Deck 6: Government Influence on Exchange Rates

Question 1

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

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

Answer 1

C

Question 2

2)A weak dollar is normally expected to cause:

A) high unemployment and high inflation in the U.S.
B) high unemployment and low inflation in the U.S.
C) low unemployment and low inflation in the U.S.
D) low unemployment and high inflation in the U.S.

Answer 2

D

Question 3

8)Under a fixed exchange rate system:

A) a foreign exchange market does not exist.
B) central bank intervention in the foreign exchange market is not necessary.
C) central bank intervention in the foreign exchange market is often necessary.
D) central bank intervention in the foreign exchange market is not allowed.

Answer 3

C

Question 4

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

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 5

19)A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which places ____ pressure on U.S. bond prices.

A) upward; downward; upward
B) upward; downward; downward
C) upward; upward; downward
D) downward; upward; upward
E) downward; downward; upward

Question 6

5)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.

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

Question 7

16)Which of the following is an example of direct intervention in foreign exchange markets?

A) lowering interest rates.
B) increasing the inflation rate.
C) exchanging dollars for foreign currency.
D) imposing barriers on international trade.

Question 8

14)Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of:

A) pegged intervention.
B) indirect intervention.
C) nonsterilized intervention.
D) sterilized intervention.
E) A and D

Question 9

1)To force the value of the pound to appreciate against the dollar, the Federal Reserve should:

A) sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
B) sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
C) sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene.
D) sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market.

Question 10

7)A primary result of the Smithsonian Agreement was:

A) the establishment of the European Monetary System (EMS).
B) establishing that exchange rates of most major countries were to be allowed to fluctuate 2.25% above or below their initially set values.
C) establishing specific rules for when tariffs and quotas could be imposed by governments.
D) establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).

Question 11

6)A primary result of the Bretton Woods Agreement was:

A) the establishment of the European Monetary System (EMS).
B) establishing specific rules for when tariffs and quotas could be imposed by governments.
C) establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
D) establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).

Question 12

9)Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major foreign countries.

A) weakening; increase
B) weakening; decrease
C) strengthening; increase
D) strengthening; decrease

Question 13

20)The euro is the currency:

A) adopted in all western European countries as of 1999.
B) adopted in all eastern European countries as of 1999.
C) adopted in all European countries as of 1999.
D) none of the above

Question 14

12)The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.

A) more; more
B) less; less
C) more; less
D) less; more

Question 15

3)A strong dollar is normally expected to cause:

A) high unemployment and high inflation in the U.S.
B) high unemployment and low inflation in the U.S.
C) low unemployment and low inflation in the U.S.
D) low unemployment and high inflation in the U.S.

Question 16

18)The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar's value is expected to:

A) remain stable.
B) strengthen.
C) weaken.
D) none of the above will have an impact on inflation.

Question 17

13)Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency depreciates against B, then A's exports to C should ____, and A's imports from C should ____.

A) decrease; increase
B) decrease; decrease
C) increase; decrease
D) increase; increase

Question 18

11)The interest rate of a country with a currency board:

A) is less stable than it would be without a currency board.
B) is typically below the interest rate of the currency to which it is tied.
C) will move in tandem with the interest rate of the currency to which it is tied.
D) is completely independent of the interest rate of the currency to which it is tied.

Question 19

4)To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:

A) sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
B) sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
C) sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
D) sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

Question 20

17)A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.

A) upward; upward
B) downward; upward
C) upward; downward
D) downward; downward

Question 21

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

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

Question 22

22)The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries.

A) Latin American
B) European
C) Asian
D) North American

Question 23

30)As foreign exchange activity has grown, a given degree of central bank intervention has become:

A) more effective.
B) more frequent.
C) less effective.
D) none of the above

Question 24

31)When using indirect intervention, a central bank is likely to focus on:

A) inflation.
B) interest rates.
C) income levels.
D) expectations of future exchange rates.

Question 25

26)Which of the following is true regarding the euro?

A) Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders.
B) It allows for more consistent economic conditions across countries.
C) It prevents each country from conducting its own monetary policy.
D) All of the above are true.

Question 26

34)China's yuan is presently:

A) allowed to fluctuate freely without any central bank intervention.
B) allowed to fluctuate but with central bank intervention.
C) pegged to the dollar.
D) pegged to the euro.

Question 27

35)During the period 1944-1971, the U.S. used a ____ system.

A) euro exchange rate
B) fixed
C) dirty float
D) flexible

Question 28

36)Which of the following are examples of currency controls?

A) import restrictions.
B) prohibition of remittance of funds.
C) ceilings on granting credit to foreign firms.
D) all of the above

Question 29

21)The euro has not been adopted by:

A) Slovenia.
B) the U.K.
C) Germany.
D) France.

Question 30

27)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?

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 31

32)Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?

A) Thailand.
B) Indonesia.
C) Russia.
D) China.
E) Malaysia.

Question 32

33)Which of the following is not true regarding Thailand?

