Question 1

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 2

Which of the following is not true regarding the Mexican peso crisis?

Accepted Answer

A) Mexico encouraged firms and consumers to buy an excessive amount of imports because the peso was stronger than it should have been. 
B) Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in Mexico. 
C) In December of 1994, the central bank of Mexico allowed the peso to float freely. 
D) The central bank of Mexico increased interest rates aFter the peso declined in value in order to prevent investors from withdrawing their investments in Mexico's debt securities. 
E) All of the above are true.

Question 3

While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive foreign prices that result from a strong home currency.

Accepted Answer

A) True 
 B)False

Question 4

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 5

To force the value of the pound to appreciate against the dollar, the Federal Reserve should:​

Accepted Answer

A) sell dollars for pounds in the foreign exchange market and the European Central Bank (EC
B)  should sell dollars for pounds in the foreign exchange market. 
B) sell pounds for dollars in the foreign exchange market and the European Central Bank (EC
B)  should sell dollars for pounds in the foreign exchange market. 
C) sell pounds for dollars in the foreign exchange market and the European Central Bank (EC
B)  should not intervene. 
D) sell dollars for pounds in the foreign exchange market and the European Central Bank (EC
B)  should sell pounds for dollars in the foreign exchange market.

Question 6

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

Question 7

The Bretton Woods Agreement created a system under which exchange rates are determined by market forces without intervention by various governments.

Accepted Answer

A) True 
 B)False

Question 8

Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would

Accepted Answer

A) buy dollars with foreign currency and simultaneously sell Treasury securities for dollars. 
B) buy dollars with foreign currency and simultaneously buy Treasury securities with dollars. 
C) sell dollars for foreign currency and simultaneously sell Treasury securities for dollars. 
D) sell dollars for foreign currency and simultaneously buy Treasury securities with dollars. 
E) none of the above

Question 9

Which of the following did not occur as a result of Bretton Woods Agreement?

Accepted Answer

A) Each currency was valued in terms of gold. 
B) Values of all currencies were fixed with respect to each other. 
C) Currencies were allowed to fluctuate no more than 1% above or below the initially set rates. 
D) The United States experienced no balance-of-trade deficits.

Question 10

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.

Question 11

Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?

Accepted Answer

A) Thailand. 
B) Indonesia. 
C) Russia. 
D) China. 
E) Malaysia.

Question 12

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

Accepted Answer

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

Question 13

If the Bank of England announces that it will start to frequently intervene in order to reduce the fluctuations of British pound, the premiums on call and put options will increase.

Accepted Answer

A) True 
 B)False

Question 14

The Asian crisis is generally believed to have started in Japan.

Accepted Answer

A) True 
 B)False

Question 15

A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on financial flows than the governments of other Asian countries.

Accepted Answer

A) True 
 B)False

Question 16

In order to stimulate a stagnant economy, a government operating under a managed float may attempt to weaken its currency.

Accepted Answer

A) True 
 B)False

Question 17

The Fed's indirect method of intervention is to trade dollars for or against other currencies.

Accepted Answer

A) True 
 B)False

Question 18

A "dirty" float represents a system of:

Accepted Answer

A) freely floating exchange rates. 
B) fixed exchange rates. 
C) floating exchange rates, but the central bank can manipulate the currency. 
D) fixed exchange rates, but the central bank can manipulate the currency.

Question 19

If the Fed desires to strengthen 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.

Question 20

Which of the following is not true regarding the eurozone?

Accepted Answer

A) Members cannot set unique monetary policy individually. 
B) Members cannot apply their own fiscal policies. 
C) Members have to agree on the ideal monetary policy. 
D) Its creation allowed for greater political union among its members.

Exam 6: Government Influence on Exchange Rates

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.

Which of the following is not true regarding the Mexican peso crisis?

While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive foreign prices that result from a strong home currency.

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.

To force the value of the pound to appreciate against the dollar, the Federal Reserve should:​

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

The Bretton Woods Agreement created a system under which exchange rates are determined by market forces without intervention by various governments.

Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would

Which of the following did not occur as a result of Bretton Woods Agreement?

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

Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?

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

If the Bank of England announces that it will start to frequently intervene in order to reduce the fluctuations of British pound, the premiums on call and put options will increase.

The Asian crisis is generally believed to have started in Japan.

A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on financial flows than the governments of other Asian countries.

In order to stimulate a stagnant economy, a government operating under a managed float may attempt to weaken its currency.

The Fed's indirect method of intervention is to trade dollars for or against other currencies.

A "dirty" float represents a system of:

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

Which of the following is not true regarding the eurozone?

To force the value of the pound to appreciate against the dollar, the Federal Reserve should: