supply is easier for a central bank under the gold standard.

A currency pegged at a value below the market equilibrium exchange rate is

The gold standard is an example of

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

China's exchange rate system from 1994 through 2005 is an example of

Pegging a country's exchange rate to the dollar can be advantageous if

Although the pegged exchange rate between the yuan and the dollar has undervalued the yuan,China has been reluctant to abandon the peg for fear that abandoning the peg would

Which of the following is a drawback to having a common currency across countries,as in the European Union?

Figure 30-2 -Refer to Figure 30-2.Which of the following would cause the change depicted in the figure above?

If the GDP deflator in the United States is 114,and the GDP deflator in Ukraine is 142,which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)

Figure 30-3 -Refer to Figure 30-3.At what level should the Thai government peg its currency to the dollar to make Thai exports cheaper to the United States?

Economics: Foundations and Models

Trade-Offs, comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, government Price Setting, and Taxes

Externalities, environmental Policy, and Public Goods

Elasticity: The Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: The Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, taxes, and the Distribution of Income

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 Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

Filters

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