Question 1

To force the value of the pound to appreciate against the dollar, the Federal Reserve should:​

Accepted Answer

Selling dollars for pounds increases the demand for pounds and decreases the supply of dollars in the foreign exchange market, leading to an appreciation of the pound against the dollar. If both the Federal Reserve and the ECB engage in this action, it amplifies the effect.

Question 2

Common reasons mentioned in the text for central bank intervention in the foreign exchange market include all of the following except:

Accepted Answer

The text does not mention providing an alternative form of bank deposit insurance as a common reason for central bank intervention in the foreign exchange market. The other options (B, C, and D) are all mentioned as common reasons for intervention.

Question 3

Which of the following is not true regarding government intervention?

Accepted Answer

Under the direct method of intervention, an appreciation of the dollar would be accomplished by exchanging foreign currencies for dollars, not the other way around as stated in choice A.

Question 4

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

Accepted Answer

If the Fed is expected to intervene heavily to affect the exchange rate, it is likely that the value of the yen will increase. Therefore, purchasing yen call options would allow the speculator to capitalize on this increase in value without having to purchase large amounts of yen upfront. Purchasing yen put options, as in choice A, would not be profitable in this scenario. Selling yen futures contracts, as in choice B, would potentially result in losses if the value of the yen increases. Buying U.S. Treasury bonds, as in choice D, would not necessarily be profitable in this scenario.

Question 5

To weaken the dollar using a sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities.

Accepted Answer

The answer of To weaken the dollar using a sterilized...

Question 6

Which of the following is not true regarding the Mexican peso crisis?

Accepted Answer

Many speculators based in the United States speculated on the potential decline in the peso by withdrawing their funds from Mexico, not by investing in Mexico.

Question 7

​The interest rate of a country with a currency board:

Accepted Answer

The interest rate of a country with a currency board is typically tied to the interest rate of the currency to which it is pegged, so it will move in tandem with that interest rate. This is because the currency board must hold sufficient reserves of the anchor currency to back the domestic currency with a fixed exchange rate. Therefore, changes in the interest rate of the anchor currency will affect the interest rate that the country with the currency board can offer.

Question 8

Assume that Japan and the United States frequently trade with each other. Under a freely floating exchange rate system, high inflation in the United States will place ____ pressure on the Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.

Accepted Answer

High inflation in the United States would lead to a depreciation of the US dollar, placing upward pressure on the Japanese yen as demand for yen increases. This would reduce the amount of yen available for sale, as people hold onto yen expecting it to appreciate. Inflation in Japan would remain unchanged initially, as the inflationary pressures are originating from the US.

Question 9

Which of the following is not a disadvantage of a freely floating exchange rate system?

Accepted Answer

The statement "the government may intervene to change the value of a given currency" is not a disadvantage of a freely floating exchange rate system, but rather a characteristic of a managed floating exchange rate system. A freely floating exchange rate system allows market forces to determine a currency's value without government intervention. A, B, and D are all disadvantages of a freely floating exchange rate system.

Question 10

​A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.

Accepted Answer

A strong dollar usually leads to lower inflation due to cheaper imports and reduced demand for domestically-produced goods. Lower inflation then creates upward pressure on the dollar as investors seek to invest in countries with stronger currency and lower inflation rates.

Question 11

​The risk-free interest rates among countries that have adopted the euro should:

Accepted Answer

Risk-free interest rates among countries that have adopted the euro are influenced by the European Central Bank's policies and economic conditions within the Eurozone, and do not necessarily have to be similar to those in other countries outside the Eurozone.

Question 12

​The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.

Accepted Answer

When Country X's currency is pegged to Country Y's currency, and Country Y's currency depreciates against Country Z, Country X's currency also effectively depreciates against Country Z. This makes Country X's goods cheaper for Country Z, likely increasing exports to Country Z. Conversely, Country Z's goods become more expensive for Country X, likely decreasing imports from Country Z.

Question 13

If the Fed ____ interest rates when inflationary expectations remain unchanged, the most likely result is that the value of the dollar will ____ and the economy may ____.

