Question 1

Suppose a permanent increase in demand for the Argentinean peso causes a chronic shortage of this currency in the foreign exchange market.The Argentinean government should then:

Accepted Answer

A)  request other countries to revalue their currency.
B)  devalue the peso.
C)  allow the peso to appreciate.
D)  restricts exports.
E)  restrict imports. C

Question 2

Which of the following holds true, if goods sell for the same price worldwide when converted to a common currency?

Accepted Answer

A)  A high rate of inflation exists
B)  A fixed exchange-rate system exists
C)  Purchasing power parity exists
D)  The foreign exchange market is in equilibrium
E)  Arbitrage opportunities exist C

Question 3

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market.Assume that the market operates under a flexible exchange rate regime. Figure 21.1  In the figure:
D1 and D2: Demand for Brazilian reals
S1 and S2: Supply of Brazilian reals
Refer to Figure 21.1.Assume that the initial equilibrium exchange rate is 6 pesos per real.Other things remaining equal, an increase in the number of Brazilian tourists to Mexico is most likely to:

Accepted Answer

A)  keep the equilibrium exchange rate constant.
B)  shift the demand curve for pesos to the right.
C)  shift the supply curve of pesos to the left.
D)  shift the demand curve for pesos to the left.
E)  shift the supply curve of pesos to the right. E

Question 4

The primary function of the World Bank is to:

Accepted Answer

A)  lend money to the World Trade Organization.
B)  provide loans to countries experiencing huge budget deficit.
C)  finance economic development in poor countries.
D)  assist countries experiencing balance of payments deficits.
E)  finance the fiscal stabilization program of the U.S.government.

Question 5

The figure given below depicts the foreign exchange market for British pounds traded for U.S.dollars. Figure 21.2  Refer to Figure 21.2.Suppose that the British central bank wishes to maintain a fixed exchange rate of £1 = $1.60.If supply decreases from S1 to S2, the bank must:

Accepted Answer

A)  buy 25 pounds to shift the supply curve from S2 to S1.
B)  buy 50 pounds to shift the supply curve from S2 to S1.
C)  sell 75 pounds to shift the supply curve from S2 to S1.
D)  buy 75 pounds to shift the supply curve from S2 to S1.
E)  sell 10 pounds to shift the supply curve from S2 to S1.

Question 6

A country on a gold standard was able to maintain people's confidence in the value of its currency by:

Accepted Answer

A)  printing more and more paper money.
B)  restricting international exchange of goods and services.
C)  ensuring the convertibility of paper money into gold.
D)  maintaining a fixed stock of foreign currencies.
E)  ensuring balance of payment surplus.

Question 7

Under the _____ arrangement, the exchange rate is adjusted periodically by small amounts at a fixed, pre-announced rate or in response to certain indicators.

Accepted Answer

A)  currency board
B)  crawling peg
C)  reserve currency
D)  conventional fixed peg
E)  independent float

Question 8

The exchange-rate arrangement that emerged from the Bretton Woods conference is often referred to as the:

Accepted Answer

A)  dollar exchange standard.
B)  euro exchange standard.
C)  gold exchange standard.
D)  silver exchange standard.
E)  flexible exchange rate standard.

Question 9

Suppose a U.S.investor buys a Canadian government bond with a face value of Canadian dollar (CAD)100 and an annual yield of 8.8 percent.Which of the following statements is true?

Accepted Answer

A)  At maturity, the dollar return from the Canadian bond will be $108.8, regardless of what happens to the exchange rate.
B)  The Canadian bond will yield the same dollar return from the time of purchase to the time of maturity.
C)  An American will make a profit on the Canadian bond only when the CAD-denominated return is higher on the Canadian bond than the dollar-denominated return on a comparable U.S.bond.
D)  The dollar return on the Canadian bond depends on the dollar price of the Canadian dollar at the time of maturity.
E)  The decision to buy the Canadian bond should be based solely on the CAD interest return and not on changes in the exchange rate.

Question 10

An appreciation of the Norwegian kroner in relation to the U.S.dollar is most likely to cause:

Accepted Answer

A)  an increase in the U.S.demand for Norwegian goods.
B)  an increase in the Norwegian demand for U.S.goods.
C)  an increase in the supply of U.S.goods to Norway.
D)  a decrease in the supply of Norwegian goods to the United States.
E)  no change in the demand or supply of goods for either country.

Question 11

Assume that you have just returned to the United States from a summer vacation in Russia, where you exchanged American dollars for Russian rubles.Your economic actions can be said to have:

Accepted Answer

A)  increased the supply of American dollars in Russia.
B)  decreased the supply of Russian rubles in America.
C)  decreased the supply of American dollars in Russia.
D)  increased the demand for American dollars in America.
E)  increased the supply of Russian rubles in Russia.

Question 12

Assume an Australian importer expects to pay 16, 000 Australian dollars (AUD)for $8, 000 worth of U.S.goods, but on the shipment date 30 days later, the same volume of U.S.goods costs the Australian importer only 10, 000 Australian dollars.This means that between the contract date and the payment date, the exchange rate has changed:

Accepted Answer

A)  from $1 = 1.25 AUD to $1 = 2.0 AUD.
B)  from $1 = 2.0 AUD to $1 = 1.25 AUD.
C)  from $1 = 0.8 AUD to $1 = 0.5 AUD.
D)  from $1 = 0.5 AUD to $1 = 0.8 AUD.
E)  from $1 = 0.5 AUD to $1 = 2.0 AUD.

