Deck 6: Government Influence on Exchange Rates

Question 1

Using indirect intervention, the Fed attempts to affect the dollar's value indirectly by influencing the factors that determine it, such as interest rates.

Answer 1

True

Question 2

A common way to reduce inflation is to weaken the value of the domestic currency.

Answer 2

False

Question 3

Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized intervention.

Answer 3

True

Question 4

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 versus the dollar.

Question 5

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

Question 6

If the Bank of England announces that it will start to frequently intervene in order to reduce the fluctuations of the British pound, the premiums on call and put options will increase.

Question 7

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

Question 8

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

Question 9

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

Question 10

While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are better able to raise prices.

Question 11

Under the system known as a managed float, a currency is allowed to float on a daily basis, but the government can periodically intervene to achieve specific objectives.

Question 12

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 13

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 14

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

Question 15

Assuming no credit risk, the interest rates among countries in the eurozone should be similar.

Question 16

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 17

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

Question 18

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

Question 19

A central bank may attempt to stimulate a stagnant economy by weakening the value of the currency.

Question 20

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 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

All European countries now use the euro as their currency.

Question 26

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

Question 27

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

Question 28

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 29

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

Question 30

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

Question 31

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

Question 32

Currency devaluations have the potential to reduce unemployment, while currency revaluations have the potential to reduce inflation.

Question 33

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 34

Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economic problems.

Question 35

If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may backfire because it will increase the money supply and thus increase inflation.

Question 36

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 37

While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive foreign prices that result from a strong home currency.

Question 38

The effects of the Asian crisis did not extend to countries in other parts of the world such as Latin America, Europe, and the United States.

Question 39

Countries whose local currencies experienced greater depreciation during the Asian crisis generally also experienced higher increases in their interest rates during the crisis.

Question 40

In order to stimulate a stagnant economy, a government operating under a managed float may attempt to weaken its currency.

Question 41

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 42

​The European Central Bank is located in:

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

Question 43

A weak dollar is normally expected to cause:

A) high unemployment and high inflation in the United States.
B) high unemployment and low inflation in the United States.
C) low unemployment and low inflation in the United States.
D) low unemployment and high inflation in the United States.

Question 44

Direct intervention is usually more effective than indirect intervention.

Question 45

The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in the eurozone.

Question 46

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

Question 47

Which of the following is not a reason for devaluation of a currency?

A) high inflation
B) to reduce a balance-of-trade deficit
C) to decrease the amount of imports
D) high unemployment

Question 48

​The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency appreciates 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) ​more; less
C) ​less; less
D) ​less; more

Question 49

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

Question 50

In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign competition.

Question 51

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

Question 52

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

Question 53

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 54

​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 55

Which of the following did not occur under the 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 percent above or below the initially set rates.
D) The United States experienced no balance-of-trade deficits.

Question 56

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) pegged intervention AND sterilized intervention.

Question 57

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

Question 58

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 59

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 60

​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 61

If a speculator expects that the Fed will intervene heavily by exchanging euros for U.S. dollars in order to affect the exchange rate, she would most likely ____ to capitalize on this intervention.

A) purchase euro put options
B) purchase euro futures contracts
C) purchase yen call options
D) sell U.S. Treasury bonds

Question 62

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

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

Question 63

Among the reasons for government intervention are:

A) to smooth exchange rate movement.
B) to establish implicit exchange rate boundaries.
C) to respond to temporary disturbances.
D) All of these are correct.

Question 64

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 these are correct.

Question 65

​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.

Question 66

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 these are correct.

Question 67

​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 68

​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 69

Which of the following is the most likely reason for revaluation of a currency?

A) to reduce inflation
B) to stimulate the local economy
C) to increase the amount of exports
D) to increase a balance-of-trade surplus

Question 70

​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 71

If a country in the eurozone is experiencing weak economic conditions, which of the following monetary policies would its government be likely to pursue to correct the problem?

A) Strengthen its currency to stimulate exports.
B) Reduce interest rates to stimulate the economy.
C) Raise interest rates to reduce inflation.
D) None of these are correct.

Question 72

A strong dollar is normally expected to cause:

A) high unemployment and high inflation in the United States.
B) high unemployment and low inflation in the United States.
C) low unemployment and low inflation in the United States.
D) low unemployment and high inflation in the United States.

Question 73

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 these will have an impact on inflation.

Question 74

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 75

​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 76

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 77

Under the ____________ from 1979-1992 (before the euro existed), the currencies of most European countries that were members were allowed to fluctuate by no more than 2.25 percent (6 percent for some currencies) from the initially established values.

A) European Monetary System (EMS)
B) snake agreement
C) Maastricht Treaty
D) Bretton Woods Agreement

Question 78

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 these are true.

Question 79

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.

Question 80

A managed float exchange rate system is 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.