Question 1

Given an initial equilibrium in the money market and foreign exchange market,suppose the Federal Reserve decreases the money supply of the United States.Under a floating exchange rate system,the dollar would:

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)  Be officially revalued by the government

Question 2

Under a floating exchange-rate system,if American exports increase and American imports fall,the value of the dollar will:

Accepted Answer

A)  Appreciate 
B)  Depreciate 
C)  Be officially revalued 
D)  Be officially devalued

Question 3

To help insulate their economies from inflation,currency depreciation,and capital flight,developing countries have implemented:

Accepted Answer

A)  Regional trading blocs 
B)  Currency boards 
C)  Central banks 
D)  Regional fiscal policies

Question 4

If Uganda revalues its shilling by 20 percent and Burundi devalues its franc by 5 percent,the shillings exchange value will appreciate by 25 percent against the franc.

Accepted Answer

A) True 
 B)False

Question 5

In recent years,the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade.The United States has argued that China has

Accepted Answer

A)  maintained an overvalued yuan that makes U.S.exports to China more expensive 
B)  maintained an undervalued yuan that makes U.S.exports to China more expensive 
C)  helped the yuan's exchange value to appreciate,thus making U.S.exports to China more expensive 
D)  revalued the yuan by adjusting its part value upward,thus making U.S.exports to China more expensive

Question 6

The purpose of an exchange stabilization fund is to ensure that the market exchange rate does not deviate beyond unacceptable levels from the official exchange rate.

Accepted Answer

A) True 
 B)False

Question 7

Proponents of a fixed exchange rate system maintain that it is superior to a freely floating exchange rate system because it

Accepted Answer

A)  keeps inflation under control 
B)  provides a simple and clear exchange-rate target 
C)  provides continuous adjustment in the balance of payments 
D)  helps prevent disorderly exchange rate movements that can disrupt trade

Question 8

Under a system of fixed exchange rates,the purpose of currency devaluation is to cause the exchange value of a currency to ______,thus counteracting a balance-of-payments ______.

Accepted Answer

A)  depreciate; deficit 
B)  depreciate; surplus 
C)  appreciate; deficit 
D)  appreciate; surplus

Question 9

Although controls on the outflow of capital for developing countries may be appealing,they tend to suffer from people finding ways to evade the controls and move funds out of the country.

Accepted Answer

A) True 
 B)False

Question 10

A potential disadvantage of freely floating exchange rates is that there would:

Accepted Answer

A)  Exist excessive amounts of hedging in the foreign exchange markets 
B)  Be a lack of incentive to initiate exchange arbitrage 
C)  Be excessive amounts of destabilizing speculation 
D)  Exist a devaluation bias in the exchange markets

Question 11

To keep the pound's exchange value from depreciating against the franc,the British exchange stabilization fund would sell pounds for francs on the foreign exchange market.

Accepted Answer

A) True 
 B)False

Question 12

Figure 15.2
Market for the British Pound
 
-Refer to Figure 15.2.Demand and supply of British Pounds is initially D0 and S0.With a system of floating exchange rates,the equilibrium exchange rate is:

Accepted Answer

A)  $0.40 per pound 
B)  $0.60 per pound 
C)  $0.80 per pound 
D)  $1.00 per pound

Question 13

Countries tend to be less served by a fixed exchange rate system when

Accepted Answer

A)  they are small,open economies 
B)  their inflation differentials are modest 
C)  they are highly exposed to international capital movements 
D)  their wages are quite flexible to changing market conditions

Question 14

Pegging to a single currency is generally done by developing nations whose trade and financial relationships are mainly with a single industrial-country partner.

Accepted Answer

A) True 
 B)False

Question 15

How can currency boards and dollarization prevent currency crises?

Accepted Answer

The answer of How can currency boards and dollarization prevent...

Question 16

For a developing country,a _____ can foster economic instability because it can result in a lending boom and ______ by banks,which promotes a financial crisis.

Accepted Answer

A)  capital inflow; excessive risk taking 
B)  capital inflow; inadequate risk taking 
C)  capital outflow; excessive risk taking 
D)  capital outflow; inadequate risk taking

Question 17

A potential limitation of freely floating exchange rates is that:

Accepted Answer

A)  Countries require a larger amount of international reserves than otherwise 
B)  Countries are unable to initiate economic policies to combat unemployment 
C)  Exchange rates may experience wide and frequent fluctuations 
D)  Demand tends to be highly sensitive to price movements

Question 18

A surplus nation can reduce its payments imbalance by:

Accepted Answer

A)  Applying tariffs and trade restrictions on imports 
B)  Revaluing its national currency 
C)  Increasing its labor productivity 
D)  Setting higher interest rates than its trading partners

Question 19

The U.S.dollar is generally regarded as the major "key currency" of the international monetary system.

Accepted Answer

A) True 
 B)False

Question 20

Unlike floating exchange rates,fixed exchange rates are not characterized by par values and central bank intervention in the foreign exchange market.

Accepted Answer

A) True 
 B)False

Exam 15: Exchange Rate Systems and Currency Crises

Given an initial equilibrium in the money market and foreign exchange market,suppose the Federal Reserve decreases the money supply of the United States.Under a floating exchange rate system,the dollar would:

Under a floating exchange-rate system,if American exports increase and American imports fall,the value of the dollar will:

To help insulate their economies from inflation,currency depreciation,and capital flight,developing countries have implemented:

If Uganda revalues its shilling by 20 percent and Burundi devalues its franc by 5 percent,the shillings exchange value will appreciate by 25 percent against the franc.

In recent years,the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade.The United States has argued that China has

The purpose of an exchange stabilization fund is to ensure that the market exchange rate does not deviate beyond unacceptable levels from the official exchange rate.

Proponents of a fixed exchange rate system maintain that it is superior to a freely floating exchange rate system because it

Under a system of fixed exchange rates,the purpose of currency devaluation is to cause the exchange value of a currency to ,thus counteracting a balance-of-payments .

Although controls on the outflow of capital for developing countries may be appealing,they tend to suffer from people finding ways to evade the controls and move funds out of the country.

A potential disadvantage of freely floating exchange rates is that there would:

To keep the pound's exchange value from depreciating against the franc,the British exchange stabilization fund would sell pounds for francs on the foreign exchange market.

Figure 15.2 Market for the British Pound -Refer to Figure 15.2.Demand and supply of British Pounds is initially D0 and S0.With a system of floating exchange rates,the equilibrium exchange rate is:

Countries tend to be less served by a fixed exchange rate system when

Pegging to a single currency is generally done by developing nations whose trade and financial relationships are mainly with a single industrial-country partner.

How can currency boards and dollarization prevent currency crises?

For a developing country,a _ can foster economic instability because it can result in a lending boom and __ by banks,which promotes a financial crisis.

A potential limitation of freely floating exchange rates is that:

A surplus nation can reduce its payments imbalance by:

The U.S.dollar is generally regarded as the major "key currency" of the international monetary system.

Unlike floating exchange rates,fixed exchange rates are not characterized by par values and central bank intervention in the foreign exchange market.