Deck 15: Exchange-Rate Systems and Currency Crises

Question 1

Small nations (e.g., the Ivory Coast) whose trade and financial relationships are mainly with a single partner tend to utilize:

A) Pegged exchange rates
B) Freely floating exchange rates
C) Managed floating exchange rates
D) Crawling pegged exchange rates

Answer 1

A

Question 2

Under a floating exchange rate system, an $\underline {\text { increase }}$ in U.S. imports of Japanese goods will cause the demand schedule for Japanese yen to:

A) Increase, inducing a depreciation in the yen
B) Decrease, inducing a depreciation in the yen
C) Increase, inducing an appreciation in the yen
D) Decrease, inducing an appreciation in the yen

Answer 2

Increase, inducing an appreciation in the yen

Question 3

Under a floating exchange-rate system, if American exports $\underline { \text { increase } }$ and American imports fall, the value of the dollar will:

A) Appreciate
B) Depreciate
C) Be officially revalued
D) Be officially devalued

Answer 3

Appreciate

Question 4

Under a pegged exchange-rate system, which does not explain why a country would have a balance-of-payments $\underline { \text { deficit } }$ ?

A) Very high rates of inflation occur domestically
B) Foreigners discriminate against domestic products
C) Technological advance is superior abroad
D) The domestic currency is undervalued relative to other currencies

Question 5

Rather than constructing their own currency baskets, many nations peg the value of their currencies to a currency basket defined by the International Monetary Fund. Which of the following illustrates this basket?

A) IMF tranche
B) Special Drawing Rights
C) Primary reserve asset
D) Swap facility

Question 6

Small nations (e.g., Tanzania) with more than one major trading partner tend to peg the value of their currencies to:

A) Gold
B) Silver
C) A single currency
D) A basket of currencies

Question 7

In 1973, the reform of the international monetary system resulted in the change from:

A) Adjustable pegged rates to managed floating rates
B) Managed floating rates to adjustable pegged rates
C) Crawling pegged rates to freely floating rates
D) Freely floating rates to crawling pegged rates

Question 8

During the 1970s, the European Union, in its quest for monetary union, adopted what came to be referred to as the "Community Snake." This device was a:

A) Adjustable pegged exchange rate system
B) Dual exchange rate system
C) Jointly floating exchange rate system
D) Freely floating exchange rate system

Question 9

Which exchange-rate system does $\underline { \text { not } }$ require monetary reserves for official exchange-rate intervention?

A) Floating exchange rates
B) Pegged exchange rates
C) Managed floating exchange rates
D) Dual exchange rates

Question 10

Which exchange-rate system involves a "leaning against the wind" strategy in which short-term fluctuations in exchange rates are reduced $\underline { \text { without } }$ adhering to any particular exchange rate over the long run?

A) Pegged or fixed exchange rates
B) Adjustable pegged exchange rates
C) Managed floating exchange rates
D) Freely floating exchange rates

Question 11

Under the historic adjustable pegged exchange-rate system, member countries were permitted to correct $\underline { \text { persistent } }$ and $\underline { \text { sizable } }$ payment deficits (i.e., fundamental disequilibrium) by:

A) Officially revaluing their currencies
B) Officially devaluing their currencies
C) Allowing their currencies to depreciate in the free market
D) Allowing their currencies to appreciate in the free market

Question 12

Under adjustable pegged exchange rates, if the rate of inflation in the United States $\underline { \text { exceeds } }$ the rate of inflation of its trading partners:

A) U.S. exports tend to rise and imports tend to fall
B) U.S. imports tend to rise and exports tend to fall
C) U.S. foreign exchange reserves tend to rise
D) U.S. foreign exchange reserves remain constant

Question 13

Under a floating exchange-rate system, if American exports $\underline { \text { decrease } }$ and American imports rise, the value of the dollar will:

A) Appreciate
B) Depreciate
C) Be officially revalued
D) Be officially devalued

Question 14

Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve $\underline {\text { increase }}$ the money supply of the United States. Under a floating exchange-rate system, the dollar would:

A) Appreciate in value relative to other currencies
B) Depreciate in value relative to other currencies
C) Be officially devalued by the government
D) Be officially revalued by the government

Question 15

The exchange-rate system that $\underline { \text { best } }$ characterizes the present international monetary arrangement used by industrialized countries is:

A) Freely fluctuating exchange rates
B) Adjustable pegged exchange rates
C) Managed floating exchange rates
D) Pegged or fixed exchange rates

