Deck 20: Government Policies Toward the Foreign Exchange Market

Question 1

Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. Pressures are there to make British pounds appreciate and not depreciate. Which of the following interventions is most likely in this situation?

A)The government of Britain should sell pounds and buy dollars.
B)The government of Britain should do nothing as a fixed rate will not change.
C)The government of Britain should buy pounds and sell dollars.
D)The government of Britain should decrease the country's money supply.

Answer 1

A

Question 2

Under which of the following policies does the government enter the foreign exchange market and buy or sell foreign currency in order to influence the exchange rate of the domestic currency?

A)Exchange controls
B)Capital controls
C)Official intervention
D)Adjustable peg

Answer 2

C

Question 3

Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. The British government can only intervene in the foreign exchange market for a limited period of time because:

A)the British government will eventually run out of pounds.
B)the British inflation rate will eventually rise so much that the government will give up their defense of the pegged rate.
C)the British government will end up with too many dollars in their central bank.
D)the British government will run out of official international reserves.

Answer 3

D

Question 4

Which of the following terms is used to describe an exchange rate regime in which the rate is fixed to a currency or basket of currencies?

A)Exchange controls
B)Pegged exchange rate
C)Managed float
D)Fully convertible

Question 5

Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. Which of the following interventions will stem the pressures for depreciation of the pound?

A)The government of Britain should sell pounds and buy dollars.
B)The government of Britain should do nothing as a fixed rate will not change.
C)The government of Britain should buy pounds and sell dollars.
D)The government of Britain should increase the country's money supply.

Question 6

If a country with a relatively high inflation rate maintains a pegged exchange rate against the currency of a relatively low inflation country:

A)its currency will depreciate.
B)its exports will become more competitive in international market.
C)its currency will sell at a discount.
D)its exports will become less competitive in the international market.

Question 7

If a country's currency is _____, then the country can borrow from other countries almost without limit by issuing assets that will be held by the central banks of other countries.

A)pegged
B)floating
C)a reserve currency
D)golden

Question 8

Which of the following mechanisms cannot be adopted by a country to defend a fixed exchange rate?

A)The government can buy or sell foreign currency in order to influence the actual exchange rate.
B)The government can allow the currency to self-adjust and the resulting market rate will be equal to the intended rate in the fixed exchange rate regime.
C)The government can impose a form of exchange control.
D)The government can alter domestic interest rates in order to influence short-term capital flows.

Question 9

With a(n) _____, the government allows the market to determine the exchange rate of a currency.

A)adjustable peg
B)dirty float
C)crawling peg
D)clean float

Question 10

Which of the following terms describes an exchange rate regime in which the government intervenes in the foreign exchange market in order to influence the market determined exchange rate?

A)Fully convertible
B)Currency control
C)Managed float
D)Clean float

Question 11

Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. A fully sterilized intervention in the foreign exchange market by the British government is expected to cause:

A)the British money supply to fall.
B)the British money supply to rise.
C)the British money supply to remain unchanged.
D)Britain to gain official international reserves.

Question 12

Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. If the British government uses sterilized intervention in the foreign exchange market, then:

A)Britain is gaining official international reserves.
B)Britain will be running a surplus.
C)the British monetary authorities will be selling British government bonds.
D)the British monetary authorities will be buying British government bonds.

Question 13

Which of the following are in place when government imposes limits on or requires approvals for payments related to some (or all) international financial activities?

A)Exchange controls
B)Capital controls
C)Official interventions
D)Adjustable pegs

Question 14

Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. If the British government intervenes in the foreign exchange market, then it can be inferred that:

A)Britain is financing a surplus in its overall balance of payments.
B)the British money supply will rise.
C)Britain is financing a deficit in its overall balance of payments.
D)Britain is gaining official international reserves.

Question 15

Action to reverse the effect of official intervention on the domestic money supply is called:

A)a crawling peg.
B)sterilization.
C)a parallel market.
D)the gold standard.

Question 16

Which of the following statements is true?

A)The special drawing right (SDR) is a basket of currencies made up of U.S.dollars, euros, British pounds, and Japanese yen.
B)Today, only China and Switzerland have currencies fixed to gold.
C)Currencies whose prices are fixed to the same commodity would ensure that arbitrage will not work and exchange rates will be floating.
D)A country maintains a floating exchange rate value to weaken the international value of its currency.

Question 17

_____ are in place when a country's government places restrictions on the conversion of the domestic currency into foreign currency or vice versa.