A) Thailand was one of the slowest growing countries before the Asian crisis.
B) High levels of spending and low levels of saving placed upward pressure on prices of real estate, products, and on Thailand's local interest rate.
C) Thailand's baht was linked to the dollar prior to July 1997, which made Thailand an attractive site for foreign investors.
D) Thai banks provided many loans that were very risky in their attempt to make use of all of their funds.
E) All of the above are true.

Question 33

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

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 34

39)Which of the following are true about the Southeast Asian currency crisis?

A) It was preceded by several years of large capital inflows to Asia.
B) It was preceded by a five-year recession in Asia.
C) Asian interest rates declined during the crisis.
D) Asian exchange rates were pegged to the Japanese yen to resolve the crisis.

Question 35

24)Countries that have adopted the euro tend to have very similar ____.

A) interest rates
B) inflation rates
C) income tax rates
D) budget deficits

Question 36

38)Which of the following countries have not adopted the euro?

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

Question 37

29)To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities.

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

Question 38

28)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 inflation. Which of the following is an appropriate action given this scenario?

A) Sell dollars for foreign currency
B) Buy dollars with foreign currency
C) Lower interest rates
D) None of the above

Question 39

25)The risk-free interest rates among countries that have adopted the euro should:

A) not necessarily be similar to risk-free rates in other countries.
B) equal the U.S. risk-free rate.
C) equal the risk-free rates in other European countries.
D) equal the risk-free rates in Asian countries.

Question 40

40.Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.

Question 41

50.Market forces are the determinant of exchange rates in a freely floating exchange rate system.

Question 42

45.The European countries conforming to the euro are completely insulated from movements in the euro's value with respect to other currencies.

Question 43

51.If a government wishes to stimulate its economy in the form of increased foreign demand for its country's products, it could attempt to weaken its currency.

Question 44

56.The Bretton Woods Agreement created a system under which exchange rates are determined by market forces without intervention by various governments.

Question 45

44.A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating European countries, which encourages more trade and capital flows within Europe.

Question 46

58.The euro is pegged to other currencies of European countries that have not adopted the euro.

Question 47

48.A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on private enterprise than the governments of other Asian countries.

Question 48

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

Question 49

59.The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers.

Question 50

60.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.

Question 51

41.An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.

Question 52

52.In a sterilized exchange rate arrangement, a country's home currency value is pegged to a foreign currency or to some unit of account.

Question 53

46.The establishment of the euro allows for more consistent economic conditions across countries but eliminates the power of any individual European country to solve local economic problems with its own unique monetary policy.

Question 54

42.Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system.

Question 55

57.Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the change in money supply.

Question 56

43.Under a pegged exchange rate system, the home currency's value is pegged to a foreign currency.

Question 57

55.China is commonly criticized for keeping the yuan's value at superficially high levels.

Question 58

54.The Fed's indirect method of intervention is to trade dollars for or against other currencies.

Question 59

47.The Asian crisis is generally believed to have started in Japan.

Question 60

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

Question 61

61.A strong home currency can harm exports; exporters typically benefit from a weaker home country currency.

Question 62

80)The European Central Bank is located in:

A) London.
B) Denmark.
C) Luxembourg.
D) Frankfurt.

Question 63

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

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 64

75)Assume that Japan and the United States frequently trade with each other. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.

A) upward; reduce; unchanged
B) upward; increase; higher
C) downward; reduce; unchanged
D) downward; increase; higher

Question 65

68.The European Central Bank is responsible for monetary policy in all countries that adopted the euro as its currency.

Question 66

62.An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from unemployment problems in other countries.

Question 67

65.Dollarization refers to the replacement of local currency with U.S. dollars.

Question 68

66.A country with fixed exchange rates often faces constraints on growth.

Question 69

67.The Bretton Woods Agreement called for the establishment of a single European currency.

Question 70

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

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 71

73)The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.

A) 2.25
B) 6
C) 10
D) 8

Question 72

78.If a U.S. firm plans to frequently purchases goods from Hong Kong over the next several years, it does not have to worry about exchange rate risk.

Question 73

63.All European countries now use the euro as their currency.

Question 74

69.A currency peg is insulated from economic or political conditions, such that the exchange rate in the market will only change if the country's government breaks the peg and sets a new exchange rate.

Question 75

70.If foreign investors fear that a peg may be broken because of fund outflows from that country, they may attempt to purchase more of that currency before the peg is broken.

Question 76

71.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.

Question 77

77)A "dirty" float represents a system of:

A) freely floating exchange rates.
B) fixed exchange rates.
C) floating exchange rates, but the central bank can manipulate the currency.
D) fixed exchange rates, but the central bank can manipulate the currency.

Question 78

79.If the French government wants to decrease inflation in France, it will exchange foreign currency for euros.

Question 79

72)Which one of the following is a disadvantage of a fixed exchange rate system:

A) Importers are insulated from the risk that the currency will appreciate over time.
B) Management of an MNC is less difficult.
C) The government might change the value of the currency.
D) Exporters are insulated from the risk that the currency will depreciate over time.

Question 80

64.A country with a currency board does not have control over its local interest rates.