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

When foreign investors in Thailand began to realize that Thailand could not maintain its peg to the dollar indefinitely, they began to sell off their investments in Thailand and exchange the baht they received for dollars. This reduction in investment by foreigners is termed

Accepted Answer

A)  foreign direct investment. 
B)  capital flight. 
C)  capital inflow. 
D)  stabilizing capitalization.

Question 3

During the Chinese experience with pegging the yuan to the dollar, the yuan was undervalued. As a result,

Accepted Answer

A)  there was a surplus of yuan on the market that the Chinese government had to purchase to maintain the peg, depleting China's reserves of dollars. 
B)  there was a surplus of dollars on the market that the Chinese government had to purchase to maintain the peg. 
C)  the prices of Chinese exports were higher than they would have been without the peg. 
D)  the equilibrium value of the yuan was below the pegged value of the yuan.

Question 4

If interest rates in the United States rise,

Accepted Answer

A)  the value of the dollar will fall as foreign investors sell their U.S. investments. 
B)  the value of the dollar will rise as the 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 sell their U.S. investments.

Question 5

Why did the United States abandon the gold standard in the 1930s?

Accepted Answer

A)  The government wanted to rapidly expand the money supply in response to the Great Depression. 
B)  The government wanted to move away from a floating exchange rate system to a fixed exchange rate system. 
C)  The Treasury Department in the United States found it was cheaper to print paper money instead of gold coins. 
D)  New sources of gold were discovered, so the price of gold plummeted, dramatically reducing the value of the dollar.

Question 6

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 7

Why do countries peg their currencies, and what problems can result from pegging?

Accepted Answer

The answer of Why do countries peg their currencies, and...

Question 8

China's exchange rate system from 1994 through 2005 is an example of

Accepted Answer

A)  a floating exchange rate system. 
B)  a managed float exchange rate system. 
C)  a fixed exchange rate system. 
D)  a flexible exchange rate system. 
E)  the Bretton Woods System.

Question 9

A currency pegged at a value below the market equilibrium exchange rate is

Accepted Answer

A)  overvalued. 
B)  undervalued. 
C)  achieving purchasing power parity. 
D)  None of the above are correct.

Question 10

What is the connection between the gold held at the Fort Knox Bullion Depository in Kentucky and the U.S. money supply?

Accepted Answer

The answer of What is the connection between the gold...

Question 11

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 12

How will the exchange rate (foreign currency per dollar) respond to an increase 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 13

If the implied exchange rate between Big Mac prices in the United States and Poland is 2.13 zlotys per dollar, but the actual exchange rate between the United States and Poland is 3.16 zlotys per dollar, which of the following would you expect to see?

Accepted Answer

A)  an appreciation of the dollar 
B)  an increase in the demand for zlotys 
C)  an increase in the demand for dollars 
D)  Both A and C are correct.

Question 14

All of the following explain why purchasing power parity does not completely explain long-run fluctuations in exchange rates except

Accepted Answer

A)  not all goods and services produced in any country are traded internationally. 
B)  consumer preferences for goods and services differ across countries. 
C)  some countries impose barriers to trade. 
D)  most countries have free markets with little, if any, government regulation.

Question 15

Under the Bretton Woods system, the World Trade Organization (WTO) provided foreign currency loans to central banks and approved adjustments to the agreed upon fixed exchange rates.

Accepted Answer

A) True 
 B)False

Question 16

The current exchange rate system has which of the following characteristics?

Accepted Answer

A)  The United States allows the dollar to float against other major currencies. 
B)  All developing countries allow their currencies to float against the dollar and other major currencies. 
C)  The countries of the European Union have adopted the gold standard. 
D)  Several developing countries in Asia have adopted the Bretton Woods system. 
E)  The current global foreign exchange system is a fixed system.

Question 17

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory. In July 2013, The Economist reported that the average price of a Big Mac in the United States was $4.56. In Switzerland, the average price of a Big Mac at that time was 6.50 Swiss francs. If the exchange rate between the dollar and the Swiss franc was 0.93 Swiss francs 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 18

If the purchasing power of a dollar is greater than the purchasing power of the yen, purchasing power parity would predict that

Accepted Answer

A)  in the short run, exchange rates will move to equalize the purchasing power of the dollar and the yen. 
B)  in the long run, exchange rates will move to equalize the purchasing power of the dollar and the yen. 
C)  in the long run, interest rates will move to equalize the purchasing power of the dollar and the yen. 
D)  in the short run, interest rates will move to equalize the purchasing power of the dollar and the yen.

Question 19

If the exchange rate between the U.S. dollar and the Mexican peso (pesos per dollar) is less 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 the United States and then selling them in Mexico. 
B)  Purchasing power parity predicts that the value of the dollar will fall as traders take advantage of arbitrage opportunities. 
C)  Purchasing power parity predicts that the dollar is overvalued as traders take advantage of arbitrage opportunities. 
D)  There are no arbitrage opportunities for which traders can take advantage.

Question 20

Why might a country raise interest rates in the face of an exchange rate crisis?

Accepted Answer

The answer of Why might a country raise interest rates...

Exam 30: The International Financial System