Question 1

When a currency is allowed to float between upper and lower rates but not allowed to move outside this band, it is called

Accepted Answer

A)  crawling peg. 
B)  exchange rate band. 
C)  dirty floating. 
D)  adjustable peg. 
A)  crawling peg. 
B)  exchange rate band. 
C)  dirty floating. 
D)  adjustable peg. B

Question 2

Are the following shocks internal or external?
(a) An increase in the marginal propensity to save
(b) A fall in the demand for exports
(c) An increase in the rate of income tax
(d) A recovery in the world economy

Accepted Answer

(a) and (c) are internal
(b) and (d) are external

Question 3

Which of the following statements is correct?

Accepted Answer

A)  The overall sum of all the entries in the balance of payments must be positive. 
B)  The overall sum of all the entries in the balance of payments must be zero. 
C)  If the current account is in deficit, then the capital account must also be in deficit. 
D)  If the current account is in surplus, then the capital account must also be in surplus. 
A)  The overall sum of all the entries in the balance of payments must be positive. 
B)  The overall sum of all the entries in the balance of payments must be zero. 
C)  If the current account is in deficit, then the capital account must also be in deficit. 
D)  If the current account is in surplus, then the capital account must also be in surplus. B

Question 4

If countries attempt to achieve similar rates of economic growth through demand management policy, for which of the following reasons may the equilibrium rate of exchange change over the longer term?
(i) The marginal propensity to import differs from one country to another.
(ii) The relative income elasticities of demand for imports and exports differ from one country to another.
(iii) The rate of growth of productivity differs from one country to another.

Accepted Answer

A)  (i) and (iii) 
B)  (ii) 
C)  (i) and (ii) 
D)  (ii) and (iii) 
E)  (i), (ii) and (iii) 
A)  (i) and (iii) 
B)  (ii) 
C)  (i) and (ii) 
D)  (ii) and (iii) 
E)  (i), (ii) and (iii)

Question 5

All currencies other than the domestic currency of a given country are referred to as

Accepted Answer

A)  hard currency. 
B)  near monies. 
C)  foreign currency. 
D)  reserve currency. 
A)  hard currency. 
B)  near monies. 
C)  foreign currency. 
D)  reserve currency.

Question 6

Under the Bretton Woods pegged exchange rate regime governments were sometimes reluctant to devalue, even when a deficit was fundamental. Why?

Accepted Answer

• It could be very disruptive to firms.

Question 7

Exchange rate movements will reinforce monetary policy but will dampen fiscal policy.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is not a reason for exchange rate volatility?

Accepted Answer

A)  Inflation targets 
B)  A high level of capital mobility 
C)  The absence of exchange controls 
D)  Money supply targets 
E)  A high level of international liquidity 
A)  Inflation targets 
B)  A high level of capital mobility 
C)  The absence of exchange controls 
D)  Money supply targets 
E)  A high level of international liquidity

Question 9

If an exchange rate falls but is expected to rise again later, there will be______	speculation.

Accepted Answer

A)  stabilising 
B)  no 
C)  destabilising 
D)  neutral 
A)  stabilising 
B)  no 
C)  destabilising 
D)  neutral

Question 10

Which of the following measures is suitable for the balance of payments problems?
-Devaluation

Accepted Answer

A)  A severe and fundamental deficit 
B)  A temporary balance of payments surplus 
C)  A moderate surplus arising from the economy operating with a low level of aggregate demand 
D)  A mild deficit that is expected to disappear as the world economy recovers from recession 
E)  A large and persistent surplus because of the country's much lower underlying rate of inflation
 F) A moderate deficit associated with a too rapid recovery from recession. 
A)  A severe and fundamental deficit 
B)  A temporary balance of payments surplus 
C)  A moderate surplus arising from the economy operating with a low level of aggregate demand 
D)  A mild deficit that is expected to disappear as the world economy recovers from recession 
E)  A large and persistent surplus because of the country's much lower underlying rate of inflation
 F) A moderate deficit associated with a too rapid recovery from recession.

