Question 1

The country of Ghathan has been in serious foreign debt for quite some time.It has large amounts of debt denominated in dollars,euros,and pounds.In the given scenario,the government of Ghathan is most likely to:

Accepted Answer

The answer of The country of Ghathan has been in...

Question 2

In the country of Losan,majority of the population is employed in the manufacturing sector.However,as the nation's overall income is low,little demand exists within Losan for the manufactured products.Yet,the government of Losan keeps its currency valuation quite low to ensure that:

Accepted Answer

By keeping the currency valuation low, Losanian goods become comparatively cheaper in the world market, making them more competitive and potentially increasing demand for their manufactured products. This could result in a boost to the Losanian economy through increased exports.

Question 3

Ramanond Technologies is an independent business that facilitates foreign exchange trades.In the context of institutions that make foreign exchange happen,Ramanond Technologies is categorized under:

Accepted Answer

The answer of Ramanond Technologies is an independent business that...

Question 4

Imagine that the exchange rate for trading Shealton Sheas for Rosmanian Ros is 0.75 Ros to 1 Sheas.Given that Sheas is the domestic currency,estimate the exchange rate for trading Sheas to Ros.

Accepted Answer

The given exchange rate of 0.75 Ros to 1 Sheas directly indicates the rate for trading Sheas to Ros, which is 0.75 Ros for every 1 Sheas.

Question 5

In the context of foreign exchange rates,which of the following statements best describes the process of dollarization?

Accepted Answer

Dollarization is the process of a country abandoning its currency and using another currency instead, usually the US dollar. This may occur due to factors such as hyperinflation or financial instability in the domestic currency. The country will then adopt the foreign currency as its legal tender, and its citizens will use this currency for transactions within the country.

Question 6

In contrast to overvalued currencies,undervalued currencies:

Accepted Answer

Undervalued currencies make domestic goods cheaper for foreign buyers, thus boosting the manufacturing sectors by increasing exports.

Question 7

In the context of foreign exchange,the difference between the buy and sell price for a currency is referred to as a _____.

Accepted Answer

The difference between the buy and sell price for a currency is referred to as a spread. The spread represents the profit for the currency provider and can vary depending on market conditions and the level of competition among providers. The spot rate refers to the current market price of a currency, while dividends are payments made by companies to their shareholders, and valence is a term used in chemistry and psychology.

Question 8

SafestMoney is a commercial bank that is involved in foreign exchange trade.In addition to conducting trade on behalf of its customers and itself,it provides trading channels for other participants.SafestMoney makes money by charging a _____ on the exchange,which is the difference between the buy and sell price for a currency.

Accepted Answer

The spread is the difference between the buy and sell price for a currency, and this is the fee that SafestMoney charges in order to make money from foreign exchange trading. Choice A (spot rate) is the current exchange rate for a currency and is not a fee charged by the bank. Choice B (dividend) is a payment made to shareholders from a company's profits and is not relevant to foreign exchange trading. Choice C (valence) refers to the capacity of an element to combine with another element, and is not related to banking or foreign exchange trading.

Question 9

Although Sinthland is a manufacturing-dependent nation,it prefers to have an overvalued currency.Which of the following is most likely a reason why Sinthland would want an overvalued domestic currency?

Accepted Answer

An overvalued currency makes imports cheaper because it increases the purchasing power of the domestic currency relative to foreign currencies, allowing the country to buy more foreign goods for less.

Question 10

Linda wants to sell U.S.dollars and buy Noan currencies,currency of the country of Noansia.The spot exchange rate is 1,170 Noan to the dollar;hence,Linda is unlikely to sell her U.S.dollars at this rate.The bank offers Linda 1,150 Noan for each dollar she sells.However,if Linda plans to sell Noan currencies to buy U.S.dollars,the bank will charge her 1,190 Noan for each dollar she purchases.In this scenario,the 20 Noan difference between the spot exchange rate and the rate that the bank offers Linda is referred to as the _____.

Accepted Answer

The 20 Noan difference between the spot exchange rate and the rate that the bank offers Linda is referred to as the spread.

Question 11

Leather sold in the country of Zanasia costs the same as leather sold in the countries of Meramba,Chidean,and Pareuim.In the context of currency values,this exemplifies:

Accepted Answer

The law of one price states that, in a perfectly competitive market, identical goods should have the same price in different countries after taking into account the exchange rate. In this scenario, the leather sold in Zanasia, Meramba, Chidean, and Pareuim all costs the same, indicating that the market for leather is highly competitive and adheres to the law of one price.