Question 13

The dollar return on a foreign investment is less than the interest rate on the foreign asset, if the foreign currency depreciates against the U.S.dollar between the purchase date and the maturity date.

Accepted Answer

A) True 
 B)False

Question 14

Under a fixed exchange-rate system, in order to maintain the exchange rate:

Accepted Answer

A)  governments must adopt a laissez-faire economic policy.
B)  all trading partners must enjoy the same level of economic growth.
C)  currencies must be inconvertible.
D)  the imports of one country must equal the exports of its trading partner.
E)  governments must intervene in the foreign exchange market.

Question 15

The figure given below depicts the foreign exchange market for British pounds traded for U.S.dollars. Figure 21.2  Refer to Figure 21.2.At the initial equilibrium point, with demand curve D and supply curve S1:

Accepted Answer

A)  the price of dollar per British pound is $1.50 and the quantity of British pounds being traded is 225.
B)  the price of dollar per British pound is $1.60 and the quantity of British pounds being traded is 225.
C)  the price of dollar per British pound is $1.60 and the quantity of British pounds being traded is 300.
D)  the price of dollar per British pound is $1.75 and the quantity of British pounds being traded is 350.
E)  the price of dollar per British pound is $1.75 and the quantity of British pounds being traded is 300.

Question 16

Economists typically date the beginning of the gold standard to the period:

Accepted Answer

A)  before 1500.
B)  before 1776.
C)  between 1880 and 1914.
D)  between the two world wars.
E)  between 1970 and 2000.

Question 17

Assume that a one-year Malaysian bond yields 10 percent interest and that the dollar return on maturity is 5 percent.If the exchange rate at maturity is $1 = MYR 4.00 (Malaysian ringgit), what was the exchange rate at the time the bond was purchased?

Accepted Answer

A)  $1 = MYR 4.2
B)  $1 = MYR 3.8
C)  $1 = MYR 3.6
D)  MYR 1 = $0.26
E)  MYR 1 = $0.4

Question 18

Assume a U.S.investor buys a Mexican bond with a face value of MXP 1, 000 and a 20 percent annual interest yield while the exchange rate is MXP 10 per dollar.What is the dollar return from the bond if the exchange rate at the end of the year is MXP 11 per dollar?

Accepted Answer

A)  9.1%
B)  10.0%
C)  18.2%
D)  20.0%
E)  32.0%

Question 19

Because of their greediness, speculators are considered bad for exchange-rate markets.

Accepted Answer

A) True 
 B)False

Question 20

Appreciation of the dollar means that now it takes more dollars to buy one unit of foreign currency.

Accepted Answer

A) True 
 B)False

Exam 39: Exchange Rates and Financial Links Between Countries

Suppose a permanent increase in demand for the Argentinean peso causes a chronic shortage of this currency in the foreign exchange market.The Argentinean government should then:

Which of the following holds true, if goods sell for the same price worldwide when converted to a common currency?

The primary function of the World Bank is to:

The figure given below depicts the foreign exchange market for British pounds traded for U.S.dollars. Figure 21.2 Refer to Figure 21.2.Suppose that the British central bank wishes to maintain a fixed exchange rate of £1 = $1.60.If supply decreases from S₁ to S₂, the bank must:

A country on a gold standard was able to maintain people's confidence in the value of its currency by:

Under the _____ arrangement, the exchange rate is adjusted periodically by small amounts at a fixed, pre-announced rate or in response to certain indicators.

The exchange-rate arrangement that emerged from the Bretton Woods conference is often referred to as the:

Suppose a U.S.investor buys a Canadian government bond with a face value of Canadian dollar (CAD) 100 and an annual yield of 8.8 percent.Which of the following statements is true?

An appreciation of the Norwegian kroner in relation to the U.S.dollar is most likely to cause:

Assume that you have just returned to the United States from a summer vacation in Russia, where you exchanged American dollars for Russian rubles.Your economic actions can be said to have:

The dollar return on a foreign investment is less than the interest rate on the foreign asset, if the foreign currency depreciates against the U.S.dollar between the purchase date and the maturity date.

Under a fixed exchange-rate system, in order to maintain the exchange rate:

The figure given below depicts the foreign exchange market for British pounds traded for U.S.dollars. Figure 21.2 Refer to Figure 21.2.At the initial equilibrium point, with demand curve D and supply curve S₁:

Economists typically date the beginning of the gold standard to the period:

Assume that a one-year Malaysian bond yields 10 percent interest and that the dollar return on maturity is 5 percent.If the exchange rate at maturity is $1 = MYR 4.00 (Malaysian ringgit) , what was the exchange rate at the time the bond was purchased?

Assume a U.S.investor buys a Mexican bond with a face value of MXP 1, 000 and a 20 percent annual interest yield while the exchange rate is MXP 10 per dollar.What is the dollar return from the bond if the exchange rate at the end of the year is MXP 11 per dollar?

Because of their greediness, speculators are considered bad for exchange-rate markets.

Appreciation of the dollar means that now it takes more dollars to buy one unit of foreign currency.