Question 16

Under managed floating exchange rates, if the rate of inflation in the United States is $\underline { \text { less } }$ than the rate of inflation of its trading partners, the dollar will likely:

A) Appreciate against foreign currencies
B) Depreciate against foreign currencies
C) Be officially revalued by the government
D) Be officially devalued by the government

Question 17

The Bretton Woods Agreement of 1944 established a monetary system based on:

A) Gold and managed floating exchange rates
B) Gold and adjustable pegged exchange rates
C) Special Drawing Rights and managed floating exchange rates
D) Special Drawing Rights and adjustable pegged exchange rates

Question 18

Which exchange-rate mechanism is intended to insulate the balance of payments from short-term capital movements while providing exchange rate stability for commercial transactions?

A) Dual exchange rates
B) Managed floating exchange rates
C) Adjustable pegged exchange rates
D) Crawling pegged exchange rates

Question 19

Which exchange-rate mechanism calls for $\underline { \text { frequent } }$ redefining of the par value by small amounts to remove a payments disequilibrium?

A) Dual exchange rates
B) Adjustable pegged exchange rates
C) Managed floating exchange rates
D) Crawling pegged exchange rates

Question 20

A primary objective of dual exchange rates is to allow a country the ability to insulate its balance of payments from net:

A) Current account transactions
B) Unilateral transfers
C) Merchandise trade transactions
D) Capital account transactions

Question 21

To temporarily offset a $\underline { \text { depreciation } }$ in the dollar's exchange value, the Federal Reserve could ____ the U.S. money supply which would promote a (an) ____ in U.S. interest rates and a (an) ____ in investment flows to the United States.

A) Increase, decrease, decrease
B) Increase, increase, increase
C) Decrease, decrease, increase
D) Decrease, increase, increase

Question 22

Which of the following is $\underline { \text { not } }$ a potential $\underline { \text { disadvantage } }$ of freely floating exchange rates?

A) They require larger amounts of international reserves than other exchange systems
B) Demand schedules for imports and exports may be price speculation
C) There may occur large amounts of destabilizing speculation
D) Capital movements among nations may be hindered via exchange rate fluctuations

Question 23

Under a floating exchange-rate system, if the U.S. dollar $\underline { \text { depreciates } }$ against the Swiss franc:

A) American exports to Switzerland will be cheaper in francs
B) American exports to Switzerland will be more expensive in francs
C) American imports from Switzerland will be cheaper in dollars
D) None of the above

Question 24

A market-determined $\underline { \text { decrease } }$ in the dollar price of the pound is associated with:

A) Revaluation of the dollar
B) Devaluation of the dollar
C) Appreciation of the dollar
D) Depreciation of the dollar

Question 25

To temporarily offset an $\underline { \text { appreciation } }$ in the dollar's exchange value, the Federal Reserve could ____ the U.S. money supply which would promote a (an) ____ in U.S. interest rates and a ____ in investment flows to the United States.

A) Increase, decrease, decrease
B) Increase, increase, decrease
C) Decrease, decrease, decrease
D) Decrease, increase, decrease

Question 26

In a managed floating exchange-rate system, temporary stabilization of the dollar's exchange value requires the Federal Reserve to adopt a (an) ____ monetary policy when the dollar is appreciating and a (an) ____ policy when the dollar is depreciating.

A) Expansionary, expansionary
B) Expansionary, contractionary
C) Contractionary, expansionary
D) Contractionary, contractionary

Question 27

A $\underline { \text { surplus } }$ nation can $\underline { \text { reduce } }$ its payments imbalance by:

A) Applying tariffs and trade restrictions on imports
B) Revaluing its national currency
C) Increasing its labor productivity
D) Setting higher interest rates than its trading partners

Question 28

A potential $\underline { \text { limitation } }$ of freely floating exchange rates is that:

A) Countries require a larger amount of international reserves than otherwise
B) Countries are unable to initiate economic policies to combat unemployment
C) Exchange rates may experience wide and frequent fluctuations
D) Demand tends to be highly sensitive to price movements

Question 29

If the Japanese yen $\underline { \text { depreciates } }$ against other currencies in the exchange markets, this will:

A) Have no effect on the Japanese balance of trade
B) Tend to worsen the Japanese balance of trade
C) Tend to improve the Japanese balance of trade
D) None of the above

Question 30

Proponents of freely floating exchange rates maintain that:

A) Central banks can easily modify fluctuations in exchange rates
B) The system allows policy makers freedom in pursuing domestic economic goals
C) Inelastic demand schedules prevent large fluctuations in exchange rates
D) Inelastic supply schedules prevent large fluctuations in exchange rates

Question 31

Under a floating exchange-rate system, which of the following best leads to a $\underline { \text { depreciation } }$ in the value of the Canadian dollar?

