Deck 14: Exchange Rate Adjustments and the Balance of Payments

Question 1

Of the 188 members of the International Monetary Fund, the most frequently used exchange rate arrangement is

A) freely fluctuating exchange rates.
B) adjustable pegged exchange rates.
C) managed floating exchange rates.
D) pegged or fixed exchange rates.

Answer 1

pegged or fixed exchange rates.

Question 2

Under a pegged exchange rate system, which does NOT explain why a country would have a balance-of-payments deficit?

A) very high rates of inflation occur domestically
B) foreigners discriminate against domestic products
C) technological advance is superior abroad
D) the domestic currency is undervalued relative to other currencies

Answer 2

the domestic currency is undervalued relative to other currencies

Question 3

Under the historic adjustable pegged exchange rate system, member countries were permitted to correct persistent and sizable payment deficits (i.e., fundamental disequilibrium) by

A) officially revaluing their currencies.
B) officially devaluing their currencies.
C) allowing their currencies to depreciate in the free market.
D) allowing their currencies to appreciate in the free market.

Answer 3

officially devaluing their currencies.

Question 4

Which exchange rate mechanism is intended to insulate the balance of payments from short-term capital movements while providing exchange rate stability for commercial transactions?

A) dual exchange rates
B) managed floating exchange rates
C) adjustable pegged exchange rates
D) crawling pegged exchange rates

Question 5

Rather than constructing their own currency baskets, many nations peg the value of their currencies to a currency basket defined by the International Monetary Fund.Which of the following is an example of this type of basket?

A) IMF tranche
B) special drawing rights
C) primary reserve asset
D) swap facility

Question 6

Suppose that Bolivia uses a fixed exchange rate system.If it chooses to also allow free capital flows, which of the following policies will it NOT be able to adopt?

A) dollarization
B) a currency board
C) independent fiscal policy
D) free capital flows

Question 7

The Bretton Woods Agreement of 1944 established a monetary system based on

A) gold and managed floating exchange rates.
B) gold and adjustable pegged exchange rates.
C) special drawing rights and managed floating exchange rates.
D) special drawing rights and adjustable pegged exchange rates.

Question 8

Other things equal, under a floating exchange rate system, if American exports decrease and American imports increase, the value of the dollar will likely

A) appreciate.
B) depreciate.
C) be officially revalued.
D) be officially devalued.

Question 9

Which exchange rate system does NOT require monetary reserves for official exchange rate intervention?

A) floating exchange rates
B) pegged exchange rates
C) managed floating exchange rates
D) dual exchange rates

Question 10

Developing nations whose trade and financial relationships are mainly with a single partner tend to utilize

A) pegged exchange rates.
B) freely floating exchange rates.
C) managed floating exchange rates.
D) crawling pegged exchange rates.

Question 11

Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve increases the money supply of the United States.Other things equal, under a floating exchange rate system, the dollar will likely

A) appreciate in value relative to other currencies.
B) depreciate in value relative to other currencies.
C) be officially devalued by the government.
D) neither appreciate nor depreciate.

Question 12

Other things equal, under managed floating exchange rates, if the rate of inflation in the United States is less than the rate of inflation of its trading partners, the dollar will likely

A) appreciate against foreign currencies.
B) depreciate against foreign currencies.
C) be officially revalued by the government.
D) be officially devalued by the government.

Question 13

During the 1970s, the European Union, in its quest for monetary union, adopted what came to be referred to as the "Community Snake." This system was a/an

A) adjustable pegged exchange rate system.
B) dual exchange rate system.
C) jointly floating exchange rate system.
D) freely floating exchange rate system.

Question 14

Other things equal, under a floating exchange rate system, an increase in U.S.imports of Japanese goods will cause a demand for Japanese yen to

A) increase, inducing a depreciation in the yen.
B) decrease, inducing a depreciation in the yen.
C) increase, inducing an appreciation in the yen.
D) decrease, inducing an appreciation in the yen.