A)Exchange controls
B)Capital controls
C)Official interventions
D)Adjustable pegs

Question 18

An exchange rate regime in which the government may change the fixed rate in the face of a significant disequilibrium in the country's international position is called a(n):

A)pegged exchange rate.
B)fixed exchange rate.
C)adjustable peg.
D)managed float.

Question 19

Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. If the British government uses unsterilized intervention in the foreign exchange market, then it is expected that:

A)the British money supply will fall.
B)the British money supply will rise.
C)the British money supply will remain unchanged.
D)Britain is gaining official international reserves.

Question 20

For a country which has a relatively high rate of inflation and wants some form of pegged exchange rate, which of the following exchange rate regimes is the best choice?

A)Fully fixed exchange rate
B)Adjustable peg
C)Crawling peg
D)Fully convertible

Question 21

A parallel or black market often arises as a result of which of the following?

A)Floating exchange rate regimes
B)Official intervention
C)Exchange controls
D)High domestic interest rates

Question 22

Suppose the Japanese government pegs the yen to the U.S. dollar. What could the Japanese central bank do to prevent depreciation of the yen against the dollar in the foreign exchange market?

A)It would lower interest rates to discourage exports to the United States.
B)It would increase its official reserve holdings by buying dollars in the foreign exchange market.
C)It would print new currency notes and exchange them for other currencies in the foreign exchange market.
D)It would buy yen and sell dollars in the foreign exchange market.

Question 23

The government policy dictating that all foreign exchange proceeds must be turned over to the country's monetary authority is referred to as capital controls.

Question 24

If a country with a fixed exchange rate is continuously losing foreign reserves, speculators will:

A)sell the country's currency and buy foreign currency.
B)speculate that the country's currency will be revalued.
C)buy the country's currency and sell foreign currency.
D)lend foreign currency to the country's central bank.

Question 25

Which of the following is currently a main function of the International Monetary Fund (IMF)?

A)To loan reserves to countries that are attempting to finance temporary payments deficits
B)To loan money to developing countries to allow them to carry out programs that will improve the standard of living
C)To house the world's gold supply
D)To set bilateral exchange rate values

Question 26

Which of the following statements is NOT accurate?

A)A fundamental disequilibrium can result in a one-way speculative gamble.
B)An ongoing disequilibrium in the foreign exchange market can be sterilized by keeping official reserve holdings steady.
C)Fundamental disequilibrium calls for a persistent series of interventions.
D)The value of the foreign currency declines if a country revalues its own currency.

Question 27

Which of the following is true of capital controls?

A)They cannot be used to maintain a fixed exchange rate.
B)They are socially inefficient methods of maintaining a fixed exchange rate.
C)They can be optimal when a disequilibrium is fundamental.
D)They are key to the success of a fixed exchange rate regime.

Question 28

For a country with a fixed exchange rate that is running continuous overall payments surpluses:

A)the country's monetary authority will eventually run out of foreign reserves.
B)the country has an overvalued currency.
C)the country is in an optimal situation.
D)the country's monetary authority will suffer losses on its official reserve holdings if the country's currency is revalued.

Question 29

An exchange rate regime in which the government intervenes in the market to influence the market-determined exchange rate can be called either a dirty float or a managed float.

Question 30

Which of the following activities does the International Monetary Fund engage in?

A)Creation of special drawing rights
B)Regulation of large international banks
C)Provision of financial services to large international banks
D)Promotion of international trade by lowering tariffs and nontariff barriers

Question 31

Which of the following best describes a situation in which a country buys domestic currency in order to defend a pegged exchange rate, and also uses a policy in the domestic economy in to prevent the domestic money supply from changing?

A)Official intervention
B)Sterilized intervention
C)Maintaining a crawling peg
D)Deficit without tears

Question 32

The pre-1914 gold standard imposed pressure to adjust mostly on countries that experienced:

A)seasonal fluctuations in export sales.
B)persistent increases in the countries' holdings of official international reserves.
C)official settlements balance deficits.
D)trade surpluses.

Question 33

Suppose under a gold standard the price of gold in the United States is $450 per ounce and the price of gold in the United Kingdom is 200£ per ounce. The exchange rate is thus:

A)2.25£ per dollar.
B)$0.45 per pound.
C)$2.25 per pound.
D)0.54£ per dollar.

Question 34

Which of the following is NOT one of the rules for a gold standard?