Accepted Answer

When the Federal Reserve increases interest rates, it typically leads to an appreciation of the dollar because higher rates offer investors higher returns on investments denominated in dollars. However, higher interest rates can also weaken the economy by making borrowing more expensive, which can reduce spending and investment.

Question 14

Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would:

Accepted Answer

The answer of Assume that the dollar has been consistently...

Question 15

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 unemployment. Which of the following is an appropriate action given this scenario?

Accepted Answer

Weakening the dollar would make U.S. goods and services cheaper for foreign buyers, increasing demand for exports and potentially creating more jobs in export industries.

Question 16

A strong dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which in turn places ____ pressure on U.S. bond prices.

Accepted Answer

The answer of A strong dollar places ____ pressure on...

Quiz 6: Government Influence on Exchange Rates

To force the value of the pound to appreciate against the dollar, the Federal Reserve should:

Common reasons mentioned in the text for central bank intervention in the foreign exchange market include all of the following except:

Which of the following is not true regarding government intervention?

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

To weaken the dollar using a sterilized intervention, the Fed will U.S. dollars and simultaneously Treasury securities.

Which of the following is not true regarding the Mexican peso crisis?

The interest rate of a country with a currency board:

Assume that Japan and the United States frequently trade with each other. Under a freely floating exchange rate system, high inflation in the United States will place pressure on the Japanese yen, the amount of Japanese yen available for sale, and result in inflation in Japan.

Which of the following is not a disadvantage of a freely floating exchange rate system?

A strong dollar places pressure on inflation, which in turn places pressure on the dollar.

The risk-free interest rates among countries that have adopted the euro should:

The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency depreciates against the currency of Country Z. It is likely that Country X will export to Country Z and import from Country Z.

If the Fed interest rates when inflationary expectations remain unchanged, the most likely result is that the value of the dollar will and the economy may .

Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would:

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 unemployment. Which of the following is an appropriate action given this scenario?

A strong dollar places pressure on U.S. inflation, which in turn places pressure on U.S. interest rates, which in turn places pressure on U.S. bond prices.

Quiz 6: Government Influence on Exchange Rates

To force the value of the pound to appreciate against the dollar, the Federal Reserve should:​

Common reasons mentioned in the text for central bank intervention in the foreign exchange market include all of the following except:

Which of the following is not true regarding government intervention?

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

To weaken the dollar using a sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities.

Which of the following is not true regarding the Mexican peso crisis?

​The interest rate of a country with a currency board:

Assume that Japan and the United States frequently trade with each other. Under a freely floating exchange rate system, high inflation in the United States will place ____ pressure on the Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.

Which of the following is not a disadvantage of a freely floating exchange rate system?

​A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.

​The risk-free interest rates among countries that have adopted the euro should:

​The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.

If the Fed ____ interest rates when inflationary expectations remain unchanged, the most likely result is that the value of the dollar will ____ and the economy may ____.

Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would:

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 unemployment. Which of the following is an appropriate action given this scenario?

A strong dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which in turn places ____ pressure on U.S. bond prices.

To force the value of the pound to appreciate against the dollar, the Federal Reserve should:

To weaken the dollar using a sterilized intervention, the Fed will U.S. dollars and simultaneously Treasury securities.

The interest rate of a country with a currency board:

Assume that Japan and the United States frequently trade with each other. Under a freely floating exchange rate system, high inflation in the United States will place pressure on the Japanese yen, the amount of Japanese yen available for sale, and result in inflation in Japan.

A strong dollar places pressure on inflation, which in turn places pressure on the dollar.

The risk-free interest rates among countries that have adopted the euro should:

The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency depreciates against the currency of Country Z. It is likely that Country X will export to Country Z and import from Country Z.

If the Fed interest rates when inflationary expectations remain unchanged, the most likely result is that the value of the dollar will and the economy may .

A strong dollar places pressure on U.S. inflation, which in turn places pressure on U.S. interest rates, which in turn places pressure on U.S. bond prices.