Question 11

Assume that there is a balance of payments deficit caused by a high rate of domestic inflation.
(a) What effect will a deflationary monetary policy (a reduction in money supply) have on interest rates?
raise/lower them
(b) What effect will this have on the capital account?
cause an inflow/outflow of capital
(c) What effect will this have on the money supply?
increase it again/reduce it further
(d) What effect will this have on inflation?
help to reduce it/increase it
(e) What effect will a deflationary fiscal policy have on interest rates?
raise/lower them
(f) What effect will this have on the capital account?
cause an inflow/outflow of capital
(g) What effect will this have on the money supply?
increase/reduce it
h) What effect will this have on inflation?
help to reduce it/increase it
i) Which will be more effective under fixed exchange rates - fiscal or monetary policy?
fiscal/monetary

Accepted Answer

(a) Raise them
(b) Cause an in

Question 12

The Bretton Woods system was abandoned in 1972 and replaced by floating exchange rates. The reason this occurred was not due to

Accepted Answer

A)  floating exchange rates being obviously better for all countries outside the Soviet bloc. 
B)  insufficient reserves to cope with balance of payments deficits. 
C)  the reluctance of countries to revalue, thus putting more pressure on deficit countries. 
D)  the Vietnam war causing large US deficits which in turn caused excess liquidity. 
A)  floating exchange rates being obviously better for all countries outside the Soviet bloc. 
B)  insufficient reserves to cope with balance of payments deficits. 
C)  the reluctance of countries to revalue, thus putting more pressure on deficit countries. 
D)  the Vietnam war causing large US deficits which in turn caused excess liquidity.

Question 13

The current account includes the receipt of EU money for capital projects.

Accepted Answer

A) True 
 B)False

Question 14

Match the List to each of the descriptions.
-Free floating

Accepted Answer

A)  Where a currency is allowed to float between an upper and lower exchange rate but is not allowed to moveoutside these limits 
B)  Where countries peg their exchange rate permanently to gold or to another currency 
C)  Where exchange rates are fixed for a period of time, but may be devalued or revalued) if a deficit orsurplus) becomes substantial 
D)  Where a group of currencies are pegged to each other but collectively are free to fluctuate against othercurrencies 
E)  Where governments do not intervene at all in foreign exchange markets 
F) Where the government allows a gradual adjustment of the exchange rate by small amounts
G) Where the government intervenes in the foreign exchange market to prevent excessive exchange ratefluctuations 
A)  Where a currency is allowed to float between an upper and lower exchange rate but is not allowed to moveoutside these limits 
B)  Where countries peg their exchange rate permanently to gold or to another currency 
C)  Where exchange rates are fixed for a period of time, but may be devalued or revalued) if a deficit orsurplus) becomes substantial 
D)  Where a group of currencies are pegged to each other but collectively are free to fluctuate against othercurrencies 
E)  Where governments do not intervene at all in foreign exchange markets 
F) Where the government allows a gradual adjustment of the exchange rate by small amounts
G) Where the government intervenes in the foreign exchange market to prevent excessive exchange ratefluctuations

Question 15

Under a system of floating exchange rates, if the quantity of pounds demanded is less than the quantity of pounds supplied

Accepted Answer

A)  the government will always decrease the supply of money to eliminate the excess supply. 
B)  the price of a pound will increase. 
C)  the price of a pound will not change. 
D)  the price of a pound will decrease. 
A)  the government will always decrease the supply of money to eliminate the excess supply. 
B)  the price of a pound will increase. 
C)  the price of a pound will not change. 
D)  the price of a pound will decrease.

Question 16

Which of the following is not a disadvantage of floating exchange rates?

Accepted Answer

A)  Speculation can be destabilising. 
B)  It is impossible for businesses to buy or sell currencies in the short- to medium- term at a fixed rate. 
C)  Long- term investment may be discouraged. 
D)  It is difficult for importers and exporters to predict their costs and revenues. 
A)  Speculation can be destabilising. 
B)  It is impossible for businesses to buy or sell currencies in the short- to medium- term at a fixed rate. 
C)  Long- term investment may be discouraged. 
D)  It is difficult for importers and exporters to predict their costs and revenues.

Question 17

An economy that trades and has financial dealings with the rest of the world is called _____economy.

Accepted Answer

A)  a free trade 
B)  an autarkic 
C)  a mixed 
D)  an open 
A)  a free trade 
B)  an autarkic 
C)  a mixed 
D)  an open

Question 18

When the exchange rate falls this is called_____, whereas when the exchange rate rises this is called___________.

