Question 1

An alternative to maintaining an undervalued currency is to ________ the fundamental value of the exchange rate by ________ monetary policy.

Accepted Answer

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

Question 2

Suppose the government of New Country has fixed the value of its currency, the New Peso, at $1 per New Peso, but the market equilibrium value of the New Peso is $2 per New Peso. In order to maintain the official value of the New Peso the Central Bank of New Country must either ________ domestic interest rates, or ________ the supply of New Pesos by purchasing or increasing their holding of international reserves.

Accepted Answer

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

Question 3

A currency appreciation is a(n):

Accepted Answer

A)  increase in the value of a currency relative to other currencies.
B)  decrease in the value of a currency relative to other currencies.
C)  reduction in the official value of a currency in a fixed-exchange-rate system.
D)  increase in the official value of a currency in a fixed-exchange-rate system. A

Question 4

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ________ exchange rate.

Accepted Answer

A)  flexible
B)  fixed
C)  real
D)  nominal

Question 5

Flexible exchange rates ________ of monetary policy to stabilize the economy and fixed exchange rates ________ of monetary policy to stabilize the economy.

Accepted Answer

A)  offset the impact; reinforce the impact
B)  prevent the use; strengthen the ability
C)  strengthen the impact; strengthen the impact
D)  strengthen the ability; prevent the use

Question 6

Holding all else constant, a decrease in the real interest rate on Mexican assets will ________ the supply of dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

Accepted Answer

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

Question 7

For a given domestic and foreign price level, an increase in the nominal exchange rate ________ the real exchange rate.

Accepted Answer

A)  increases
B)  decreases
C)  may either increase or decrease
D)  offsets any change in

Question 8

Suppose the government of South Island has fixed the value of its currency, the Islandia, at $0.50 per Islandia, but the market equilibrium value of the Islandia is $0.25 per Islandia. In order to maintain the official value of the Islandia the Central Bank of South Island must either ________ domestic interest rates or purchase Islandia, which causes the supply of international reserves to ________.

Accepted Answer

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

Question 9

Easy monetary policy ________ interest rates which ________ the demand for a currency and ________ the market equilibrium value of the exchange rate.

Accepted Answer

A)  increases; increases; increases
B)  decreases; decreases; decreases
C)  increases; increases; decreases
D)  increases; decreases; increases

Question 10

The net decline in a country's stock of international reserves over a year is called a(n):

Accepted Answer

A)  balance-of-payments deficit.
B)  balance-of-payments surplus.
C)  trade deficit.
D)  trade surplus.

Question 11

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 3 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

Accepted Answer

A)  decrease by 9,000 dollars per period
B)  increase by 9,000 dollars per period
C)  decrease by 3,000 dollars per period
D)  increase by 3,000 dollars per period

Question 12

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.

Accepted Answer

A)  appreciated; appreciated
B)  appreciated; depreciated
C)  depreciated; appreciated
D)  depreciated; depreciated

Question 13

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

Accepted Answer

A)  appreciated.
B)  depreciated.
C)  become overvalued.
D)  become undervalued.

Question 14

Based on this figure, if the official fixed value of krone is fixed at $0.15 per krone, then the Norwegian krone is ________ and the international reserves of Norway will ________ krone per period.

Accepted Answer

A)  undervalued; increase by 2,000
B)  overvalued; decrease by 5,500
C)  undervalued; increase by 5,500
D)  overvalued; decrease by 2,000

Question 15

Holding all else constant, an increase in the preferences of Americans for Mexican goods will ________ the supply of dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

Accepted Answer

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

Question 16

A speculative attack is:

Accepted Answer

A)  a presumptive increase in the officially fixed value of a currency.
B)  a presumptive decrease in the officially fixed value of a currency.
C)  the imposition of tariffs and quotas to prevent the inflow of foreign goods.
D)  a massive selling of domestic currency assets by domestic and foreign financial investors.

Question 17

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

Accepted Answer

A)  appreciated
B)  depreciated
C)  become overvalued
D)  become undervalued

Question 18

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

Accepted Answer

A)  appreciated
B)  depreciated
C)  become overvalued
D)  become undervalued

Question 19

Suppose the government of South Island fixes the exchange rate of its currency, the Islandia, in terms of the U.S. dollar. Initially the exchange rate is set at $1 per Islandia. In a crisis, the government changes the exchange rate to $0.50 per Islandia. This is an example of a(n):

Accepted Answer

A)  appreciation.
B)  depreciation.
C)  devaluation.
D)  revaluation.