Question 15

Other things equal, under adjustable pegged exchange rates, if the rate of inflation in the United States exceeds the rate of inflation of its trading partners

A) U.S. exports tend to rise and imports tend to fall.
B) U.S. imports tend to rise and exports tend to fall.
C) U.S. foreign exchange reserves tend to rise.
D) U.S. foreign exchange reserves remain constant.

Question 16

Which exchange rate mechanism calls for frequent redefining of the par value by small amounts to remove a payment's disequilibrium?

A) dual exchange rates
B) adjustable pegged exchange rates
C) managed floating exchange rates
D) crawling pegged exchange rates

Question 17

In 1973, the reform of the international monetary system resulted in the change from

A) adjustable pegged rates to managed floating rates.
B) managed floating rates to adjustable pegged rates.
C) crawling pegged rates to freely floating rates.
D) freely floating rates to crawling pegged rates.

Question 18

Other things equal, under a floating exchange rate system, if American exports increase and American imports decrease, the value of the dollar will likely

A) appreciate.
B) depreciate.
C) be officially revalued.
D) neither appreciate not depreciate.

Question 19

Developing nations with more than one major trading partner tend to peg the value of their currencies to

A) gold.
B) silver.
C) a single currency.
D) a basket of currencies.

Question 20

Which exchange rate system involves a "leaning against the wind" strategy in which short-term fluctuations in exchange rates are reduced without adhering to any particular exchange rate over the long run?

A) pegged or fixed exchange rates
B) adjustable pegged exchange rates
C) managed floating exchange rates
D) freely floating exchange rates

Question 21

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D0 and S0 respectively.
Figure 15.1. The Market for the Swiss Franc
?

-Refer to Figure 15.1.Suppose that the United States increases its imports from Switzerland, resulting in a rise in the demand for francs from D₀ to D₁.Other things equal, under a floating exchange rate system, the new equilibrium exchange rate would be

A) $0.40 per franc.
B) $0.50 per franc.
C) $0.60 per franc.
D) $0.70 per franc.

Question 22

A main purpose of exchange stabilization funds is to

A) permit a country to overvalue its currency in the exchange markets.
B) permit a country to undervalue its currency in the exchange markets.
C) increase the supply of foreign currency when imports increase and exceed exports.
D) decrease the supply of foreign currency when imports increase and exceed exports.

Question 23

Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve decreases the money supply of the United States.Other things equal, under a floating exchange rate system, demand for the dollar will likely

A) increase, inducing an appreciation in value relative to other currencies.
B) decrease, inducing a depreciation in value relative to other currencies.
C) decrease, inducing an appreciation in value relative to other currencies.
D) increase, inducing a depreciation in value relative to other currencies.

Question 24

Under the Bretton Woods system of 1944-1973, member countries could re-peg their currencies up to _____, without permission of the International Monetary Fund.

A) 2 percent
B) 5 percent
C) 10 percent
D) 25 percent

Question 25

As a policy instrument, currency devaluation may be controversial since it

A) imposes hardships on the exporters of foreign countries.
B) imposes hardships on exporters of the devaluing country.
C) is generally followed by unemployment in the devaluing country.
D) is generally followed by price deflation in the devaluing country.

Question 26

Under managed floating exchange rates, other things equal, a central bank would initiate

A) a contractionary monetary policy to offset a depreciation of its currency.
B) a contractionary monetary policy to offset an appreciation of its currency.
C) an expansionary monetary policy to offset a depreciation of its currency.
D) None of these are correct.

Question 27

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D0 and S0 respectively.
Figure 15.1. The Market for the Swiss Franc
?

-Refer to Figure 15.1.With a system of floating exchange rates, the equilibrium exchange rate is

A) $0.40 per franc.
B) $0.50 per franc.
C) $0.60 per franc.
D) $0.70 per franc.

