Question 1

With fixed exchange rates, assume that the home currency becomes overvalued relative to its par value.Other things equal, to maintain the fixed exchange rate the home country's central bank must

Accepted Answer

A)  purchase the home currency, and as a result it loses international reserves. 
B)  purchase the home currency, and as a result it gains international reserves. 
C)  sell the home currency, and as a result it loses international reserves. 
D)  sell the home currency, and as a result it gains international reserves.

Question 2

Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve increases the money supply of the United States.Other things equal, under a floating exchange rate system, the dollar will likely

Accepted Answer

A)  appreciate in value relative to other currencies. 
B)  depreciate in value relative to other currencies. 
C)  be officially devalued by the government. 
D)  neither appreciate nor depreciate.

Question 3

Sources of a currency crisis often include weak financial systems and budget deficits financed by inflation.

Accepted Answer

A) True 
 B)False

Question 4

In 1973, the major industrial countries terminated managed floating exchange rates and adopted adjustable pegged exchange rates.

Accepted Answer

A) True 
 B)False

Question 5

Which exchange rate system does NOT require monetary reserves for official exchange rate intervention?

Accepted Answer

A)  floating exchange rates 
B)  pegged exchange rates 
C)  managed floating exchange rates 
D)  dual exchange rates

Question 6

The par values of most developing-country currencies are currently defined in terms of gold.

Accepted Answer

A) True 
 B)False

Question 7

Many developing nations with low inflation rates have pegged their currencies to the U.S.dollar as a way of allowing modest increases in domestic inflation rates.

Accepted Answer

A) True 
 B)False

Question 8

The purpose of currency devaluation is to cause the home country's exchange value to appreciate, thus reducing a balance of trade surplus.

Accepted Answer

A) True 
 B)False

Question 9

Other things equal, under a floating exchange rate system, an increase in U.S.imports of Japanese goods will cause a demand for Japanese yen to

Accepted Answer

A)  increase, inducing a depreciation in the yen. 
B)  decrease, inducing a depreciation in the yen. 
C)  increase, inducing an appreciation in the yen. 
D)  decrease, inducing an appreciation in the yen.

Question 10

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D0 and S0 respectively. 
Figure 15.1. The Market for the Swiss Franc
? 
-Refer to Figure 15.1.Suppose the demand for francs increases from D0 to D1.Other things equal, under a fixed exchange rate system, the U.S.exchange stabilization fund could maintain a fixed exchange rate of $0.50 per franc by

Accepted Answer

A)  selling francs for dollars on the foreign exchange market. 
B)  selling dollars for francs on the foreign exchange market. 
C)  decreasing U.S. exports, thus decreasing the supply of francs. 
D)  stimulating U.S. imports, thus increasing the demand for francs.

Question 11

If Uganda sets its par value at 400 shillings per SDR and Burundi sets its par value at 200 francs per SDR, the official exchange rate is 1 franc = o.5 shillings.

Accepted Answer

A) True 
 B)False

Question 12

Which exchange rate mechanism calls for frequent redefining of the par value by small amounts to remove a payment's disequilibrium?

Accepted Answer

A)  dual exchange rates 
B)  adjustable pegged exchange rates 
C)  managed floating exchange rates 
D)  crawling pegged exchange rates

Question 13

Under the historic adjustable pegged exchange rate system, member countries were permitted to correct persistent and sizable payment deficits (i.e., fundamental disequilibrium) by

Accepted Answer

A)  officially revaluing their currencies. 
B)  officially devaluing their currencies. 
C)  allowing their currencies to depreciate in the free market. 
D)  allowing their currencies to appreciate in the free market.

Question 14

Smaller nations with relatively undiversified economies and large trade sectors tend to peg their currencies to one of the world's key currencies.

Accepted Answer

A) True 
 B)False

Question 15

For developing countries, currency boards and dollarization are intended to

Accepted Answer

A)  convince speculators that the exchange rate is unchangeable. 
B)  promote confidence in the soundness of the nation's money supply. 
C)  arrest any tendencies in an economy toward inflation. 
D)  All of these are correct.

Question 16

Large industrial nations with diversified economies and small trade sectors have generally pegged their currencies to one of the world's key currencies.

Accepted Answer

A) True 
 B)False

Question 17

Most developing countries have chosen to allow their currencies to float independently in the foreign exchange market.

Accepted Answer

A) True 
 B)False

Question 18

Other things equal, under managed floating exchange rates, if the rate of inflation in the United States is less than the rate of inflation of its trading partners, the dollar will likely

Accepted Answer

A)  appreciate against foreign currencies. 
B)  depreciate against foreign currencies. 
C)  be officially revalued by the government. 
D)  be officially devalued by the government.

Question 19

With fixed exchange rates, assume that the home currency becomes undervalued-that is, above its par value when expressed as the home currency price of the foreign currency.Other things equal, to maintain the fixed exchange rate the home country's central bank must

Accepted Answer

A)  sell the home currency and purchase foreign currencies. 
B)  sell the home currency and sell foreign currencies. 
C)  purchase the home currency and sell foreign currencies. 
D)  purchase the home currency and purchase foreign currencies.

Question 20

Most nations currently allow their currencies' exchange values to be determined solely by the forces of supply and demand in a free market.

Accepted Answer

A) True 
 B)False

Exam 14: Exchange Rate Adjustments and the Balance of Payments

With fixed exchange rates, assume that the home currency becomes overvalued relative to its par value.Other things equal, to maintain the fixed exchange rate the home country's central bank must

Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve increases the money supply of the United States.Other things equal, under a floating exchange rate system, the dollar will likely

Sources of a currency crisis often include weak financial systems and budget deficits financed by inflation.

In 1973, the major industrial countries terminated managed floating exchange rates and adopted adjustable pegged exchange rates.

Which exchange rate system does NOT require monetary reserves for official exchange rate intervention?

The par values of most developing-country currencies are currently defined in terms of gold.

Many developing nations with low inflation rates have pegged their currencies to the U.S.dollar as a way of allowing modest increases in domestic inflation rates.

The purpose of currency devaluation is to cause the home country's exchange value to appreciate, thus reducing a balance of trade surplus.

Other things equal, under a floating exchange rate system, an increase in U.S.imports of Japanese goods will cause a demand for Japanese yen to

If Uganda sets its par value at 400 shillings per SDR and Burundi sets its par value at 200 francs per SDR, the official exchange rate is 1 franc = o.5 shillings.

Which exchange rate mechanism calls for frequent redefining of the par value by small amounts to remove a payment's disequilibrium?

Under the historic adjustable pegged exchange rate system, member countries were permitted to correct persistent and sizable payment deficits (i.e., fundamental disequilibrium) by

Smaller nations with relatively undiversified economies and large trade sectors tend to peg their currencies to one of the world's key currencies.

For developing countries, currency boards and dollarization are intended to

Large industrial nations with diversified economies and small trade sectors have generally pegged their currencies to one of the world's key currencies.

Most developing countries have chosen to allow their currencies to float independently in the foreign exchange market.

Other things equal, under managed floating exchange rates, if the rate of inflation in the United States is less than the rate of inflation of its trading partners, the dollar will likely

With fixed exchange rates, assume that the home currency becomes undervalued-that is, above its par value when expressed as the home currency price of the foreign currency.Other things equal, to maintain the fixed exchange rate the home country's central bank must

Most nations currently allow their currencies' exchange values to be determined solely by the forces of supply and demand in a free market.