Question 1

Countries that have adopted the euro tend to have very similar ____.

Accepted Answer

A)  interest rates 
B)  inflation rates 
C)  income tax rates 
D)  budget deficits 
A)  interest rates 
B)  inflation rates 
C)  income tax rates 
D)  budget deficits

Question 2

Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on the local currency of that country.

Accepted Answer

A) True 
 B)False

Question 3

All European countries now use the euro as their currency.

Accepted Answer

A) True 
 B)False

Question 4

Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the change in money supply.

Accepted Answer

A) True 
 B)False

Question 5

An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from unemployment problems in other countries.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is true regarding the euro?

Accepted Answer

A)  Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders. 
B)  It allows for more consistent economic conditions across countries. 
C)  It prevents each country from conducting its own monetary policy. 
D)  All of the above are true. 
A)  Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders. 
B)  It allows for more consistent economic conditions across countries. 
C)  It prevents each country from conducting its own monetary policy. 
D)  All of the above are true.

Question 7

To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities.

Accepted Answer

A)  buy; sell 
B)  sell; buy 
C)  buy; buy 
D)  sell; sell 
A)  buy; sell 
B)  sell; buy 
C)  buy; buy 
D)  sell; sell

Question 8

If the Fed desires to weaken the dollar without affecting the dollar money supply, it should:

Accepted Answer

A)  exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars. 
B)  exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars. 
C)  exchange dollars for foreign currencies, and buy existing Treasury securities with dollars. 
D)  exchange foreign currencies for dollars, and buy existing Treasury securities with dollars. 
A)  exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars. 
B)  exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars. 
C)  exchange dollars for foreign currencies, and buy existing Treasury securities with dollars. 
D)  exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

Question 9

When using indirect intervention, a central bank is likely to focus on:

Accepted Answer

A)  inflation. 
B)  interest rates. 
C)  income levels. 
D)  expectations of future exchange rates. 
A)  inflation. 
B)  interest rates. 
C)  income levels. 
D)  expectations of future exchange rates.

Question 10

If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may backfire because it will increase money supply and thus increase inflation.

Accepted Answer

A) True 
 B)False

Question 11

If the French government wants to decrease inflation in France, it will exchange foreign currency for euros.

Accepted Answer

A) True 
 B)False

Question 12

Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system.

Accepted Answer

A) True 
 B)False

Question 13

Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economic problems.

Accepted Answer

A) True 
 B)False

Question 14

Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized intervention.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following are true about the Southeast Asian currency crisis?

Accepted Answer

A)  It was preceded by several years of large capital inflows to Asia. 
B)  It was preceded by a five-year recession in Asia. 
C)  Asian interest rates declined during the crisis. 
D)  Asian exchange rates were pegged to the Japanese yen to resolve the crisis. 
A)  It was preceded by several years of large capital inflows to Asia. 
B)  It was preceded by a five-year recession in Asia. 
C)  Asian interest rates declined during the crisis. 
D)  Asian exchange rates were pegged to the Japanese yen to resolve the crisis.

Question 16

While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are better able to raise prices.

Accepted Answer

A) True 
 B)False

Question 17

Assuming no credit risk, the interest rates among countries in the eurozone should be similar.

Accepted Answer

A) True 
 B)False

Question 18

The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers.

Accepted Answer

A) True 
 B)False

Question 19

If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to capitalize on this intervention.

Accepted Answer

A)  purchase euro put options 
B)  purchase euro futures contracts 
C)  purchase yen call options 
D)  sell U.S. Treasury bonds 
A)  purchase euro put options 
B)  purchase euro futures contracts 
C)  purchase yen call options 
D)  sell U.S. Treasury bonds

Question 20

The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro.

Accepted Answer

A) True 
 B)False

Exam 6: Government Influence on Exchange Rates

Countries that have adopted the euro tend to have very similar ____.

Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on the local currency of that country.

All European countries now use the euro as their currency.

Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the change in money supply.

An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from unemployment problems in other countries.

Which of the following is true regarding the euro?

To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities.

If the Fed desires to weaken the dollar without affecting the dollar money supply, it should:

When using indirect intervention, a central bank is likely to focus on:

If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may backfire because it will increase money supply and thus increase inflation.

If the French government wants to decrease inflation in France, it will exchange foreign currency for euros.

Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system.

Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economic problems.

Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized intervention.

Which of the following are true about the Southeast Asian currency crisis?

While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are better able to raise prices.

Assuming no credit risk, the interest rates among countries in the eurozone should be similar.

The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers.

If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to capitalize on this intervention.

The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro.

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

To strengthen the dollar using sterilized intervention, the Fed would dollars and simultaneously Treasury securities.