Question 1

Destabilizing speculation refers to

Accepted Answer

A)  actions taken by the International Monetary Fund that increase lending to countries who have pegged their currencies against the dollar. 
B)  actions taken by currency traders to sell a currency that is undervalued. 
C)  actions taken by investors who sell a country's currency in anticipation of buying it back later at a lower price. 
D)  any depreciation of a country's currency as a result of long-run adjustments to purchasing power parity.

Question 2

In 2010,foreign purchases of U.S.corporate stocks and bonds

Accepted Answer

A)  doubled. 
B)  fell. 
C)  grew at a faster pace than foreign investment in U.S. government bonds. 
D)  grew at a faster pace than foreign investment in U.S. corporate bonds.

Question 3

What three real-world complications keep purchasing power parity from being a complete explanation of exchange rate fluctuations in the long run? Explain.

Accepted Answer

The answer of What three real-world complications keep purchasing power...

Question 4

Fluctuating exchange rates can alter a multinational firm's profits and losses.The U.S.corporation,Motorola,produces cell phones and sells cell phones in Mexico.If the dollar depreciates against the peso,then Motorola's revenues from these operations should ________ and its costs from these operations should ________.

Accepted Answer

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

Question 5

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.In July 2011,the Economist reported that the average price of a Big Mac in the United States was $4.07.In Mexico,the average price of a Big Mac at that time was 32 pesos.If the exchange rate between the dollar and the peso was 13.60 pesos per dollar,how would purchasing power parity predict the exchange rate will change in the long run? Support your answer graphically.

Accepted Answer

The answer of The "Big Mac Theory of Exchange Rates"...

Question 6

A persistent surplus of pounds at a given fixed exchange rate (in dollars per pound)is evidence that the pound is ________ versus the dollar.This surplus can be reduced or eliminated through a ________ of the pound.

Accepted Answer

A)  undervalued; devaluation 
B)  undervalued; revaluation 
C)  overvalued; revaluation 
D)  overvalued; devaluation

Question 7

If a country's currency is "pegged" to the dollar,its exchange rate is

Accepted Answer

A)  floating. 
B)  flexible. 
C)  fixed. 
D)  undervalued.

Question 8

You decide to work in Japan for the next 10 years,accumulate some savings,then move back to the United States and convert your savings from yen to dollars.At the time of your move,economists predict that consumers in the United States have reignited their love of Japanese products,especially hybrid cars,and expect that this strong preference for Japanese products will continue for the next decade.How should this influence your decision to work and save in Japan?

Accepted Answer

A)  You should be discouraged as the growing U.S. preference for Japanese goods should increase the value of the yen to the dollar and decrease the value of your savings when converted to dollars. 
B)  You should be discouraged as the growing U.S. preference for Japanese goods should decrease the value of the yen to the dollar and decrease the value of your savings when converted to dollars. 
C)  You should be encouraged as the growing U.S. preference for Japanese goods should decrease the value of the yen to the dollar and raise the value of your savings when converted to dollars. 
D)  You should be encouraged as the growing U.S. preference for Japanese goods should increase the value of the yen to the dollar and raise the value of your savings when converted to dollars.

Question 9

How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar?

Accepted Answer

A)  Because the yuan was undervalued at the pegged exchange rate, the level of Chinese exports remained higher than they would have been if the exchange rate was allowed to float freely. 
B)  Because the yuan was overvalued at the pegged exchange rate, competing firms from other countries feared that abandoning the peg would lead to an increase in Chinese exports. 
C)  Competitors feared that the declining value of the dollar would continue to make Chinese goods more expensive. 
D)  Because China's population is so large relative to other countries, the pegged exchange rate made the goods of foreign competing firms much less expensive than domestic Chinese goods.

Question 10

Under pressure from Japan,the United States and Europe,China announced it switched from pegging the yuan against the dollar to linking the value of the yuan to a 'basket' of currencies.The result of this change was

Accepted Answer

A)  the value of the yuan increased slightly relative to the dollar. 
B)  the value of the yuan has become very responsive to changes in demand and supply in the foreign currency market. 
C)  the value of the yuan has increased dramatically and is beginning to remove the trade imbalance between the United States and China. 
D)  the value of the yuan has decreased dramatically and has further spurred Chinese exports.

Question 11

If the purchasing power of the dollar is greater than the purchasing power of the euro,purchasing power parity predicts that the exchange rate will

Accepted Answer

A)  increase if the exchange rate is greater than 1 euro per dollar. 
B)  decrease if the exchange rate is less than 1 euro per dollar. 
C)  be equal to the relative purchasing power across the currencies in the long run. 
D)  not fluctuate and stay constant in the long run.

Question 12

From the beginning of 1973 until October 2011,the value of the dollar has ________ relative to the Canadian dollar and ________ relative to the Japanese yen.

Accepted Answer

A)  appreciated; appreciated 
B)  appreciated; depreciated 
C)  depreciated; appreciated 
D)  depreciated; depreciated

Question 13

Should European nations which are not currently using the euro choose to adopt the euro as their currency,these countries would risk giving up the ability to use ________ to stabilize their economies in the event of a recession.

Accepted Answer

A)  expansionary fiscal policy 
B)  contractionary fiscal policy 
C)  expansionary monetary policy 
D)  contractionary monetary policy

Question 14

If the exchange rate between the U.S.dollar and the Indian rupee (rupees per dollar)is greater than the relative purchasing power between the two countries,which of the following would be true?

Accepted Answer

A)  There are opportunities for profit by purchasing goods in India and then selling them in the United States. 
B)  Purchasing power parity predicts that the value of the dollar will rise as traders take advantage of arbitrage opportunities. 
C)  Purchasing power parity predicts that the dollar is undervalued as traders take advantage of arbitrage opportunities. 
D)  There are no arbitrage opportunities for which traders can take advantage.

