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 countries have not adopted the euro?

Accepted Answer

A)  Germany 
B)  Italy 
C)  Switzerland 
D)  France

Question 3

It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?

Accepted Answer

A)  Weaken the dollar 
B)  Strengthen the dollar 
C)  Buy dollars with foreign currency in the foreign exchange market 
D)  Implement a tight monetary policy

Question 4

In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign competition.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

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

Question 6

The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a:

Accepted Answer

A)  pegged system. 
B)  fixed system. 
C)  managed float system. 
D)  crawling peg system.

Question 7

If the Fed desires to weaken 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 8

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 9

Which one is not a disadvantage of a freely floating exchange rate system?

Accepted Answer

A)  It can adversely affect a country that has high unemployment. 
B)  It can adversely affect a country that has high inflation. 
C)  The government may intervene to change the value of a given currency. 
D)  The exchange rate risk is high and may be costly to manage.

Question 10

Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized 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 11

Countries that have adopted the euro must agree on a single ____ policy.

Accepted Answer

A)  monetary 
B)  fiscal 
C)  worker compensation 
D)  foreign relations

Question 12

To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities.

Accepted Answer

A)  buy; sell 
B)  sell; sell 
C)  sell; buy 
D)  buy ; sell

Question 13

The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro.

Accepted Answer

A) True 
 B)False

Question 14

An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.

Accepted Answer

A) True 
 B)False

Question 15

One of the best-known pegged exchange rate arrangements that was established by several European countries in April 1972 and was difficult to maintain is called the:

Accepted Answer

A)  European Monetary System (EMS). 
B)  snake agreement. 
C)  Maastricht Treaty. 
D)  European Union.

Question 16

From a financial management perspective, which of the following is true regarding the introduction of the Euro?

Accepted Answer

A)  U.S.-based MNCs are not subject to exchange rate risk when they have transactions in euros. 
B)  The euro is pegged to all other European currencies. 
C)  Transactions costs decline for MNCs that conduct transactions within Europe. 
D)  The euro replaced the British pound.

Question 17

Consider two countries that trade with each other, called X and Y. According to the text, inflation in Country X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the ____ system.

Accepted Answer

A)  floating rate; fixed rate 
B)  floating rate; floating rate 
C)  fixed rate; fixed rate 
D)  fixed rate; floating rate

Question 18

Currency devaluation can boost a country's exports, but currency revaluation can increase foreign competition.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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

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 countries have not adopted the euro?

It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?

In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign competition.

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

The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a:

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

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

Which one is not a disadvantage of a freely floating exchange rate system?

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

Countries that have adopted the euro must agree on a single ____ policy.

To weaken the dollar using sterilized intervention, the Fed will U.S. dollars and simultaneously Treasury securities.

The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro.

An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.

One of the best-known pegged exchange rate arrangements that was established by several European countries in April 1972 and was difficult to maintain is called the:

From a financial management perspective, which of the following is true regarding the introduction of the Euro?

Currency devaluation can boost a country's exports, but currency revaluation can increase foreign competition.

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.

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.