Question 1

What is a speculative attack on a currency?
A) National governments decide to engage in competitive devaluations against a given country.
B) International organizations such as the WTO and the IMF attempt to reorder the currency's system.
C) Private investors sell domestic currency and buy foreign currency, betting that the domestic currency will soon be devaluated.
D) Casinos in Las Vegas allow the proliferation of bets for and against a given currency.
E) A country is at war, and the enemy country "freezes" all the accounts denominated in the local currency.

Accepted Answer

A speculative attack on a currency occurs when private investors sell the domestic currency and buy foreign currency, betting that the domestic currency will soon be devaluated. The goal is to make a profit from the difference in exchange rates. This can lead to a decrease in the value of the domestic currency and potentially lead to a currency crisis. Options A and B involve government or international organization actions, while options D and E are not relevant to currency speculation.

Question 2

Suppose, before the Asian financial crisis, the Thai baht was fixed against the dollar at a rate of 26 bahts for one U.S. dollar. If the exchange rate were allowed to float freely, the market would then set the rate at 35 bahts for one dollar. Under these circumstances, we say that the baht was:
A) about to appreciate.
B) fixed below its par value.
C) overvalued.
D) undervalued.
E) revalued.

Accepted Answer

When the exchange rate in a fixed system is different from the exchange rate in a floating system, it indicates that the currency is either overvalued or undervalued. In this case, since the market-set exchange rate of 35 bahts per dollar is higher than the fixed rate of 26 bahts per dollar, the baht is considered overvalued.

Question 3

The deleveraging of financial institutions led to the financial crisis of 2007-2008 sometimes also referred to as the _____.
A) stock crisis
B) debt crisis
C) stock market bubble
D) bank run
E) credit crisis

Accepted Answer

The term "deleveraging" refers to the process of reducing debt levels, and the financial crisis of 2007-2008 was primarily caused by a de-leveraging of financial institutions that had invested heavily in risky mortgage-backed securities. As a result, many of these institutions experienced significant losses, which triggered a widespread credit crunch and a sharp contraction in lending. This, in turn, led to a broader economic downturn and a wave of bank failures and bailouts. The term "credit crisis" is often used to describe this chain of events, so the best answer is choice E. The other options are either too narrow (choice A, stock crisis), too vague (choice B, debt crisis), or not directly related to the underlying causes of the crisis (choices C and D, stock market bubble and bank run, respectively).

Question 4

Which of the following is a probable consequence of the presence of accounting rules that allow firms to hide the financial impact of actions that would harm investors?
A) Investors may be able to enforce market efficiency.
B) The WTO will disenfranchise the country that allows this to happen.
C) Investors will immediately organize a speculative attack and the price of stocks will inflate.
D) The balance-of-payments deficit will increase leading the economy into a debt trap.
E) Investors may not be able to adequately judge when the risk of investing in a firm rises.

Accepted Answer

If accounting rules allow firms to hide the financial impact of actions that could harm investors, investors may not be able to accurately determine the level of risk associated with investing in that firm. This could result in investors making poor investment decisions, potentially leading to financial losses.

Question 5

The figure given below shows the demand curves for dollars arising out of Thai demand for U.S. goods and services and the supply of dollars arising out of the U.S. demand for Thai goods, services, and financial assets. D1 and S1 are the original demand and supply curves.
Figure 18.1
 
-Refer to Figure 18.1. Assume that there is a market perception that the value of Thai assets will decrease in the near future. This affects the current equilibrium exchange rate. What can the Thai central bank do to restore the previous value of the baht?
A) Increase the demand for U.S. dollars
B) Sell Thai bahts in the foreign exchange market
C) Sell dollars in the foreign exchange market
D) Appeal to the WTO for help
E) Buy back outstanding Thai bonds in open market operations

Accepted Answer

The answer of The figure given below shows the demand...

Question 6

The figure given below shows the demand curves for dollars arising out of Thai demand for U.S. goods and services and the supply of dollars arising out of the U.S. demand for Thai goods, services, and financial assets. D1 and S1 are the original demand and supply curves.
Figure 18.1
 
-Refer to Figure 18.1. If there were a perception that the value of Thai assets would decrease, the equilibrium exchange rate would move to _____.
A) A
B) B
C) F
D) E
E) G

Accepted Answer

The answer of The figure given below shows the demand...

Question 7

The figure given below shows the demand curves for dollars arising out of Thai demand for U.S. goods and services and the supply of dollars arising out of the U.S. demand for Thai goods, services, and financial assets. D1 and S1 are the original demand and supply curves.
Figure 18.1
 
-Refer to Figure 18.1. What would happen to the value of the U.S. dollar if there were a perception that the value of Thai assets would decrease?
A) The dollar would depreciate against the baht.
B) The dollar would appreciate against the baht.
C) The dollar would remain at the same value against the baht.
D) The dollar would appreciate depending on the elasticity of demand for bahts.
E) The dollar would depreciate depending on the elasticity of demand for bahts.

Accepted Answer

The answer of The figure given below shows the demand...