Accepted Answer

A)  depreciation; appreciation 
B)  fixing; floating 
C)  valuation; revaluation 
D)  inflation; deflation 
A)  depreciation; appreciation 
B)  fixing; floating 
C)  valuation; revaluation 
D)  inflation; deflation

Question 19

Match the List to each of the descriptions.
-Totally fixed

Accepted Answer

A)  Where a currency is allowed to float between an upper and lower exchange rate but is not allowed to moveoutside these limits 
B)  Where countries peg their exchange rate permanently to gold or to another currency 
C)  Where exchange rates are fixed for a period of time, but may be devalued or revalued) if a deficit orsurplus) becomes substantial 
D)  Where a group of currencies are pegged to each other but collectively are free to fluctuate against othercurrencies 
E)  Where governments do not intervene at all in foreign exchange markets 
F) Where the government allows a gradual adjustment of the exchange rate by small amounts
G) Where the government intervenes in the foreign exchange market to prevent excessive exchange ratefluctuations 
A)  Where a currency is allowed to float between an upper and lower exchange rate but is not allowed to moveoutside these limits 
B)  Where countries peg their exchange rate permanently to gold or to another currency 
C)  Where exchange rates are fixed for a period of time, but may be devalued or revalued) if a deficit orsurplus) becomes substantial 
D)  Where a group of currencies are pegged to each other but collectively are free to fluctuate against othercurrencies 
E)  Where governments do not intervene at all in foreign exchange markets 
F) Where the government allows a gradual adjustment of the exchange rate by small amounts
G) Where the government intervenes in the foreign exchange market to prevent excessive exchange ratefluctuations

Question 20

Under a floating exchange rate, contractionary monetary policies are likely to increase the competitiveness of a country's exports.

Accepted Answer

A) True 
 B)False

Exam 27: The Balance of Payments and Exchange Rates

When a currency is allowed to float between upper and lower rates but not allowed to move outside this band, it is called

Are the following shocks internal or external? (a) An increase in the marginal propensity to save (b) A fall in the demand for exports (c) An increase in the rate of income tax (d) A recovery in the world economy

Which of the following statements is correct?

All currencies other than the domestic currency of a given country are referred to as

Under the Bretton Woods pegged exchange rate regime governments were sometimes reluctant to devalue, even when a deficit was fundamental. Why?

Exchange rate movements will reinforce monetary policy but will dampen fiscal policy.

Which of the following is not a reason for exchange rate volatility?

If an exchange rate falls but is expected to rise again later, there will be______ speculation.

Which of the following measures is suitable for the balance of payments problems? -Devaluation

The Bretton Woods system was abandoned in 1972 and replaced by floating exchange rates. The reason this occurred was not due to

The current account includes the receipt of EU money for capital projects.

Match the List to each of the descriptions. -Free floating

Under a system of floating exchange rates, if the quantity of pounds demanded is less than the quantity of pounds supplied

Which of the following is not a disadvantage of floating exchange rates?

An economy that trades and has financial dealings with the rest of the world is called _____economy.

When the exchange rate falls this is called_____, whereas when the exchange rate rises this is called___________.

Match the List to each of the descriptions. -Totally fixed

Under a floating exchange rate, contractionary monetary policies are likely to increase the competitiveness of a country's exports.

The Business Environment and Business Economics

Economics and the World of Business

Business Organisations

The Working of Competitive Markets

Business in a Market Environment

Demand and the Consumer

Demand and the Firm

Products, Marketing and Advertising

Costs of Production

Revenue and Profit

Profit Maximisation Under Perfect Competition and Monopoly

Profit Maximisation Under Imperfect Competition

An Introduction to Business Strategy

Alternative Theories of the Firm

Growth Strategy

The Small-Firm Sector

Pricing Strategy

Labour Markets, Wages and Industrial Relations

Investment and the Employment of Capital

Reasons for Government Intervention in the Market

Government and the Firm

Government and the Market

Globalisation and Multinational Business

International Trade

Trading Blocs

The Macroeconomic Environment of Business

Banking, Money and Interest Rates

Business Activity, Employment and Inflation

Demand-Side Policy

Supply-Side Policy

International Economic Policy

Filters

When the exchange rate falls this is called_, whereas when the exchange rate rises this is called_______.