Deck 8: Exchange-Rate Policy

Question 1

Given that _____ is relatively scarce in Latin America, the outflows of capital from the region have been historically ______.

A) labor, large
B) labor, small
C) capital, large
D) capital, small
E) commodities, small

Answer 1

C

Question 2

Which of the following is not part of the current account?

A) FDI
B) exports
C) remittances
D) ODA
E) none of the above

Answer 2

E

Question 3

Which of the following would be related to a surplus in the current account balance?

A) low commodity prices
B) large payments on debt
C) low tourism revenues
D) high commodity prices
E) low remittances

Answer 3

D

Question 4

It is common for Latin American countries to have a _____ for their balances of trade, and a _____ for their current account balance.

A) surplus, surplus
B) surplus, deficit
C) deficit, deficit
D) deficit, surplus
E) surplus, surplus

Question 5

A record of the difference between the holding of foreign assets by domestic residents and domestic assets by foreign residents is known as:

A) financial account
B) current account
C) Bretton Woods system
D) official reserve assets
E) real exchange rate

Question 6

What is not included in the current account?

A) transactions involving goods
B) investment income
C) FDI
D) transactions involving services
E) unilateral transfers

Question 7

The difference between the income from and the payments to the rest of the world constitute the balance on what?

A) investment income
B) FDI
C) the current account
D) the financial account
E) unilateral transfers

Question 8

The tendency of investors to withdraw portfolio capital from an entire region in response to perceived economic difficulties in a single country or subset of countries is known as:

A) crawling peg
B) exchange rate regime
C) intervention
D) contagion
E) Bretton Woods system

Question 9

What are remittances?

A) the transfers of money from foreign workers to their home country
B) grants given for development aid
C) the profits made from FDI
D) interest rate paid to the IMF
E) a crawling peg exchange system

Question 10

Which of the following would be the most volatile component of the current account in Latin America?

A) imports of goods
B) imports of services
C) income on foreign assets
D) unilateral transfers
E) exports of goods

Question 11

Which of these is a type of unilateral transfer?

A) FDI
B) dividends from investments
C) IMF or World Bank loan
D) remittances
E) profits from investments

Question 12

Which nation uses the U.S. dollar as its currency?

A) Mexico
B) Guatemala
C) Brazil
D) Chile
E) Ecuador

Question 13

Higher commodity prices show up in:

A) the merchandise trade balance.
B) the balance on goods and services.
C) the current account balance.
D) all of the above
E) none of the above

Question 14

What international institution was created at the Bretton Woods conference?

A) the United Nations
B) UNCTAD
C) the International Court of Justice
D) the International Monetary Fund
E) the International Olympic Committee

Question 15

The exchange rate observed in the market is known as what?

A) real exchange rate
B) financial account
C) current account
D) absolute purchasing power parity
E) nominal exchange rate

Question 16

If there is a black market in foreign exchange, then what is likely to be the case?

A) There is no intervention in the foreign exchange market.
B) There are no exchange controls.
C) There is a free market in foreign exchange market.
D) all of the above
E) none of the above

Question 17

Attempting to influence the exchange rate by buying or selling foreign exchange is known as _____ in the foreign exchange market.

A) sterilization
B) stabilization
C) intervention
D) monetarization
E) amelioration

Question 18

Exchange controls plus high inflation tends to produce:

A) sterilization.
B) intervention.
C) an undervalued exchange rate.
D) a black market in foreign exchange.
E) none of the above

Question 19

If Bolivia decides to fix their exchange rate but does not have enough foreign exchange (dollars) to intervene in the foreign exchange market, then they might institute a system of:

A) exchange controls.
B) white markets.
C) nominal markets.
D) an MTN.
E) all of the above

Question 20

Buying and selling of foreign exchange to influence the exchange rate is referred to as:

A) capital controls
B) a managed float.
C) exchange controls.
D) sterilization.
E) intervention.

Question 21

Which of the following would cause the exchange rate to depreciate?

A) an increase in the supply
B) an increase in demand
C) a decrease in supply
D) a and b
E) b and c

Question 22

Intervention in the foreign exchange market would be associated with:
A rightward shift of the supply curve.
B) a leftward shift of the supply curve.
C) a leftward shift in the demand curve.
D) corruption.
E) none of the above

Question 23

In a fixed exchange rate system, a country would accumulate reserves when the current account is in _____ and use these reserves during period when the country has a current account balance in ______.

A) surplus, surplus
B) surplus, deficit
C) deficit, deficit
D) deficit, surplus
E) balanced, surplus

Question 24

Which of the following is associated with fixed exchange rates?

A) intervention in the foreign exchange market
B) exchange controls
C) black markets
D) all of the above
E) none of the above

Question 25

Rationing of foreign exchange is associated with:

A) exchange controls.
B) floating exchange rates.
C) monetary policy.
D) fiscal policy.
E) none of the above

Question 26

The theory that exchange rates are related to difference in the level of prices between countries is known as:

A) contagion.
B) exchange rate regime.
C) purchasing power parity.
D) law of two prices.
E) relative parity.

Question 27

The buying and selling of foreign exchange used to acquire foreign assets is known as:

A) exchange rate regime
B) intervention
C) unilateral transfers
D) real exchange rate
E) contagion

Question 28

Central bank buying and selling of foreign exchange to influence the exchange rate is known as:

A) sterilization.
B) manipulation.
C) intervention.
D) PPP.
E) none of the above

Question 29

Describe the current account. Be sure to list all of its component parts. What does a typical current account look like for a Latin American nation?

Question 30

Explain why Latin American nations tend to have surpluses for their balance of trade, yet deficits on their current account balance.

Question 31

Explain the concepts of absolute purchasing power parity, relative purchasing power parity, and the law of one price. Why are they relevant for Latin America?

Question 32

Show and explain what would happen in a country if the inflation rate is very high and the exchange rate is floating.

Question 33

Draw a graph showing how a fixed exchange rate is associated with a current account deficit. Next, list how the current account deficit can be offset.

Question 34

Describe the "fear of floating". How does it apply to Latin America?

Question 35

Why would a black market or foreign exchange exist?

Question 36

Describe several methods of exchange control. Why might a country choose to implement exchange controls?

Question 37

If the exchange rate is fixed, then a commodity exporter would need to accumulate foreign exchange when commodity prices are high. Show why this is true.

Question 38

Describe Latin America's history of exchange rate systems.

Question 39

Show how a tariff would tend to worsen the welfare of the average citizen in Latin America.

Question 40

Suppose that the price of copper crashes. Describe what would happen to the current account balance in Chile.