Question 28

In a managed floating exchange rate system, temporary stabilization of the dollar's exchange value requires the Federal Reserve to adopt a (an) ____ monetary policy when the dollar is appreciating and a (an) ____ policy when the dollar is depreciating.

A) expansionary, expansionary
B) expansionary, contractionary
C) contractionary, expansionary
D) contractionary, contractionary

Question 29

Other things equal, a surplus nation can reduce its payments imbalance by

A) applying tariffs and trade restrictions on imports.
B) devaluing its national currency.
C) increasing its labor productivity.
D) setting higher interest rates than its trading partners.

Question 30

To defend a pegged exchange rate that overvalues its currency, a country could

A) discourage commodity exports.
B) encourage commodity imports.
C) purchase its own currency in international markets.
D) sell its own currency in international markets.

Question 31

Suppose that Japan maintains a pegged exchange rate that overvalues the yen.Other things equal this would likely result in

A) Japanese exports becoming cheaper in world markets.
B) imports becoming expensive in the Japanese market.
C) unemployment for Japanese workers.
D) full employment for Japanese workers.

Question 32

In recent years, the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade.Thus, proposals have been made that the United States should offset China's currency manipulation by

A) selling yuan and buying dollars, thus depreciating the yuan against the dollar.
B) selling and buying dollars, thus appreciating the yuan against the dollar.
C) buying yuan and selling dollars, thus depreciating the yuan against the dollar.
D) buying yuan and selling dollars, thus appreciating the yuan against the dollar.

Question 33

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D0 and S0 respectively.
Figure 15.1. The Market for the Swiss Franc
?

-Refer to Figure 15.1.Suppose the United States _decreases investment spending in Switzerland, thus reducing the demand for francs from D₀ to D₂.Other things equal, under a floating exchange rate system, the new equilibrium exchange rate would be

A) $0.40 per franc.
B) $0.50 per franc.
C) $0.60 per franc.
D) $0.70 per franc.

Question 34

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D0 and S0 respectively.
Figure 15.1. The Market for the Swiss Franc
?

-Refer to Figure 15.1.Suppose the demand for francs increases from D₀ to D₁.Other things equal, under a fixed exchange rate system, the U.S.exchange stabilization fund could maintain a fixed exchange rate of $0.50 per franc by

A) selling francs for dollars on the foreign exchange market.
B) selling dollars for francs on the foreign exchange market.
C) decreasing U.S. exports, thus decreasing the supply of francs.
D) stimulating U.S. imports, thus increasing the demand for francs.

Question 35

In recent years, the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade.The United States has argued that the central bank of China has

A) sold yuan and bought dollars, thus depreciating the yuan against the dollar.
B) sold yuan and bought dollars, thus appreciating the yuan against the dollar.
C) bought yuan and sold dollars, thus depreciating the yuan against the dollar.
D) bought yuan and sold dollars, thus appreciating the yuan against the dollar.

Question 36

Other things equal, under a floating exchange rate system, if the U.S.dollar depreciates against the Swiss franc

A) American exports to Switzerland will be cheaper in francs.
B) American exports to Switzerland will be more expensive in francs.
C) American imports from Switzerland will be cheaper in dollars.
D) None of these are correct.

Question 37

Given a two-country world, assume Canada and Sweden devalue their currencies by 20 percent.Other things equal, this would result in

A) an appreciation in the Canadian currency.
B) an appreciation in the Swedish currency.
C) an appreciation in both currencies.
D) an appreciation in neither currency.

Question 38

Given a two-country world, suppose Japan devalues the yen by 20 percent and South Korea devalues the won by 15 percent.Other things equal, this results in

A) an appreciation in the value of both currencies.
B) a depreciation in the value of both currencies.
C) an appreciation in the value of the yen against the won.
D) a depreciation in the value of the yen against the won.