Question 20

Under a flexible exchange rate system an increase in the value of a currency relative to other currencies is a called a(n)________ and under a fixed exchange rate system an increase in the official value of a currency is called a(n)________.

Accepted Answer

A)  depreciation; devaluation
B)  appreciation; revaluation
C)  revaluation; appreciation
D)  depreciation; appreciation

Exam 28: Exchange Rates and the Open Economy

An alternative to maintaining an undervalued currency is to the fundamental value of the exchange rate by monetary policy.

A currency appreciation is a(n) :

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ________ exchange rate.

Flexible exchange rates of monetary policy to stabilize the economy and fixed exchange rates of monetary policy to stabilize the economy.

Holding all else constant, a decrease in the real interest rate on Mexican assets will the supply of dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

For a given domestic and foreign price level, an increase in the nominal exchange rate ________ the real exchange rate.

Easy monetary policy interest rates which the demand for a currency and the market equilibrium value of the exchange rate.

The net decline in a country's stock of international reserves over a year is called a(n) :

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has and the U.S. dollar has .

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

Based on this figure, if the official fixed value of krone is fixed at $0.15 per krone, then the Norwegian krone is and the international reserves of Norway will krone per period.

Holding all else constant, an increase in the preferences of Americans for Mexican goods will the supply of dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

A speculative attack is:

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

Suppose the government of South Island fixes the exchange rate of its currency, the Islandia, in terms of the U.S. dollar. Initially the exchange rate is set at $1 per Islandia. In a crisis, the government changes the exchange rate to $0.50 per Islandia. This is an example of a(n) :

Under a flexible exchange rate system an increase in the value of a currency relative to other currencies is a called a(n) and under a fixed exchange rate system an increase in the official value of a currency is called a(n) .

Exam 28: Exchange Rates and the Open Economy

An alternative to maintaining an undervalued currency is to ________ the fundamental value of the exchange rate by ________ monetary policy.

A currency appreciation is a(n) :

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ________ exchange rate.

Flexible exchange rates ________ of monetary policy to stabilize the economy and fixed exchange rates ________ of monetary policy to stabilize the economy.

Holding all else constant, a decrease in the real interest rate on Mexican assets will ________ the supply of dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

For a given domestic and foreign price level, an increase in the nominal exchange rate ________ the real exchange rate.

Easy monetary policy ________ interest rates which ________ the demand for a currency and ________ the market equilibrium value of the exchange rate.

The net decline in a country's stock of international reserves over a year is called a(n) :

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

Based on this figure, if the official fixed value of krone is fixed at $0.15 per krone, then the Norwegian krone is ________ and the international reserves of Norway will ________ krone per period.

Holding all else constant, an increase in the preferences of Americans for Mexican goods will ________ the supply of dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

A speculative attack is:

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

Suppose the government of South Island fixes the exchange rate of its currency, the Islandia, in terms of the U.S. dollar. Initially the exchange rate is set at $1 per Islandia. In a crisis, the government changes the exchange rate to $0.50 per Islandia. This is an example of a(n) :

Under a flexible exchange rate system an increase in the value of a currency relative to other currencies is a called a(n) ________ and under a fixed exchange rate system an increase in the official value of a currency is called a(n) ________.

An alternative to maintaining an undervalued currency is to the fundamental value of the exchange rate by monetary policy.

Flexible exchange rates of monetary policy to stabilize the economy and fixed exchange rates of monetary policy to stabilize the economy.

Holding all else constant, a decrease in the real interest rate on Mexican assets will the supply of dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

Easy monetary policy interest rates which the demand for a currency and the market equilibrium value of the exchange rate.

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has and the U.S. dollar has .

Based on this figure, if the official fixed value of krone is fixed at $0.15 per krone, then the Norwegian krone is and the international reserves of Norway will krone per period.

Holding all else constant, an increase in the preferences of Americans for Mexican goods will the supply of dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

Under a flexible exchange rate system an increase in the value of a currency relative to other currencies is a called a(n) and under a fixed exchange rate system an increase in the official value of a currency is called a(n) .