Deck 10: The Determination of Exchange Rates

Question 1

An independently floating exchange rate is adjusted periodically at a fixed pronounced rate.

Answer 1

False

Question 2

In order to join the IMF, a country must contribute a certain sum of money, called a ________.

A)special drawing right
B)trade balance
C)monetary reserve
D)quota

Answer 2

D

Question 3

The IMF's primary role is to identify exchange rate regimes.

Answer 3

False

Question 4

The IMF uses the quota system to determine how much a country may borrow from the Fund.

Question 5

The Bretton Woods Agreement established a system of fixed exchange rates under which each IMF member country set a ________.

A)quota
B)par value
C)gold standard
D)nominal interest rate

Question 6

________ is a form of locking the value of a country's currency onto another currency.

A)Managed floating
B)Monetarization
C)Dollarization
D)Floating

Question 7

The primary objective of the International Monetary Fund is to ________.

A)encourage euro adoption
B)promote exchange rate stability
C)establish a unilateral system of payments
D)foster the power of the foreign-exchange market

Question 8

Which of the following was part of the stability and growth pact that was required for countries to be part of the European Monetary Union?

A)The annual government budget must be no greater than 3% of GDP.
B)The annual inflation rate must remain within 1.5% of the three best-performing EU countries.
C)The annual government budget deficit could be no greater than 60% of GDP.
D)The annual inflation rate must remain within 5.5% of the four best-performing EU countries.

Question 9

The primary result of the Jamaica Agreement was to ________.

A)allow greater exchange-rate flexibility
B)set austerity measures for debt control
C)establish a system based on par values
D)implement fixed exchange rates

Question 10

Which of the following was NOT a result of the Smithsonian Agreement?

A)revaluation of currencies other than the dollar against gold
B)establishment of par values the quota system
C)devaluation of the dollar against gold
D)widening of exchange-rate flexibility

Question 11

The major objective of the European Central Bank is to ________.

A)set monetary policy for EU countries that adopt the euro
B)ensure that EU interest rates are equal to U.S. rates
C)control taxes as a means of monitoring EU debt
D)reduce spending by EU countries

Question 12

Dollarization of a currency occurs when a country takes all of its own currency out of circulation and replaces it with U.S.dollars.

Question 13

Which type of exchange rate arrangement is based on supply and demand?

A)soft peg
B)hard peg
C)crawling
D)floating

Question 14

What is a Special Drawing Right (SDR)? How is it used?

Question 15

Which of the following BEST describes the special drawing right?

A)an international reserve asset created to supplement members' existing reserve assets
B)the official currency for international trade established by the World Bank
C)a substitute for the fixed value of gold as determined by currency rates
D)a contribution made by countries to join the IMF

Question 16

Which of the following problems with the euro most likely worsened the financial crisis in Greece?

A)excessive flexibility with interest rates
B)cultural disagreements on labor reform
C)lack of uniform fiscal regulation standards
D)unclear policies of the European Central Bank

Question 17

What is the International Monetary Fund (IMF)? What are its objectives? What occurs when a country joins the IMF today?

Question 18

Which EU country has NOT adopted the euro?

A)Germany
B)France
C)Denmark
D)Greece

Question 19

The SDR is equal in value to the U.S.dollar.

Question 20

The value of the SDR is currently based on the ________.

A)euro
B)U)S. dollar
C)weighted average of four currencies
D)weighted average of six currencies

Question 21

The Fed wants to counter downward pressure on the dollar, so it will most likely ________.

A)sell dollars for foreign currency
B)sell dollars and buy foreign stocks
C)buy Treasury bills with dollars
D)buy dollars with foreign currency

Question 22

Thomas is planning a vacation to Country X.On a tourism Web site, he reads that the government of Country X limits the amount of money a tourist may convert into the country's currency.Country X most likely uses which of the following?

A)import deposit requirements
B)multiple exchange rates
C)import licensing
D)quantity controls

Question 23

Which of the following has the greatest amount of foreign-exchange reserves in the world?

A)China
B)Ireland
C)Russia
D)Taiwan

Question 24

Fully convertible currencies are also called ________.

A)external currencies
B)hard currencies
C)unlimited currencies
D)soft currencies

Question 25

Given the daily volume of foreign-exchange transactions, it is most accurate to say which of the following?

A)It is impossible for a government's interventions in the foreign-exchange market to affect market psychology.
B)A government's intervention in the foreign-exchange market can reverse a currency's slide for the long term.
C)A government's intervention cannot force the foreign-exchange market to move in a determined direction.
D)A government should focus more on intervening in foreign-exchange markets than on correcting economic fundamentals.

Question 26

Describe the exchange rate arrangements used in the EU, Hong Kong, China, and the U.S.

Question 27

A country's central bank is responsible for ________.