Question 39

Under managed floating exchange rates, other things equal, the Federal Reserve could offset an appreciation of the dollar against the yen by

A) increasing the money supply, which promotes falling interest rates and net investment outflows.
B) increasing the money supply, which promotes rising interest rates and net investment inflows.
C) decreasing the money supply, which promotes falling interest rates and net investment outflows.
D) decreasing the money supply, which promotes rising interest rates and net investment inflows.

Question 40

Other things equal, the central bank of the United Kingdom could prevent the pound from appreciating by

A) selling pounds on the foreign exchange market.
B) buying pounds on the foreign exchange market.
C) reducing its inflation rate relative to its trading partners.
D) promoting domestic investment and technological development.

Question 41

Suppose Sweden's inflation rate is less than that of its trading partner.Other things equal, under a floating exchange rate system Sweden would experience a/an

A) appreciation in its currency.
B) depreciation in its currency.
C) decrease in the level of its exports.
D) increase in the level of its imports.

Question 42

According to the Bretton Woods system of 1944-1973, the United States was designated as the

A) par value country.
B) floating exchange rate country.
C) reserve currency country.
D) liquidity deficit country.

Question 43

The crawling peg is a

A) fixed exchange rate system.
B) floating exchange rate system.
C) compromise between fixed and floating exchange rates.
D) exchange rate system used by nations experiencing no inflation.

Question 44

Under the Bretton Woods system of 1944-1973

A) member countries set the par value of their currencies in terms of gold.
B) market exchange rates were almost fixed.
C) currency devaluations or revaluations could be used to adjust the par value of a currency when it became overvalued or undervalued.
D) All of these are correct.

Question 45

Figure 15.2 Market for the British Pound
Refer to Figure 15.2.Suppose that the United States increases its imports from England.Other things equal, under a floating exchange rate system the new equilibrium exchange rate would be

A) $0.40 per pound.
B) $0.60 per pound.
C) $0.80 per pound.
D) $1 per pound.

Question 46

In order to stabilize a currency, a currency board needs to

A) use an expansionary monetary policy to offset currency depreciation.
B) use an expansionary monetary policy to offset currency appreciation.
C) use a contractionary policy to offset currency appreciation.
D) None of these are correct.

Question 47

If Mexico fully dollarizes its economy, it agrees to

A) print pesos only to finance deficits of its national government.
B) use the U.S. dollar alongside its peso to finance transactions.
C) have the U.S. Treasury be in charge of its tax collections.
D) replace pesos with U.S. dollars in its economy.

Question 48

If Mexico dollarizes its economy, it essentially

A) allows the Federal Reserve to be its lender of last resort.
B) accepts the monetary policy of the Federal Reserve.
C) ensures that its business cycle is identical to that of the U.S.
D) abandons its ability to run governmentally balanced budgets.

Question 49

The Bretton Woods system of 1944-1973 was based upon

A) the international silver standard.
B) the international gold standard.
C) freely fluctuating exchange rates.
D) relatively stable exchange rates.

Question 50

Suppose Japan runs a trade deficit.Other things equal, if the Japanese yen appreciates against other currencies in the exchange markets, this will

A) have no effect on the Japanese balance of trade.
B) tend to improve the Japanese balance of trade because Japanese imports will become more expensive.
C) tend to worsen the Japanese balance of trade because Japanese exports will become cheaper.
D) None of these is correct.

Question 51

Figure 15.2 Market for the British Pound
Refer to Figure 15.2.Suppose the demand for pounds increases from D₀ to D₁.Other things equal, under a fixed exchange rate system the U.S.exchange stabilization fund could maintain a fixed exchange rate of $0.80 per pound by

A) selling pounds for dollars on the foreign exchange market.
B) selling dollars for pounds on the foreign exchange market.
C) decreasing U.S. exports, thus decreasing the supply of pounds.
D) stimulating U.S. imports, thus increasing the demand for pounds.

Question 52

An objective of the dollarization of the Mexican economy would be to

A) shield its economy from hyperinflation, currency depreciation, and capital flight.
B) allow the Federal Reserve to be its lender of last resort.
C) ensure that its monetary policy is independent of the Federal Reserve.
D) permit it to benefit from tariffs and subsidies imposed by the U.S. government.

