Deck 9: Foreign Exchange Rate Determination and Intervention

Question 1

The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks, as well as the expected future levels and rates of growth of monetary stock.

A) balance of payments
B) monetary
C) asset market
D) law of one price

Answer 1

monetary

Question 2

The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.

Answer 2

True

Question 3

The balance of payments approach of exchange rate theory is largely dismissed by the academic community today, while the practitioner public still rely on different variations of the theory for their decision making.

Answer 3

True

Question 4

Describe the asset market approach to exchange rate determination. How is this consistent with economic theory of (say, security) prices in general?

Question 5

________ is the active buying and selling of the domestic currency against foreign currencies.

A) Indirect Intervention
B) Direct Intervention
C) Foreign Direct Investment
D) Federal Funding

Question 6

________ is defined as the spread of a crisis in one country to its neighboring countries and other countries with similar characteristics.

A) Speculation
B) Contagion
C) Capital market liquidity
D) Political science

Question 7

The asset market approach to forecasting is not applicable to emerging markets.

Question 8

The asset market approach to forecasting assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations. These include all but which of the following choices?

A) relative real interest rates
B) capital market liquidity
C) political safety
D) All of the above are considered by investors in their decision process.

Question 9

The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.

A) balance of payments
B) monetary
C) asset market
D) law of one price

Question 10

Most theories of technical analysis differentiate fair value from market value.

Question 11

Critics of the balance of payments approach to exchange rate determination point to the emphasis on ________ of currency and capital rather than ________ of money or financial assets.

A) flows; stocks
B) stocks; flows
C) import; export
D) export; import

Question 12

The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets

A) balance of payments
B) monetary
C) asset market
D) law of one price

Question 13

It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate, i.e., they are linked AND mutually determined.

Question 14

Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.

Question 15

The ________ provides a means to account for international cash flows in a standardized and systematic manner.

A) parity conditions
B) asset approach
C) balance of payments
D) International Fisher Effect

Question 16

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?

A) infrastructure weaknesses
B) speculation on the part of market participants
C) the sharp reduction of cross-border foreign direct investment
D) All of the above contributed to the emerging markets exchange rate collapse of the 1990s.

Question 17

The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.

A) balance of payments
B) parity conditions
C) managed float
D) asset market

Question 18

The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.

Question 19

Which of the following versions of PPP is thought to be the most relevant to possibly explaining what drives exchange rate values?

A) The Law of One Price
B) Absolute Purchasing Power Parity
C) Relative Purchasing Power Parity
D) The International Fisher Effect

Question 20

An important thing to remember about foreign exchange rate determination is that parity conditions, asset approach, and balance of payments approaches are ________ theories rather than ________ theories.

A) competing; complementary
B) competing; contemporary
C) complementary; contiguous
D) complementary; competing

Question 21

If a central bank wishes to "defend its currency," it might follow an expansive monetary policy, which would drive real rates of interest up.

Question 22

________ is the alteration of economic or financial fundamentals that are thought to be drivers of capital to flow in and out of specific currencies.

A) Indirect Intervention
B) Direct Intervention
C) Foreign Direct Investment
D) Capital Controls

Question 23

Indirect intervention for domestic currency valuation typically uses tools of monetary policy as opposed to using tools of fiscal policy.

Question 24

Prior to July 2, 1997, the Thai government:

A) allowed the Thai Bhat to float against major currencies.
B) fixed the Bhat's value against the Korean won only.
C) fixed the Bhat's value against major currencies especially the U.S. dollar.
D) none of the above

Question 25

________ is the restriction of access to foreign currency by government.

A) Indirect Intervention
B) Direct Intervention
C) Foreign Direct Investment
D) Capital Controls

Question 26

If the goal were to decrease the value of a country's currency - to fight an appreciation of the domestic currency in exchange for foreign currency - the central bank would:

A) buy its own currency in exchange for foreign currency.
B) follow a restrictive monetary policy.
C) drive real rates of interest up.
D) sell its own currency in exchange for foreign currency.

Question 27

Explain how a central bank would engage in direct intervention to decrease the value of its domestic currency. Since the 1970s, it has been difficult for central banks alone to engage in direct intervention to alter the value of their domestic currency. Identify and explain at least two other activities in which a central bank could engage to alter the value of their domestic currency.

Question 28

Slow economic growth and continued unemployment problems are common reasons for central banks to hold currency values down.

Question 29

Which of the following was NOT an international currency crisis in the 1990s and early 2000s?

A) the Asian Crisis
B) the Canadian Crisis
C) the Argentine Crisis
D) All of the above were currency crises in the 1990s and 2000s.

Question 30

The authors refer to the practice of many Asian firms being largely controlled by families of groups related to the governing body of the country as:

A) illegal.
B) insider trading.
C) cronyism.
D) not in my back yard.

Question 31

The fall in the value of the domestic currency will sharply reduce the purchasing power of foreign tourists in the country whose currency values are falling.

Question 32

The authors did NOT identify which of the following as a root of the Asian currency crisis?

A) the collapse of some Asian currencies
B) the rate of inflation in the United States
C) corporate socialism
D) banking stability and management

Question 33

A country wishing for its currency to fall in value, particularly when confronted with a continual appreciation of its value against major trading partner currencies, the central bank may work to lower real interest rates, reducing the returns to capital.

Question 34

The International Monetary Fund, as one of its basic principles (Article IV), encourages members to pursue "currency manipulation" to gain competitive advantages over other members as opposed to engaging in military action to achieve the same advantage.

Question 35

Direct intervention for currency valuation involves limiting the ability to exchange domestic currency for foreign currency.