A)distributing money to foreign countries that are in a debt crisis
B)encouraging disorderly conditions in foreign-exchange markets
C)the policies affecting the value of its country's currency
D)establishing foreign-exchange markets

Question 28

According to the Treaty of Maastricht, a euro applicant must have a total outstanding government debt that does not exceed 60% of its GDP.

Question 29

A black market exists when ________.

A)a country closely monitors and adjusts the foreign-exchange rate
B)people pay more for hard currency than the official rate
C)a country is running a budget surplus
D)a country is experiencing a recession

Question 30

Hard currencies are usually ________.

A)not fully convertible
B)undesirable assets
C)highly liquid
D)unstable

Question 31

If inflation in the United States is relatively higher than inflation in Japan, and the Japanese government wants to keep the exchange rate fixed between the yen and the dollar, it should most likely ________.

A)allow its currency to rise against the dollar
B)allow its currency to fall against the dollar
C)increase the supply of yen in the market
D)decrease the supply of yen in the market

Question 32

In a short essay, compare the roles of the Federal Reserve Bank of New York and the European Central Bank.

Question 33

The purchasing power parity theory claims that a change in relative ________ between two countries must cause a change in ________ in order to keep the prices of goods in two countries fairly similar.

A)exchange rates; inflation
B)inflation; exchange rates
C)interest rates; inflation
D)interest rates; exchange rates

Question 34

Country X has a floating rate for luxury goods and a lower rate for semi-manufactured goods.Which of the following is most likely used by Country X?

A)import deposit requirements
B)multiple exchange rates
C)import licensing
D)quantity controls

Question 35

All of the following are ways to control currency convertibility EXCEPT ________.

A)import licenses
B)multiple exchange rates
C)import deposits
D)purchasing power parity

Question 36

The major objective of the European Central Bank is to control taxes as a means of deficit spending.

Question 37

The ________ is the currency most widely used as a reserve asset.

A)euro
B)Japanese yen
C)U)S. dollar
D)British pound

Question 38

The central bank in the United States is the ________.

A)Federal Reserve System
B)U)S. Exchange Reserve
C)Board of Governors
D)U)S. Treasury

Question 39

A form of currency control that often applies to tourism because it limits the amount of currency that someone can get from the bank for foreign travel is known as ________.

A)multiple exchange rates
B)confidence
C)quantity controls
D)hard currency

Question 40

Governments use a multiple exchange rate system to ________.

A)increase their budget surplus
B)reduce exports
C)control foreign-exchange convertibility
D)limit deposit requirements

Question 41

Purchasing power parity (PPP)is a well-known theory that seeks to define relationships between currencies.

Question 42

Which of the following is used as an illustration of the PPP theory for estimating exchange rates?

A)the Composition of Official Foreign Exchange Reserves (COFER)
B)the black market rate
C)the import licensing ratio
D)the Big Mac Index

Question 43

The International Fisher Effect implies that ________.

A)the country with the higher interest rate should have lower inflation
B)the currency of the country with the lower interest rate will strengthen in the future
C)the currency of the country with the higher interest rate will strengthen in the future
D)interest rates and inflation are not linked at all

Question 44

According to purchasing power parity, if the domestic inflation rate is ________ than that in the foreign country, the domestic currency should be ________ than that of the foreign country.

A)lower; weaker
B)higher; higher
C)lower; stronger
D)higher; stronger

Question 45

Inflation in the United States would cause China's massive dollar reserves to lose value.

Question 46

The International Fisher Effect ________.

A)links interest rates and inflation
B)implies that the currency of the country with the lower interest rate will weaken in the future
C)implies that the country with the higher interest rate should have lower inflation
D)links interest rates and exchange rates

Question 47

A currency that is pegged to another currency is usually changed on a supply-and-demand basis.

Question 48

In a multiple exchange-rate system, the government determines which kinds of transactions are to be conducted at which exchange rate.

Question 49

The ________ theory seeks to define the relationship between currencies based on relative inflation.

A)inflation growth rate
B)revaluation
C)purchasing power parity
D)interest rate

Question 50

The Japanese yen is an example of a soft currency.

Question 51

Which of the following statements BEST describes a limitation of the Big Mac Index?

A)Profit margins vary by the strength of competition, which affects relative prices.
B)The theory of PPP incorrectly assumes that there are barriers to trade.
C)The Big Mac represents all possible commodities and services.
D)Taxes have no effect on Big Mac prices.

Question 52

The Big Mac Index perfectly explains the relative size of economies.

Question 53

If a Big Mac costs $3.41 in the United States and $2.67 in Argentina (the price of a Big Mac in Argentine pesos converted into dollars at the spot exchange rate), which of the following is most likely true?