Question 53

Figure 15.2 Market for the British Pound
Refer to Figure 15.2.Suppose the United States decreases financial investment in England.Other things equal, under a floating exchange rate system the new equilibrium exchange rate would be

A) $0.40 per franc.
B) $0.60 per franc.
C) $0.80 per franc.
D) $1 per franc.

Question 54

To help insulate their economies from inflation, currency depreciation, and capital flight, developing countries have implemented

A) regional trading blocs.
B) currency boards.
C) central banks.
D) regional fiscal policies.

Question 55

The result of devaluations of the dollar in the early 1970s was to

A) increase the price of U.S. exports.
B) decrease the price of U.S. exports.
C) decrease the price of U.S. imports.
D) increase the U.S. balance of payments surplus.

Question 56

Exchange rate controls

A) achieved prominence during the economic crises of the late 1930s.
B) were popular immediately after World War II.
C) are widely used by the developing nations.
D) All of these are correct.

Question 57

To offset an appreciation of the dollar against the yen, other things equal, the Federal Reserve would

A) sell dollars on the foreign exchange market and lower domestic interest rates.
B) sell dollars on the foreign exchange market and raise domestic interest rates.
C) buy dollars on the foreign exchange market and lower domestic interest rates.
D) buy dollars on the foreign exchange market and raise domestic interest rates.

Question 58

Figure 15.2 Market for the British Pound
Refer to Figure 15.2.Demand and supply of British Pounds is initially D₀ and S₀.With a system of floating exchange rates, the equilibrium exchange rate is

A) $0.40 per pound.
B) $0.60 per pound.
C) $0.80 per pound.
D) $1 per pound.

Question 59

In 1944, financial ministers throughout the world met in New Hampshire to set up an adjustable pegged exchange rate system.This system became known as the

A) General Agreement on Tariffs and Trade.
B) Bretton Woods system.
C) Bank for International Settlements.
D) World Bank.

Question 60

The Bretton Woods system of 1944-1973 was essentially a system of

A) freely fluctuating exchange rates.
B) crawling pegged exchange rates.
C) managed floating exchange rates.
D) adjustable pegged exchange rates.

Question 61

A potential limitation of freely floating exchange rates is that

A) countries require a larger amount of international reserves than otherwise.
B) countries are unable to initiate economic policies to combat unemployment.
C) exchange rates may experience wide and frequent fluctuations.
D) demand tends to be highly sensitive to price movements.

Question 62

The "impossible trinity" explains the relationship between

A) free movements of international capital.
B) independent monetary policies of countries.
C) fixed exchange rate systems of countries.
D) All of these are correct.

Question 63

Countries tend to be less served by a fixed exchange rate system when

A) they are small, open economies.
B) their inflation differentials are modest.
C) they are highly exposed to international capital movements.
D) their wages are quite flexible to changing market conditions.

Question 64

Proponents of freely floating exchange rates maintain that

A) central banks can easily modify fluctuations in exchange rates.
B) the system allows policy makers freedom in pursuing domestic economic goals.
C) inelastic demand schedules prevent large fluctuations in exchange rates.
D) inelastic supply schedules prevent large fluctuations in exchange rates.

Question 65

When the United States abandoned the Bretton Woods system in 1973, it adopted a system of

A) managed floating exchange rates.
B) freely fluctuating exchange rates.
C) adjustable pegged exchange rates.
D) crawling pegged exchange rates.

Question 66

Members of the International Monetary Fund agree that

A) their exchange rate systems should not be manipulated to gain unfair competitive advantages over other members.
B) their exchange rate systems should not be manipulated to prevent effective balance-of-payments adjustments.
C) members countries can act to counter short-term disorderly conditions in foreign exchange markets.
D) All of these are correct.