Question 15

China has been accused of deliberately undervaluing its currency,the yuan,in order to

Accepted Answer

A)  increase its exports. 
B)  increase its imports. 
C)  prevent deflation. 
D)  maintain purchasing power parity.

Question 16

The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory.In July 2011,the Economist reported that the average price of a Big Mac in the U.S.was $4.07.In Mexico,the average price of a Big Mac at that time was 32 pesos.What is the "implied exchange rate" between the peso and the dollar?

Accepted Answer

A)  1.30 pesos per dollar 
B)  4.17 pesos per dollar 
C)  7.86 pesos per dollar 
D)  12.72 pesos per dollar

Question 17

You are a Canadian citizen who works in Toronto,Canada and owns a winter home in Phoenix,Arizona.When you spend the winters in Phoenix,an increase in the value of the Canadian dollar relative to the U.S.dollar should

Accepted Answer

A)  help you as each Canadian dollar of your salary is now worth more U.S. dollars. 
B)  hurt you as each Canadian dollar of your salary is now worth less U.S. dollars. 
C)  hurt you as it is now more expensive to live in Phoenix since the Canadian dollar appreciation. 
D)  help you as it is now less expensive to live in Canada since the Canadian dollar appreciation.

Question 18

Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?

Accepted Answer

A)  borrowing dollars from the International Monetary Fund in exchange for baht 
B)  buying baht on the foreign exchange market to support higher demand for the baht 
C)  increasing domestic interest rates to attract more foreign investors 
D)  foreigners selling off of new investments in Thailand

Question 19

What is destabilizing speculation? What role did it play in the collapse of the Bretton Woods system?

Accepted Answer

The answer of What is destabilizing speculation? What role did...

Question 20

Investors in which country accounted for about half of all foreign purchases of U.S.stocks and bonds in 2010?

Accepted Answer

A)  Japan 
B)  the United Kingdom 
C)  China 
D)  Mexico

Exam 19: The International Financial System

Destabilizing speculation refers to

In 2010,foreign purchases of U.S.corporate stocks and bonds

What three real-world complications keep purchasing power parity from being a complete explanation of exchange rate fluctuations in the long run? Explain.

A persistent surplus of pounds at a given fixed exchange rate (in dollars per pound) is evidence that the pound is versus the dollar.This surplus can be reduced or eliminated through a of the pound.

If a country's currency is "pegged" to the dollar,its exchange rate is

How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar?

Under pressure from Japan,the United States and Europe,China announced it switched from pegging the yuan against the dollar to linking the value of the yuan to a 'basket' of currencies.The result of this change was

If the purchasing power of the dollar is greater than the purchasing power of the euro,purchasing power parity predicts that the exchange rate will

From the beginning of 1973 until October 2011,the value of the dollar has relative to the Canadian dollar and relative to the Japanese yen.

Should European nations which are not currently using the euro choose to adopt the euro as their currency,these countries would risk giving up the ability to use ________ to stabilize their economies in the event of a recession.

If the exchange rate between the U.S.dollar and the Indian rupee (rupees per dollar) is greater than the relative purchasing power between the two countries,which of the following would be true?

China has been accused of deliberately undervaluing its currency,the yuan,in order to

You are a Canadian citizen who works in Toronto,Canada and owns a winter home in Phoenix,Arizona.When you spend the winters in Phoenix,an increase in the value of the Canadian dollar relative to the U.S.dollar should

Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?

What is destabilizing speculation? What role did it play in the collapse of the Bretton Woods system?

Investors in which country accounted for about half of all foreign purchases of U.S.stocks and bonds in 2010?

Exam 19: The International Financial System

Destabilizing speculation refers to

In 2010,foreign purchases of U.S.corporate stocks and bonds

What three real-world complications keep purchasing power parity from being a complete explanation of exchange rate fluctuations in the long run? Explain.

A persistent surplus of pounds at a given fixed exchange rate (in dollars per pound) is evidence that the pound is ________ versus the dollar.This surplus can be reduced or eliminated through a ________ of the pound.

If a country's currency is "pegged" to the dollar,its exchange rate is

How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar?

Under pressure from Japan,the United States and Europe,China announced it switched from pegging the yuan against the dollar to linking the value of the yuan to a 'basket' of currencies.The result of this change was

If the purchasing power of the dollar is greater than the purchasing power of the euro,purchasing power parity predicts that the exchange rate will

From the beginning of 1973 until October 2011,the value of the dollar has ________ relative to the Canadian dollar and ________ relative to the Japanese yen.

Should European nations which are not currently using the euro choose to adopt the euro as their currency,these countries would risk giving up the ability to use ________ to stabilize their economies in the event of a recession.

If the exchange rate between the U.S.dollar and the Indian rupee (rupees per dollar) is greater than the relative purchasing power between the two countries,which of the following would be true?

China has been accused of deliberately undervaluing its currency,the yuan,in order to

You are a Canadian citizen who works in Toronto,Canada and owns a winter home in Phoenix,Arizona.When you spend the winters in Phoenix,an increase in the value of the Canadian dollar relative to the U.S.dollar should

Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?

What is destabilizing speculation? What role did it play in the collapse of the Bretton Woods system?

Investors in which country accounted for about half of all foreign purchases of U.S.stocks and bonds in 2010?

A persistent surplus of pounds at a given fixed exchange rate (in dollars per pound) is evidence that the pound is versus the dollar.This surplus can be reduced or eliminated through a of the pound.

From the beginning of 1973 until October 2011,the value of the dollar has relative to the Canadian dollar and relative to the Japanese yen.