A)The peso is overvalued against the dollar.
B)The dollar is overvalued against the peso.
C)It should be harder for a U.S. tourist to buy a leather coat in Buenos Aires because the dollar won't go very far.
D)It will be cheap for Argentine companies to invest in the United States because the dollar is relatively weak.

Question 54

According to the purchasing power parity theory, a change in relative interest rates between two countries must cause a change in exchange rates.

Question 55

Although central banks are responsible for foreign-exchange policy, they have no power to intervene in exchange rate markets.

Question 56

Which of the following states that the country with the higher interest rate should have the higher inflation?

A)the Fisher Effect
B)the International Fisher Effect
C)the Interest Rate Inflation Theory
D)the Forward Rate Theory

Question 57

The Big Mac Index suggests that exchange rates should leave Big Mac hamburgers costing the same in the United States as abroad.

Question 58

Central bank reserve assets are kept in three major forms: foreign-exchange reserves, silver, and gold.

Question 59

Demand for a country's independently floating currency is a function of the demand for that country's goods, services, and financial assets.

Question 60

If the real interest rate is 5%, the rate of inflation in the United States is 6%, and the rate of inflation in the United Kingdom is 3%, which of the following statements would NOT be true?

A)The nominal rate of interest in the United States would be greater than the nominal interest rate in the United Kingdom.
B)The difference between the U.K. and U.S. interest rates is a function of the difference between their inflation rates.
C)The nominal rate of interest in the United States and the United Kingdom would be the same because of purchasing power parity.
D)Investors would get a higher return on their money in the United States.

Question 61

In a short essay, discuss purchasing power parity and the short-run problems that affect PPP.

Question 62

Technical forecasting relies on trends in economic variables to predict future exchange rates.

Question 63

The International Fisher Effect implies that the country with the higher interest rate should have lower inflation.

Question 64

In a country with a currency that is not freely floating, the timing of an exchange rate change is often a ________ decision.

A)cultural
B)consensus
C)political
D)market

Question 65

Ted, a manager at Global Manufacturing, is analyzing trends in economic variables to predict future exchange rates that might affect the MNE's international operations.Which of the following is Ted most likely doing?

A)fundamental forecasting
B)technical forecasting
C)resource forecasting
D)economic forecasting

Question 66

When forecasting exchange rates, forecasters must predict the magnitude, timing, and direction of change in exchange rates.

Question 67

Fundamental forecasting uses trends in economic variables to predict future rates.

Question 68

A current account deficit suggests that a country is importing more than it is exporting and building up foreign debt.

Question 69

Shelly, a manager at a global firm, is studying the foreign currency intervention practices of Indonesia.Shelly is most likely examining ________ factors.

A)institutional setting
B)fundamental analysis
C)confidence
D)circumstantial

Question 70

Why is China most likely considering a greater reliance on the SDR?

A)gains in the foreign-exchange market
B)concerns about the value of the U.S. dollar
C)demands to replace the dollar with the euro for reserves
D)requirements by the IMF to make China's currency more flexible

Question 71

What are the main arguments for and against Africa developing a common currency like the EU?

Question 72

Research has shown that past exchange rates are an accurate predictor of future exchange rates ________.

A)only in the long run
B)only in the very short run
C)only during times of economic crisis
D)only during times of economic calm

Question 73

Craig, a manager at a global firm, is studying the cyclical nature of growth and employment as a part of the process to forecast exchange rates.Which factor is Craig most likely monitoring?

A)the institutional setting
B)fundamental analyses
C)cultural analyses
D)circumstances

Question 74

Fundamental forecasters assume that if current exchange rates reflect all facts in the market, then under similar circumstances, future rates will follow the same patterns.

Question 75

The International Fisher Effect links interest rates and exchange rates.

Question 76

Forecasters must predict the magnitude, direction, and ________ of an exchange rate change or movement.

A)length
B)timing
C)altitude
D)depth

Question 77

Sarah, a manager at Farley Enterprises, an MNE with operations in Asia, Europe, and North America, is using past trends in exchange rate movements to spot future trends.Which type of forecasting approach is Sarah most likely using?

A)fundamental
B)technical
C)application
D)economic

Question 78

Tanya is a manager at a global firm that has operations located in Brazil, India, and Japan.Tanya is in the process of making a fundamental analysis in order to forecast exchange rates in each country.Which of the following questions is most relevant to Tanya?

A)What is the cyclical situation in terms of employment and inflation?
B)Are the government's intervention practices sustainable?
C)What level of credibility does the government have?
D)What is the possibility of a national crisis?

Question 79

It is easier to predict the ________ of a change than the ________ of a change in exchange rates.

A)altitude; magnitude
B)depth; length
C)timing; depth
D)direction; magnitude

Question 80

The three variables predicted by forecasting are the timing, magnitude, and length of exchange rate movements.