Question 1

Table 30-1
  
Source: "The Big Mac Index," Economist, July 28, 2011.
-Refer to Table 30-1.Fill in the missing values in the above table.Assume the Big Mac is selling for $4.07 in the United States.Explain whether the U.S.dollar is overvalued or undervalued relative to each of the other currencies and predict what will happen in the future to each exchange rate.

Accepted Answer

To calculate the implied exchange rate,divide the foreign currency price of a Big Mac by the U.S.price.
  The U.S.dollar is overvalued if the actual exchange rate is greater than the implied exchange rate,and undervalued if the actual exchange rate is less than the implied exchange rate.In this case,the U.S.dollar is overvalued against the Peruvian new sol and the Turkish lira,and it is undervalued against the Danish krone and Swedish krona.Overvaluation of the U.S.dollar would lead us to predict that the value of the dollar would fall in the future relative to the new sol and the lira.Undervaluation of the U.S.dollar would lead us to predict that the dollar's value would rise in the future relative to the krone and the krona.

Question 2

Although the pegged exchange rate between the yuan and the dollar has ________ the yuan,China has been reluctant to abandon the peg for fear that abandoning the peg would ________.

Accepted Answer

A)   undervalued; reduce exports
B)   undervalued; reduce imports
C)   overvalued; increase imports
D)   overvalued; reduce exports A

Question 3

How will the exchange rate (foreign currency per dollar)respond to an increase in preference for imported goods in the United States in the long run?

Accepted Answer

A)   Exchange rates will rise.
B)   Exchange rates will fall.
C)   Exchange rates will be unaffected by changes in the relative rate of productivity growth in the United States, both in the short run and in the long run.
D)   The exchange rate will be affected in the short run, but not in the long run. B

Question 4

During the Chinese experience with pegging the yuan to the dollar,the yuan was ________.As a result,there was a ________ of dollars on the market,and the Chinese government had to purchase dollars to maintain the peg.

Accepted Answer

A)   overvalued; shortage
B)   undervalued; surplus
C)   overvalued; surplus
D)   undervalued; shortage

Question 5

If a country's currency ________ the dollar,its exchange rate is fixed.

Accepted Answer

A)   is exchanged in currency markets for
B)   depreciates against
C)   is pegged to
D)   has a floating exchange rate value which is equal to

Question 6

Figure 30-7
 
-Refer to Figure 30-7.The graph above depicts supply and demand for U.S.dollars during a trading day,where the quantity is millions of dollars. In order to support a fixed exchange rate of 0.30 pounds per dollar,the British central bank must

Accepted Answer

A)   buy 0.4 million dollars per trading day.
B)   sell 0.4 million dollars per trading day.
C)   buy 0.8 million dollars per trading day.
D)   sell 0.8 million dollars per trading day.

Question 7

If the average productivity of Indian firms is rising more quickly than the average productivity of American firms,which of the following would you expect to see? (India's currency is the rupee.)

Accepted Answer

A)   a decrease in the value of the rupee relative to the dollar
B)   an increase in the prices of Indian products
C)   an increase in the quantity demanded of Indian products relative to American products
D)   All of the above are correct.

Question 8

Figure 30-1
 
-Refer to Figure 30-1. Which of the following would cause the change depicted in the figure above?

Accepted Answer

A)   U.S. productivity falls relative to European productivity.
B)   Americans increase their preferences for goods produced in the EU relative to American goods.
C)   The European Union increases its quotas on Italian wine.
D)   The price level of goods produced in the EU decreases relative to the price level of goods produced in the United States.

Question 9

Under the Bretton Woods system,U.S.dollars were redeemable for ________ only if the dollars were presented by a foreign central bank?

Accepted Answer

A)   silver
B)   foreign currency
C)   gold
D)   U.S. Treasury bonds

Question 10

The Bretton Woods exchange rate system was a

Accepted Answer

A)   floating exchange rate system.
B)   managed float exchange rate system.
C)   fixed exchange rate system.
D)   flexible exchange rate system.

Question 11

The currency adopted by most countries in ________ is referred to as the euro.

Accepted Answer

A)   Western Europe
B)   Eastern Europe
C)   Europe and Asia
D)   Southern Europe and Northern Africa

Question 12

All of the following are considered among the four most important determinants in explaining exchange rate fluctuations in the long run except

Accepted Answer

A)   tariffs and quotas.
B)   preferences for domestic and foreign goods.
C)   interest rates.
D)   relative rates of productivity growth across countries.

Question 13

By the late 1950s,dollars held by foreign central banks exceeded the official dollar value of U.S.gold reserves.

Accepted Answer

A) True 
 B)False

Question 14

If one U.S.dollar could be exchanged for one Australian dollar in 1970,and one U.S.dollar can now be exchanged for 0.98 Australian dollars,which of the following is true?

Accepted Answer

A)   The U.S. dollar gained value against the Australian dollar.
B)   The Australian dollar lost value against the U.S. dollar.
C)   The Australian dollar gained value against the U.S. dollar.
D)   Both A and C are true.

Question 15

Figure 30-7
 
-Limits on the flow of foreign exchange and financial investment across countries are called

Accepted Answer

A)   capital controls.
B)   fixed exchange rates.
C)   credit constraints.
D)   currency restrictions.

Question 16

A persistent shortage or surplus of a currency under the Bretton Woods system was evidence of

Accepted Answer

A)   failure to support the existing fixed exchange rate by central banks.
B)   fundamental disequilibrium in the country's exchange rate.
C)   speculation against the currency by speculators in world exchange markets.
D)   all of the above

Question 17

If currencies around the world are based on the gold standard,and the EU lowers the amount of gold for which the euro will trade,then holding all else constant,

Accepted Answer

A)   the euro will depreciate against the dollar.
B)   the euro will appreciate against the dollar.
C)   the value of the euro relative to the dollar will stay constant.
D)   the value of U.S. exports to EU countries in terms of the euro will decrease.

Question 18

If interest rates in the United States fall,

Accepted Answer

A)   the value of the dollar will fall as foreign investors decrease their holdings of U.S. investments.
B)   the value of the dollar will rise as foreign investors increase their holdings of U.S. investments.
C)   the value of the dollar will fall as foreign investors increase their holdings of U.S. investments.
D)   the value of the dollar will rise as foreign investors decrease their holdings of U.S. investments.

Question 19

How will the exchange rate (foreign currency per dollar)respond to a decrease in the relative rate of productivity growth in the United States in the long run?

Accepted Answer

A)   Exchange rates will rise.
B)   Exchange rates will fall.
C)   Exchange rates will be unaffected by changes in the relative rate of productivity growth in the United States, both in the short run and in the long run.
D)   The exchange rate will be affected in the short run, but not in the long run.

Question 20

In order to maintain an undervalued yuan to encourage a trade surplus,the Chinese government must buy dollars and increase the supply of yuan.

Accepted Answer

A) True 
 B)False

Exam 19: The International Financial System

Although the pegged exchange rate between the yuan and the dollar has the yuan,China has been reluctant to abandon the peg for fear that abandoning the peg would .

How will the exchange rate (foreign currency per dollar) respond to an increase in preference for imported goods in the United States in the long run?

During the Chinese experience with pegging the yuan to the dollar,the yuan was .As a result,there was a of dollars on the market,and the Chinese government had to purchase dollars to maintain the peg.