Question 36

The "tequila effect" is a slang term used to describe a form of financial panic called:

A) run on the market.
B) speculation.
C) contrary investing.
D) contagion.

Question 37

Which of the following is NOT a technique used by governments or central banks to impact domestic currency valuation?

A) Indirect Intervention
B) Direct Intervention
C) Capital Controls
D) All of the above are techniques used to control currency valuation.

Question 38

If the goal were to increase the value of a country's currency - to fight an depreciation of the domestic currency in exchange for foreign currency - the central bank would:

A) buy its own currency in exchange for foreign currency.
B) follow a expansive monetary policy.
C) drive real rates of interest down.
D) sell its own currency in exchange for foreign currency.

Question 39

The Asian Currency crisis appeared to begin in:

A) South Korea.
B) Taiwan.
C) Thailand.
D) Japan.

Question 40

Which of the following is NOT a motivation for a government or central bank to manipulate domestic currency valuation?

A) fight inflation
B) slow too rapid economic growth
C) spur too slow economic growth
D) All of the above are motivations for the government or central bank to manipulate currency values.

Question 41

The smaller and less liquid markets and currency markets frequently demonstrate behaviors that follow the principles outlined by the different schools of thought on exchange rate determination (parity conditions, balance of payments approach, and asset approach) relatively well in the medium to long term.

Question 42

A major U.S. multinational firm has forecast the euro/dollar rate to be €1.10/$ one year hence, and an exchange rate of $1.40 for the British pound (£) in the same time period. What does this imply the company's expected rate for the euro per pound to be in one year?

A) €1.40/£
B) £1.40/€
C) £1.54/€
D) €1.54/£

Question 43

In 1991, Argentina adopted a currency board (the Argentine peso had been pegged to the U.S. dollar at a one-to-one rate of exchange) to fight hyperinflation. This currency board lasted for a decade until the economic crisis of 2001. Discuss: 1) the pros and cons of a currency board policy, 2) the crisis condition of the Argentina's economy by 2001, and 3) the lessons to be drawn from the Argentina story.

Question 44

As economic conditions continued to deteriorate in Argentina by the end of 2001, banks suffered increasing runs. The government, fearing that the increasing financial drain on banks would cause their collapse, closed the banks for weeks.

Question 45

The single most important element of technical analysis is that future exchange rates are based on the current exchange rate.

Question 46

________, traditionally referred to as chartists, focus on price and volume data to determine past trends that are expected to continue into the future.

A) Mappists
B) Trappist monks
C) Filibusters
D) Technical analysts

Question 47

The ________ is the Argentine currency unit.

A) peso
B) dollar
C) real
D) peseta

Question 48

A currency board is:

A) a structure, rather than a mere commitment, to limiting the growth of the money supply in the economy.
B) a recipe for conservative and prudent financial management.
C) designed to eliminate the power of politicians to exercise judgment by relying on an automatic and unbendable rule.
D) all of the above

Question 49

By 2001, crisis conditions had revealed three very important underlying problems Argentina's economy EXCEPT:

A) The Argentine peso was overvalued.
B) The currency board regime had eliminated monetary policy alternatives for macroeconomic policy.
C) The printing of paper money without restrictions, resulting in hyperinflation.
D) The Argentina government budget deficit was out of control - government spending continued to increased but tax receipts did not.

Question 50

Argentina's economic performance in the 1990s while their peso was pegged to the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.

A) high; high
B) low; low
C) low; high
D) high; low

Question 51

In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a one-to-one basis.

Question 52

Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________.

A) long-term investment; long-term capital appreciation
B) long-term capital appreciation; desire to hedge a receivable
C) the desire to hedge a payable; the desire for long-term investment
D) the desire for long-term investment; the desire to hedge a payable

Question 53

The most visible roots of the crisis were in the excesses of capital inflows into Thailand extending credit to a variety of domestic investments and enterprises beyond what the Thai economy could support and creating an investment "bubble."

Question 54

The principle focus of the IMF bailout efforts during the Asian financial crisis was:

A) banking liquidity.
B) shareholder's wealth.
C) reestablishing fixed currency exchange rates in Asia.
D) dollarization of Asian currencies.

Question 55

The roots of the Asian currency crisis extended from a fundamental change in the economics of the region, the transition of many Asian nations from being net importers to net exporters.

Question 56

Leading up to the Russian currency collapse of 1998, Russia followed a currency policy of managed float that allowed their currency to slide daily at a 1.5% per month rate.

Question 57

Examples of a business motivation for long-run exchange rate forecasts include all but which of the following?

A) a major capital investment in a foreign country
B) the desire to hedge a 90-day security
C) a portfolio manager considering investing in foreign securities
D) All of the above are examples of a business motivation for long-run exchange rate forecast.

Question 58

Which of the following did NOT contribute to the Russian currency crisis of 1998?

A) an accelerated flight of capital
B) generally deteriorating economic conditions
C) a surprisingly healthy government surplus that was neither funding internal investment nor external debt service
D) all of the above

Question 59

The large and liquid capital and currency markets follow many of the principles outlined by the different schools of thought on exchange rate determination (parity conditions, balance of payments approach, and asset approach) relatively well in the medium to long term.

Question 60

The longer the time horizon of the technical analyst the more accurate the prediction of foreign exchange rates is likely to be.

Question 61

The more efficient the foreign exchange market is, the more likely it is that exchange rate movements are random walks.

Question 62

Technical analysts, traditionally referred to as chartists, focus on fundamental data to determine past trends that are expected to continue into the future.

Question 63

Foreign exchange forecasting can be either long-term, or short-term in duration. Compare and contrast the motivation for and the techniques a forecaster might use for each of the time periods.