A) A decrease in the Canadian money supply
B) A fall in the Canadian interest rate
C) An increase in national income overseas
D) Rising inflation overseas

Question 32

Suppose Sweden's inflation rate is $\underline { \text { less } }$ than that of its trading partner. Under a floating exchange rate system, Sweden would experience a:

A) Appreciation in its currency
B) Depreciation in its currency
C) Fall in the level of its exports
D) Rise in the level of its imports

Question 33

A potential $\underline { \text { disadvantage } }$ of freely floating exchange rates is that there would:

A) Exist excessive amounts of hedging in the foreign exchange markets
B) Be a lack of incentive to initiate exchange arbitrage
C) Be excessive amounts of destabilizing speculation
D) Exist a devaluation bias in the exchange markets

Question 34

The central bank of the United Kingdom could $\underline { \text { prevent } }$ the pound from $\underline { \text { appreciating } }$ by:

A) Selling pounds on the foreign exchange market
B) Buying pounds on the foreign exchange market
C) Reducing its inflation rate relative to its trading partners
D) Promoting domestic investment and technological development

Question 35

Under a floating exchange rate system, if there occurs a $\underline { \text { fall } }$ in the dollar price of the franc:

A) American exports to France will be cheaper in francs
B) American exports to France will be more expensive in francs
C) American imports from France will be more expensive in dollars
D) None of the above

Question 36

A market-determined $\underline { \text { increase } }$ in the dollar price of the pound is associated with:

A) Revaluation of the dollar
B) Devaluation of the dollar
C) Appreciation of the dollar
D) Depreciation of the dollar

Question 37

Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve $\underline { \text { decreases } }$ the money supply of the United States. Under a floating exchange rate system, the dollar would:

A) Appreciate in value relative to other currencies
B) Depreciate in value relative to other currencies
C) Be officially devalued by the government
D) Be officially revalued by the government

Question 38

If the Japanese yen $\underline { \text { appreciates } }$ against other currencies in the exchange markets, this will:

A) Have no effect on the Japanese balance of trade
B) Tend to improve the Japanese balance of trade
C) Tend to worsen the Japanese balance of trade
D) None of the above

Question 39

Assume that interest rates in London $\underline { \text { rise } }$ relative to those in Switzerland. Under a floating exchange-rate system, one would expect the pound (relative to the franc) to:

A) Depreciate due to the increased demand for pounds
B) Depreciate due to the increased demand for francs
C) Appreciate due to the increased demand for francs
D) Appreciate due to the increased demand for pounds

Question 40

Under a system of floating exchange rates, a U.S. trade $\underline { \text { deficit } }$ with Japan will cause:

A) A flow of gold from the United States to Japan
B) The U.S. government to ration yen to U.S. importers
C) An increase in the dollar price of yen
D) A decrease in the dollar price of yen

Question 41

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D₀ and S₀ respectively.
Figure 15.1. The Market for the Swiss Franc

Refer to Figure 15.1. Suppose the demand for francs increases from D₀ to D₁. Under a fixed exchange rate system, the U.S. exchange stabilization fund could maintain a fixed exchange rate of $0.50 per franc by:

A) Selling francs for dollars on the foreign exchange market
B) Selling dollars for francs on the foreign exchange market
C) Decreasing U.S. exports, thus decreasing the supply of francs
D) Stimulating U.S. imports, thus increasing the demand for francs

Question 42

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D₀ and S₀ respectively.
Figure 15.1. The Market for the Swiss Franc

Refer to Figure 15.1. Suppose that the United States increases its imports from Switzerland, resulting in a rise in the demand for francs from D₀ to D₁. Under a floating exchange rate system, the new equilibrium exchange rate would be:

A) $0.40 per franc
B) $0.50 per franc
C) $0.60 per franc
D) $0.70 per franc

Question 43

Given a two-country world, suppose Japan revalues the yen by 15 percent and South Korea revalues the won by 12 percent. This results in:

A) An appreciation in the value of both currencies
B) A depreciation in the value of both currencies
C) An appreciation in the value of the yen against the won
D) A depreciation in the value of the yen against the won

Question 44

To defend a pegged exchange rate that $\underline { \text { overvalues } }$ its currency, a country could:

A) Discourage commodity exports
B) Encourage commodity imports
C) Purchase its own currency in international markets
D) Sell its own currency in international markets

Question 45

Under managed floating exchange rates, a central bank would initiate:

A) Contractionary monetary policy to offset a depreciation of its currency
B) Contractionary monetary policy to offset an appreciation of its currency
C) Expansionary monetary policy to offset a depreciation of its currency
D) None of the above

Question 46

As a policy instrument, currency $\underline { \text { devaluation } }$ may be controversial since it:

A) Imposes hardships on the exporters of foreign countries
B) Imposes hardships on exporters of the devaluing country
C) Is generally followed by unemployment in the devaluing country
D) Is generally followed by price deflation in the devaluing country

Question 47

A main purpose of exchange stabilization funds is to:

A) Permit a country to overvalue its currency in the exchange markets
B) Permit a country to undervalue its currency in the exchange markets
C) Increase the supply of foreign currency when imports exceed exports
D) Decrease the supply of foreign currency when imports exceed exports

Question 48

To offset an appreciation of the dollar against the yen, the Federal Reserve would:

A) Sell dollars on the foreign exchange market and lower domestic interest rates
B) Sell dollars on the foreign exchange market and raise domestic interest rates
C) Buy dollars on the foreign exchange market and lower domestic interest rates
D) Buy dollars on the foreign exchange market and raise domestic interest rates

Question 49

Table 15.1. The Market for Francs

Refer to Table 15.1. If monetary authorities fix the exchange rate at $0.10 per franc, there would be a:

A) Shortage of 200 francs
B) Shortage of 400 francs
C) Surplus of 200 francs
D) Surplus of 400 francs

Question 50

Given a two-country world, assume Canada and Sweden $\underline { \text { devalue } }$ their currencies by 20 percent. This would result in:

A) An appreciation in the Canadian currency
B) An appreciation in the Swedish currency
C) An appreciation in both currencies
D) An appreciation in neither currency

Question 51

If Mexico dollarizes its economy, it essentially

A) Allows the Federal Reserve to be its lender of last resort
B) Accepts the monetary policy of the Federal Reserve
C) Ensures that its business cycle was identical to that of the U.S.
D) Abandons its ability to run governmental balanced budgets

Question 52

To help insulate their economies from inflation, currency depreciation, and capital flight, developing countries have implemented:

A) Regional trading blocs
B) Currency boards
C) Central banks
D) Regional fiscal policies

Question 53

If Mexico fully dollarizes its economy, it agrees to

A) Print pesos only to finance deficits of its national government
B) Use the U.S. dollar alongside its peso to finance transactions
C) Have the U.S. Treasury be in charge of its tax collections
D) Replace pesos with U.S. dollars in its economy

Question 54

Given a two-country world, suppose Japan devalues the yen by 20 percent and South Korea devalues the won by 15 percent. This results in:

A) An appreciation in the value of both currencies
B) A depreciation in the value of both currencies
C) An appreciation in the value of the yen against the won
D) A depreciation in the value of the yen against the won

Question 55

Table 15.1. The Market for Francs

Refer to Table 15.1. Under a system of floating exchange rates, the equilibrium exchange rate equals:

A) $0.15 per franc
B) $0.20 per franc
C) $0.25 per franc
D) $0.30 per franc

Question 56

Table 15.1. The Market for Francs

Refer to Table 15.1. If monetary authorities fix the exchange rate at $0.30 per franc, there will be a:

A) Shortage of 200 francs
B) Shortage of 400 francs
C) Surplus of 200 francs
D) Surplus of 400 francs

Question 57

Under managed floating exchange rates, the Federal Reserve could offset an appreciation of the dollar against the yen by:

A) Increasing the money supply which promotes falling interest rates and net investment outflows
B) Increasing the money supply which promotes rising interest rates and net investment inflows
C) Decreasing the money supply which promotes falling interest rates and net investment outflows
D) Decreasing the money supply which promotes rising interest rates and net investment inflows

Question 58

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D₀ and S₀ respectively.
Figure 15.1. The Market for the Swiss Franc

Refer to Figure 15.1. Suppose the United States decreases investment spending in Switzerland, thus reducing the demand for francs from D₀ to D₂. Under a floating exchange rate system, the new equilibrium exchange rate would be:

A) $0.40 per franc
B) $0.50 per franc
C) $0.60 per franc
D) $0.70 per franc

Question 59

Suppose that Japan maintains a pegged exchange rate that $\underline { \text { overvalues } }$ the yen. This would likely result in:

A) Japanese exports becoming cheaper in world markets
B) Imports becoming expensive in the Japanese market
C) Unemployment for Japanese workers
D) Full employment for Japanese workers

Question 60

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D₀ and S₀ respectively.
Figure 15.1. The Market for the Swiss Franc

Refer to Figure 15.1. With a system of floating exchange rates, the equilibrium exchange rate is:

A) $0.40 per franc
B) $0.50 per franc
C) $0.60 per franc
D) $0.70 per franc

Question 61

Developing countries with more than one major trading partner often peg their currencies to a group or basket of those trading partner currencies.

Question 62

In order to stabilize a currency, the central bank will need to adopt

A) An expansionary monetary policy to offset currency depreciation
B) An expansionary monetary policy to offset currency appreciation
C) A contractionary policy to offset currency appreciation
D) Both b and c

Question 63

Today, special drawing rights (SDRs) represent the most important currency basket against which developing countries maintain pegged exchange rates.

Question 64

Figure 15.2 Market for the British Pound

Refer to Figure 15.2. Suppose the United States decreases investment spending in England. Under a floating exchange rate system, the new equilibrium exchange rate would be:

A) $0.40 per franc
B) $0.60 per franc
C) $0.80 per franc
D) $1.00 per franc

Question 65

Figure 15.2 Market for the British Pound

Refer to Figure 15.2. Suppose the demand for pounds increases from D₀ to D₁. Under a fixed exchange rate system, the U.S. exchange stabilization fund could maintain a fixed exchange rate of $0.80 per pound by:

A) Selling pounds for dollars on the foreign exchange market
B) Selling dollars for pounds on the foreign exchange market
C) Decreasing U.S. exports, thus decreasing the supply of pounds
D) Stimulating U.S. imports, thus increasing the demand for pounds

Question 66

Many developing nations with low inflation rates have pegged their currencies to the U.S. dollar as a way of allowing modest increases in domestic inflation rates.

Question 67

The flexibility of floating rates may generate the problem of

A) Inflationary bias
B) Deflationary bias
C) Continuous depreciation
D) Both a and c

Question 68

Smaller nations with relatively undiversified economies and large trade sectors tend to peg their currencies to one of the world's key currencies.

Question 69

Small nations, such as Angola and Barbados, peg their currencies to the U.S. dollar since the prices of many of their traded goods are determined in markets in which the dollar is the key currency.

Question 70

An objective of the dollarization of the Mexican economy would be to:

A) Shield its economy from hyperinflation, currency depreciation, and capital flight
B) Allow the Federal Reserve to be its lender of last resort
C) Ensure that its monetary policy is independent of the Federal Reserve
D) Permit it to benefit from tariffs and subsidies imposed by the U.S. government

Question 71

Exchange rate controls

A) Achieved prominence during the economic crises of the late 1930's
B) Were popular immediately after World War II
C) Are widely used by the developing nations
D) All of the above

Question 72

Since 1974, the major industrial countries have operated under a system of fixed exchange rates based on the gold standard.

Question 73

Figure 15.2 Market for the British Pound

Refer to Figure 15.2. Suppose that the United States increases its imports from England. Under a floating exchange rate system, the new equilibrium exchange rate would be:

A) $0.40 per pound
B) $0.60 per pound
C) $0.80 per pound
D) $1.00 per pound

Question 74

Pegging to a single currency is generally done by developing nations whose trade and financial relationships are mainly with a single industrial-country partner.

Question 75

The crawling peg is a

A) Fixed exchange rate system
B) Floating exchange rate system
C) Compromise between fixed and floating exchange rates
D) Exchange rate system used by nations experiencing no inflation

Question 76

Today, fixed exchange rates are used primarily by small, developing countries that tie their currencies to a key currency such as the U.S. dollar.

Question 77

By the early 1970s, gold had been phased out of the international monetary system.

Question 78

Figure 15.2 Market for the British Pound

Refer to Figure 15.2. Demand and supply of British Pounds is initially D₀ and S₀. With a system of floating exchange rates, the equilibrium exchange rate is:

A) $0.40 per pound
B) $0.60 per pound
C) $0.80 per pound
D) $1.00 per pound

Question 79

Large industrial nations with diversified economies and small trade sectors have generally pegged their currencies to one of the world's key currencies.

Question 80

Most developing countries have chosen to allow their currencies to float independently in the foreign exchange market.