Question 8

The figure given below shows the demand curves for dollars arising out of Thai demand for U.S. goods and services and the supply of dollars arising out of the U.S. demand for Thai goods, services, and financial assets. D1 and S1 are the original demand and supply curves. Figure 18.2 -Refer to Figure 18.2. Suppose investors predict that the value of Thai assets will decrease in the near future. This affects the current equilibrium exchange rate. To restore the original equilibrium, the Thai government intervenes in the foreign exchange market. How will this government action appear on the graph? A) As a shift in the demand curve from D₂ to D₁ B) As a shift in the demand curve from D₁ to D₃ C) As a shift in the supply curve from S₁ to S₃ D) As a shift in the supply curve from S₁ to S₂ E) As a shift in the demand curve from D₂ to D₃

Accepted Answer

The Thai government would sell foreign reserves to buy Thai currency, increasing the supply of foreign currency and shifting the supply curve from S1 to S2 to restore equilibrium.

Question 9

The financial crisis of 2007-2008 illustrated how important the integration of international financial markets could be in contributing to the spread of financial problems from one country to another. What solution is cited to curb the spread of financial problems from one country to another?
A) Better regulation of financial institutions to ensure prudent risk taking
B) Lower the fiscal budget
C) Less international investment
D) Paying off debts from the Federal Reserve
E) Mitigate lack of government transparency

Accepted Answer

Better regulation of financial institutions to ensure prudent risk taking is the best solution to curb the spread of financial problems from one country to another. This will prevent the excessive buildup of risk in the financial system and reduce the likelihood of financial contagion in case of financial stress.

Question 10

Globalization benefits all the participating nations equally.

Accepted Answer

Globalization does not necessarily benefit all nations equally. Some countries may benefit more than others depending on factors such as their level of economic development, access to resources and markets, and political stability. Critics argue that globalization can also exacerbate inequality and create winners and losers within countries.

Question 11

Generally, which of the following is the most common reason why countries that experienced a financial crisis could not maintain their fixed exchange rate?
A) They were exporting too many commodities.
B) The rates they had established were not in accordance with directives from the IMF.
C) The exchange rate parities established were inconsistent with their corresponding macroeconomic policies.
D) The general public refused to participate.
E) The parities established made their currencies undervalued.

Accepted Answer

When countries experience a financial crisis and cannot maintain their fixed exchange rate, it is often due to inconsistency between the exchange rate parities established and their corresponding macroeconomic policies. This can lead to economic imbalances and unsustainable situations. Export levels, IMF directives, public participation, and undervalued currencies may also be contributing factors, but inconsistency with macroeconomic policies is the most common reason.

Question 12

The figure given below shows the demand curves for dollars arising out of Thai demand for U.S. goods and services and the supply of dollars arising out of the U.S. demand for Thai goods, services, and financial assets. D1 and S1 are the original demand and supply curves.
Figure 18.2
 
-Assume that the foreign exchange market is initially at equilibrium when the demand and supply curves are D1 and S1 respectively. When the demand curve shifts from D1 to D2, the Thai government intervenes to restore the original equilibrium. If Figure 18.2 describes these changes, which of the following will be true?
A) The baht depreciates slightly, as the equilibrium exchange rate goes down from E to F.
B) The baht depreciates, as the equilibrium exchange rate goes up from E to G.
C) The baht appreciates, as the equilibrium exchange rate goes down from E to D.
D) The equilibrium exchange rate goes up from D to G.
E) The baht appreciates slightly, as the equilibrium exchange rate goes up from E to F.

Accepted Answer

When the demand curve shifts from D1 to D2, the equilibrium exchange rate will increase from E to G. However, the Thai government intervenes to restore the original equilibrium, which means they must increase the supply of baht. This will cause the exchange rate to depreciate slightly from G to F, resulting in answer choice A.

Question 13

Which of the following resulted in the financial crisis in 2007-08?
A) Falling international reserves
B) Short-term investments made by China in the US
C) Lack of transparency
D) Bad loans on U.S. mortgages
E) Fixed rates of interest

Accepted Answer

The financial crisis of 2007-08 was largely caused by the proliferation of bad loans made on US mortgages. These loans were often made to borrowers who could not afford to pay them back, and were packaged into complex financial instruments that were given high ratings by credit rating agencies. When the housing market collapsed and these investments lost their value, it triggered a cascade of defaults and a liquidity crisis that spread throughout the financial system. The other options listed may have contributed to the crisis in some way, but the bad loans on US mortgages were the primary driver of the crisis.

Question 14

As the Asian financial crisis of 1997 began to spread, it became obvious to investors that Korean investments would provide lower returns than expected. What was the impact of such a realization on the foreign exchange market?
A) The supply of Korean won decreased as people tried to withdraw their Korean investments.
B) The price of dollar in terms of Korean currency decreased as people invested more in U.S. assets.
C) The demand for dollars decreased as investors realized that there is a worldwide crisis going on.
D) The demand for dollars increased as investors put their money in U.S. and other foreign assets.
E) The demand for Korean won increased as investors decided to invest in Korean assets.

