Question 1

Article Summary
According to Gautam Kalani, currency strategist at Deutsche Bank, the Chinese yuan is the most overvalued currency in the world. Kalani based his rankings on three valuation metrics, including purchasing power parity. Emerging market currencies dominate the most overvalued list, while many emerging market currencies are undervalued as well. For developed markets, the Swiss franc is the most overvalued currency, running a close second to the Chinese yuan, and the Japanese yen ranks as the world's most undervalued currency. The U.S. dollar falls toward the middle of the spectrum, ranking as slightly overvalued.

-Refer to the Article Summary. If, as the article claims, the Japanese yen is the most undervalued currency in the world, how would you expect demand and supply in the foreign exchange markets to respond?

Accepted Answer

A)  The supply of the yen will fall, while the demand for other currencies will rise. 
B)  The demand for the yen will rise, while the supply of other currencies will fall. 
C)  The demand for the yen will rise, while the supply of other currencies will rise. 
D)  The demand for the yen will fall, while the supply of other currencies will rise.

Question 2

If the U.S. government removes tariffs it had placed on imports from countries that have been accused of deliberately undervaluing their currencies, the price of these imports will ________ and the demand for the undervalued currency will ________.

Accepted Answer

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

Question 3

What do reports that the dollar is "undervalued" mean? How will foreign exchange markets respond to this information? Support your answer graphically.

Accepted Answer

The answer of What do reports that the dollar is...

Question 4

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.

Question 5

Increasing a fixed exchange rate is called a revaluation.

Accepted Answer

A) True 
 B)False

Question 6

Exchange rates under the Bretton Woods system were determined by relative supplies of gold held by countries within the system.

Accepted Answer

A) True 
 B)False

Question 7

In 1991, Argentina decided to peg its currency (the Argentinean peso) to the U.S. dollar. To maintain the peg, Argentina had to purchase surplus pesos on the foreign exchange market, depleting its reserves of dollars to such an extent that it eventually had to abandon the peg. Show graphically what this implies about the peg relative to the equilibrium exchange rate in the market for the Argentinean peso.

Accepted Answer

The answer of In 1991, Argentina decided to peg its...

Question 8

During the Chinese experience with pegging the yuan to the dollar, the yuan was undervalued. As a result

Accepted Answer

A)  there was a surplus of yuan on the market that the Chinese government had to purchase to maintain the peg, depleting China's reserves of dollars. 
B)  there was a surplus of dollars on the market that the Chinese government had to purchase to maintain the peg. 
C)  the prices of Chinese exports were higher than they would have been without the peg. 
D)  the equilibrium value of the yuan was below the pegged value of the yuan.

Question 9

If a firm in Thailand borrows dollars from a U.S. bank, its interest payments on the loan in bahts will decrease if the baht appreciates against the dollar.

Accepted Answer

A) True 
 B)False

Question 10

All of the following explain why purchasing power parity does not completely explain long-run fluctuations in exchange rates except

Accepted Answer

A)  not all goods and services produced in any country are traded internationally. 
B)  consumer preferences for goods and services differ across countries. 
C)  some countries impose barriers to trade. 
D)  most countries have free markets with little, if any, government regulation.

Question 11

What determined the exchange rates among currencies under the gold standard, and what caused the gold standard to collapse?

Accepted Answer

The answer of What determined the exchange rates among currencies...

Question 12

Figure 30-10 
-Refer to Figure 30-10. Under the Bretton Woods System of exchange rates, if the par exchange rate was $4 per pound in the figure above, then which of the following is true?

Accepted Answer

A)  The Bank of England would have to buy 0.7 million pounds per day with dollars. 
B)  There is a shortage of pounds equal to 0.7 million. 
C)  The Bank of England would have to sell 0.7 million pounds per day in exchange for dollars. 
D)  The par exchange rate is below the equilibrium rate, causing a shortage of domestic currency.

Question 13

According to the theory of purchasing power parity, if the inflation rate in the United States is greater than the inflation rate in Canada, explain what should happen to the exchange rate between the U.S. dollar and the Canadian dollar.

Accepted Answer

The answer of According to the theory of purchasing power...

Question 14

Figure 30-6 
-Refer to Figure 30-6. Which of the following would cause the change depicted in the figure above?

Accepted Answer

A)  An increase in investment in infrastructure causes U.S. productivity to rise relative to Mexican productivity. 
B)  A declining preference for Kentucky bourbon causes Mexican consumers to decrease their preferences for U.S.-produced alcohol relative to Mexican-produced alcohol. 
C)  Dumping accusations result in the United States placing tariffs on produce imported from Mexico. 
D)  A contractionary monetary policy causes a decrease in the price level of U.S. goods relative to Mexican goods.

Question 15

China began pegging its currency, the yuan, to the dollar in 1994. Because the yuan was ________ at the pegged exchange rate, the Chinese government increased its reserves of ________ as the government purchased more ________ to maintain the pegged exchange rate.

Accepted Answer

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

Question 16

If, at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar, the rand is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

Accepted Answer

A)  The demand for the dollar will fall, while the supply of the rand will rise. 
B)  The demand for the dollar will rise, while the supply of the rand will fall. 
C)  The supply of the dollar will rise, while the demand for the rand will rise. 
D)  The supply of the dollar will rise, while the demand for the rand will fall.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

The United States abandoned the Bretton Woods system of exchange rates in

Accepted Answer

A)  the 1920s. 
B)  the 1940s. 
C)  the 1970s. 
D)  the 1990s.

Exam 30: The International Financial System

If the U.S. government removes tariffs it had placed on imports from countries that have been accused of deliberately undervaluing their currencies, the price of these imports will and the demand for the undervalued currency will .

What do reports that the dollar is "undervalued" mean? How will foreign exchange markets respond to this information? Support your answer graphically.

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.)

Increasing a fixed exchange rate is called a revaluation.

Exchange rates under the Bretton Woods system were determined by relative supplies of gold held by countries within the system.

During the Chinese experience with pegging the yuan to the dollar, the yuan was undervalued. As a result

If a firm in Thailand borrows dollars from a U.S. bank, its interest payments on the loan in bahts will decrease if the baht appreciates against the dollar.

All of the following explain why purchasing power parity does not completely explain long-run fluctuations in exchange rates except

What determined the exchange rates among currencies under the gold standard, and what caused the gold standard to collapse?

Figure 30-10 -Refer to Figure 30-10. Under the Bretton Woods System of exchange rates, if the par exchange rate was $4 per pound in the figure above, then which of the following is true?

According to the theory of purchasing power parity, if the inflation rate in the United States is greater than the inflation rate in Canada, explain what should happen to the exchange rate between the U.S. dollar and the Canadian dollar.

Figure 30-6 -Refer to Figure 30-6. Which of the following would cause the change depicted in the figure above?

China began pegging its currency, the yuan, to the dollar in 1994. Because the yuan was at the pegged exchange rate, the Chinese government increased its reserves of as the government purchased more to maintain the pegged exchange rate.

If, at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar, the rand is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

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

The United States abandoned the Bretton Woods system of exchange rates in