Question 67

Under a floating exchange rate system, other things equal, if there occurs a fall in the dollar price of the Swiss franc

A) American exports to Switzerland will be cheaper in francs.
B) American exports to Switzerland will be more expensive in francs.
C) American imports from Switzerland will be more expensive in dollars.
D) None of the above.

Question 68

Under a system of fixed exchange rates, the purpose of currency revaluation is to cause the exchange value of a currency to ______, thus counteracting a balance-of-payments ______.

A) depreciate, deficit
B) depreciate, surplus
C) appreciate, deficit
D) appreciate, surplus

Question 69

Under a system of floating exchange rates, other things equal, a U.S.trade deficit with Japan will cause

A) a flow of gold from the United States to Japan.
B) the U.S. government to ration yen to U.S. importers.
C) an increase in the dollar price of yen.
D) a decrease in the dollar price of yen.

Question 70

Other things equal, to temporarily offset a depreciation in the dollar's exchange value, the Federal Reserve could ____ the U.S.money supply, which would promote a (an) ____ in U.S.interest rates and a (an) ____ in investment flows to the United States.

A) increase, decrease, decrease
B) increase, increase, increase
C) decrease, decrease, increase
D) decrease, increase, increase

Question 71

Other things equal, a market-determined increase in the dollar price of the pound is associated with

A) revaluation of the dollar.
B) devaluation of the dollar.
C) appreciation of the dollar.
D) depreciation of the dollar.

Question 72

Assume that interest rates in London increase relative to those in Switzerland.Other things equal, under a floating exchange rate system one would expect the pound (relative to the Swiss franc) to

A) depreciate due to the increased demand for pounds.
B) depreciate due to the increased demand for Swiss francs.
C) appreciate due to the increased demand for Swiss francs.
D) appreciate due to the increased demand for pounds.

Question 73

Under a system of fixed exchange rates, the purpose of currency devaluation is to cause the exchange value of a currency to ______, thus counteracting a balance-of-payments ______.

A) depreciate, deficit
B) depreciate, surplus
C) appreciate, deficit
D) appreciate, surplus

Question 74

A potential disadvantage of freely floating exchange rates is that there would

A) exist excessive amounts of hedging in the foreign exchange markets.
B) be a lack of incentive to initiate exchange arbitrage.
C) be excessive amounts of destabilizing speculation.
D) exist a devaluation bias in the exchange markets.

Question 75

Other things equal, to temporarily offset an appreciation in the dollar's exchange value, the Federal Reserve could ____ the U.S.money supply, which would promote a (an) ____ in U.S.interest rates and a ____ in investment flows to the United States.

A) increase, decrease, decrease
B) increase, increase, decrease
C) decrease, decrease, decrease
D) decrease, increase, decrease

Question 76

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

A) They require larger amounts of international reserves than other exchange systems.
B) Demand for imports and exports may be influenced by price speculation.
C) There may occur large amounts of destabilizing speculation.
D) Capital movements among nations may be hindered via exchange rate fluctuations.

Question 77

In recent years, members of the International Monetary Fund have adopted exchange rate systems including

A) currency board arrangements.
B) fixed exchange rates.
C) crawling pegged exchange rates.
D) All of these are correct.

Question 78

Under a floating exchange rate system, other things equal, which of the following best leads to a depreciation in the value of the Canadian dollar?

A) a decrease in the Canadian money supply
B) a decrease in the Canadian interest rate
C) an increase in the national income of Canada's trade partners
D) rising inflation rates in Canada's trade partners

Question 79

A market-determined decrease in the dollar price of the pound is associated with

A) revaluation of the dollar.
B) devaluation of the dollar.
C) appreciation of the dollar.
D) depreciation of the dollar.

Question 80

In recent years, members of the International Monetary Fund have adopted exchange rate systems including

A) independently floating exchange rates.
B) managed floating exchange rates.
C) crawling pegged exchange rates.
D) All of these are correct.