Question 12

Dansaz is one of the largest textile-producing nations.However,little demand exists within the country for its own goods because incomes are traditionally low and most of the produced textiles are too expensive for the average Dansazian.In spite of this,the Dansazian government chooses to keep its currency valuation low.This is likely to:

Accepted Answer

Keeping the currency valuation low can make Dansazian goods cheaper on the international market, thus potentially boosting exports and aiding in the development of the Dansazian industry.

Question 13

Taverna is a manufacturing-dependent nation.The Taverna government plans to increase the supply of the national currency by a major proportion in an effort to devalue the currency in international markets.In this scenario,the Tavernan government prefers to have its currency undervalued in an effort to:

Accepted Answer

By devaluing the currency, Taverna can make their exports cheaper in international markets. This can lead to an increase in demand for Tavernan goods, which in turn can lead to increased economic activity and potentially create jobs. Additionally, it can also help the government earn more revenue from exports, which can be used to pay off foreign debts.

Question 14

In the context of institutions that make foreign exchange happen,nonfinancial customers include:

Accepted Answer

Nonfinancial customers refer to individuals and entities who are not directly involved in financial intermediation. Among the options given, only governments and businesses fall under this category, as they are not banks nor hedge funds.

Question 15

In the context of foreign exchange rates,which of the following scenarios exemplifies dollarization?

Accepted Answer

Dollarization refers to the practice of a country using a foreign currency alongside or instead of its own national currency. In the given options, B) Melton using the currency of Alarodo as legal tender is an example of dollarization, even though the specific foreign currency is not named as the U.S. dollar, the concept applies to any foreign currency being used in this manner.

Question 16

In contrast to undervalued currencies,overvalued currencies:

Accepted Answer

The answer of In contrast to undervalued currencies,overvalued currencies:
...

Question 17

The government of Ambria generally does not interfere in the value of the nation's currency.However,recently when the nation faced a severe financial crisis leading to its currency being depreciated to a great extent,the government decided to explicitly intervene by increasing the supply of money.In this scenario,the Ambrian government can be said to be engaging in a _____.

Accepted Answer

A managed float is a flexible exchange rate system where the government intervenes in the currency market to influence the exchange rate. In this scenario, the government increased the supply of money to help stabilize the depreciated currency, which is an intervention in the currency market. Therefore, the Ambrian government can be said to be engaging in a managed float. Clean float is when the exchange rate is purely determined by market forces without any government intervention. Fixed float is when the exchange rate is fixed and maintained by the government. Spreader float is not a recognized term in the field of economics.

Question 18

In the context of foreign exchange rates,when the country of Zansia fixes its currency Zan to the U.S dollar at 5.5 Zan per dollar,it can be said that:

Accepted Answer

When a country fixes its currency to another currency, it is known as currency pegging. In this case, Zansia is pegging its currency, Zan, to the U.S dollar at a fixed exchange rate of 5.5 Zan per dollar. Therefore, B is the correct choice.

Question 19

A Big Mac costs 4 Jon in the country of Jonanda,where Jon is the national currency,whereas in the country of Forunisa,where Fortan is the national currency,it costs 2.5 Fortan.If Fortan is the domestic currency,then the exchange rate is 1.60.Hence,if the exchange rate of Jon to Fortan is any greater,the Big Mac Index would state that:

Accepted Answer

According to the Big Mac Index, if a Big Mac costs more in one country than in another, then the currency of the country where it costs more is overvalued. In this case, a Big Mac costs more in Jonanda (4 Jon) than in Forunisa (2.5 Fortan). If the exchange rate of Jon to Fortan is any greater, it means that the value of Jon is getting stronger compared to Fortan. Therefore, the Jon is overvalued, according to the Big Mac Index. The correct answer is B.

Question 20

When the nation of Varnia faced rampant economic inflation,it became evident that the inflation would reduce Varnia's domestic currency's buying power.As a result,the Varnian government decided to officially use the currency of Rhotabha as legal tender for conducting transactions.In this scenario,the Varnian government's action of abandoning its own domestic currency and using Rhotabha's currency instead is called _____.

Accepted Answer

The Varnian government's action of abandoning its own domestic currency and using Rhotabha's currency instead is known as dollarization.

Quiz 6: Currency and Foreign Exchange