A)Each country should fix the value of its currency in terms of gold.
B)Capital controls should be used to conserve each country's gold holdings.
C)There should be an unrestricted flow of gold between countries.
D)The central bank in each country should hold gold reserves in a direct relationship to the currency it issues.

Question 35

Faced with increasing outflows of gold in the late 1960's and early 1970s, the United States:

A)used contractionary fiscal policies to rid the nation of deficits.
B)decreased the dollar price of gold.
C)suspended the convertibility of dollars into gold.
D)encouraged other countries to increase their domestic interest rates.

Question 36

If a country with a fixed exchange rate faces a fundamental disequilibrium because it has a large, ongoing surplus in it official settlements balance, which of the following policies can it employ to try to achieve external balance?

A)Impose import barriers
B)Raise interest rates
C)Allow the exchange rate to float
D)Obtain a loan from the IMF

Question 37

Today, no country fixes its currency to gold.

Question 38

One disadvantage of the pre-1914 gold standard was that:

A)slow expansion of the world's gold stock led to too much inflation in the prices of products other than gold.
B)internal prices of economies being rigid, there arose uncertainty in the international trade.
C)pressures to adjust were placed mainly on countries in payments deficit situations, and not on countries in surplus.
D)central banks often changed their announced gold prices to achieve competitive devaluations.

Question 39

Which one of the following is NOT a way for a country to defend its fixed exchange rate?

A)Promote real appreciation of the country's currency
B)Intervene in the foreign exchange market
C)Alter domestic interest rates
D)Impose some form of exchange control

Question 40

The central feature of the Bretton Woods system was:

A)the use of a floating exchange rate regime.
B)official encouragement for one-way speculative gambles.
C)the use of capital controls.
D)the use of an adjustable pegged exchange rate regime.

Question 41

With respect to exchange rates, the 1997 Asian currency crisis caused the Thai, Malaysian, Indonesian, and Korean governments to give up their pegged or heavily managed exchange rates and move to floating exchange rates.

Question 42

Government can change domestic interest rates to influence short-term capital flows and thereby defend a fixed exchange rate.

Question 43

The exchange-rate mechanism (ERM) crisis occurred because exchange controls were not adjusted frequently enough.

Question 44

A country with a fixed exchange rate experiences downward pressure on the exchange rate value of its currency. The central bank chooses to intervene in the market to maintain its fixed exchange rate. How would the central bank go about intervening? If the pressures for the currency to depreciate persist for a long period, even after successive interventions in the foreign exchange market, would it be difficult to maintain the fixed exchange rate? Why or why not? Give an example of a country that attempted to maintain its exchange rate in the face of downward pressures. What was the result?

Question 45

"Dollarization" can be classified as a form of a fixed exchange rate.

Question 46

During 2005-2008, the Chinese currency gradually depreciated against the U.S. dollar.

Question 47

If a country's currency is a reserve currency, then intervention in the foreign exchange market to maintain a pegged exchange rate is unnecessary.

Question 48

Exchange controls used by a country's government to maintain an overvalued exchange rate result in considerable costs to the country. Explain the situation with a diagram and use it to show the deadweight loss. Describe the role that bribery and parallel markets can play in economies with exchange controls.

Question 49

The current world exchange rate system is usually described as an adjustable peg system.

Question 50

Describe the Bretton Woods exchange rate system and explain how it fell apart.

Question 51

A country with a fixed exchange rate experiences upward pressure on the exchange rate value of its currency. The central bank chooses to intervene in the market to maintain its fixed exchange rate. How would the central bank go about intervening? If the pressures for the currency to appreciate persist, would it be difficult to maintain the fixed exchange rate? Why or why not? Would your answers differ if the country carried out sterilized intervention? Why or why not. Give an example of a country that attempted to maintain their exchange rate in the face of upward pressures on their currency value. What was the result?

Question 52

Fixed exchange rates are likely to be changed at some point over time.

Question 53

Describe a situation in which a one-way speculative gamble would be possible and explain the effects that this type of speculation would have on a country trying to maintain its fixed exchange rate.

Question 54

The Bretton Woods conference led to the creation of the International Monetary Fund (IMF).

Question 55

The success of the gold standard in the period before World War I is attributed partly to the high degree of tranquility in global markets.

Question 56

The special drawing right (SDR) is a basket of three currencies: the British pound, the U.S. dollar, and the Japanese yen.