Exam 30: The International Financial System

Figure 30-4 -Refer to Figure 30-4. The equilibrium exchange rate is at A, $3/pound. Suppose the British government pegs its currency at $4/pound. Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D2. After the shift,

Americans, other than jewelers or rare coin collectors, were not allowed to own gold from the early 1930s until the

Under a floating exchange rate, the exchange rate

In a fixed exchange rate system, speculation regarding an expected revaluation or devaluation of a currency makes it more difficult to maintain the existing exchange rate.

When the value of a currency is determined ________, the exchange rate system is defined as a floating exchange rate system.

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 Mexico, the average price of a Big Mac at that time was 37 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.

The fact that the prices for McDonald's Big Mac sandwich are not the same around the world illustrates one reason why purchasing power does not hold: Many goods are not traded internationally.

In order to support an undervalued euro, the European Central Bank must ________ dollars. Over time, this action will cause the rate of inflation in the EU to ________.

If the purchasing power of a dollar is less than the purchasing power of the euro, purchasing power parity would predict that

Under the gold standard, the government must have enough gold to back up any

The United States abandoned the ________ because the government wanted to rapidly expand the money supply in response to the Great Depression.

The gold standard is an example of

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

Figure 30-12 -A persistent shortage of yen at a given fixed exchange rate (in dollars per yen) is evidence that the yen is ________ versus the dollar. This shortage can be reduced or eliminated through a ________ of the yen.

If inflation in Russia is higher than it is in the United States,

By 2013, how many European countries were members of the European Union?

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

Will the use of the euro help increase economic growth in countries in the European Union? Will it help individual countries using the euro in times of recession? Explain.

Briefly describe how the Bretton Woods system operated.

Which of the following is most important in explaining exchange rate fluctuations in the short run?