Accepted Answer

As investors realized that Korean investments would provide lower returns, they began to put their money in U.S. and other foreign assets. This led to an increased demand for dollars, causing the price of dollar in terms of Korean currency to increase. Therefore, option D is the correct answer.

Question 15

After a speculative attack has been successful, and the country is forced to devalue its currency, it is common to see many local business firms driven to bankruptcy. This most commonly occurs because _____.
A) nobody ever wants to invest in a country that just suffered a devaluation
B) many local firms had foreign loans (denominated in, say, dollars), and they cannot repay them at the new exchange rate
C) the WTO forces troubled firms to show profits or make way for new, more efficient firms
D) local firms cannot compete with their foreign competitors at the new prices after the devaluation
E) many local firms do not know how to deal with the complicated financial operations involved in a speculative attack

Accepted Answer

Local firms with foreign loans denominated in other currencies will have to pay back those loans using the newly devalued currency. This could lead to bankruptcy for those firms who cannot afford to repay their loans at the new exchange rate.

Question 16

Globalization is an economic issue and does not involve political and social dimensions.

Accepted Answer

Globalization has economic, political, and social dimensions. It refers to the interconnectedness and interdependence of countries and cultures in various aspects, including trade, investment, technology, communication, migration, and cultural exchange. The political and social dimensions of globalization include issues such as governance, human rights, labor standards, environmental protection, cultural diversity, and identity. Therefore, it is inaccurate to view globalization solely as an economic issue.

Question 17

International trade constantly increased throughout the twentieth century.

Accepted Answer

The answer of International trade constantly increased throughout the twentieth...

Question 18

Which of the following increases the possibility of depreciation of the domestic currency in the foreign exchange market?
A) An increase in the demand for domestic goods in the foreign market
B) A decrease in total imports made by the domestic country
C) A decrease in the interest rates in the domestic country
D) An increase in the short-term foreign investments
E) An increase in domestic production of import substitutes

Accepted Answer

The answer of Which of the following increases the possibility...

Question 19

To counteract the depreciation of national currency against the U.S. dollar, the central bank of a country can intervene in the foreign exchange market. Which of the following imposes a restriction on this ability of the central banks to maintain the fixed exchange rate?
A) The central banks have a limited amount of international reserve.
B) The central banks have a limited amount of domestic currency.
C) Unrestricted sale of foreign currency will cause inflation in the domestic economy.
D) The supply of dollars is perfectly elastic in the foreign exchange market.
E) The central banks need to maintain a certain amount of its assets in the form of gold.

Accepted Answer

If the central bank has a limited amount of international reserve, it will not be able to intervene in the foreign exchange market beyond this limit. This restriction will limit the ability of the central bank to maintain a fixed exchange rate. The other options do not directly limit the ability of the central bank to intervene in the foreign exchange market.

Question 20

There are certain variables that are so obviously related to past crises that they may serve as warning indicators of potential future crises. Identify one such variable from the following.
A) Barriers to trade
B) Short-term international investment
C) Flexible exchange rates
D) Rising international reserves
E) Fluctuating share prices

Accepted Answer

Short-term international investment has been a contributing factor to past financial crises, such as the Asian financial crisis in 1997 and the global financial crisis in 2008. Short-term investments, which are often speculative and can be quickly withdrawn, can create a sudden and rapid outflow of funds from a country, leading to currency devaluation and financial instability.

Quiz 18: Globalization

What is a speculative attack on a currency?

Suppose, before the Asian financial crisis, the Thai baht was fixed against the dollar at a rate of 26 bahts for one U.S. dollar. If the exchange rate were allowed to float freely, the market would then set the rate at 35 bahts for one dollar. Under these circumstances, we say that the baht was:

The deleveraging of financial institutions led to the financial crisis of 2007-2008 sometimes also referred to as the _____.

Which of the following is a probable consequence of the presence of accounting rules that allow firms to hide the financial impact of actions that would harm investors?

The financial crisis of 2007-2008 illustrated how important the integration of international financial markets could be in contributing to the spread of financial problems from one country to another. What solution is cited to curb the spread of financial problems from one country to another?

Globalization benefits all the participating nations equally.

Generally, which of the following is the most common reason why countries that experienced a financial crisis could not maintain their fixed exchange rate?

Which of the following resulted in the financial crisis in 2007-08?

As the Asian financial crisis of 1997 began to spread, it became obvious to investors that Korean investments would provide lower returns than expected. What was the impact of such a realization on the foreign exchange market?

After a speculative attack has been successful, and the country is forced to devalue its currency, it is common to see many local business firms driven to bankruptcy. This most commonly occurs because _____.

Globalization is an economic issue and does not involve political and social dimensions.

International trade constantly increased throughout the twentieth century.

Which of the following increases the possibility of depreciation of the domestic currency in the foreign exchange market?

To counteract the depreciation of national currency against the U.S. dollar, the central bank of a country can intervene in the foreign exchange market. Which of the following imposes a restriction on this ability of the central banks to maintain the fixed exchange rate?

There are certain variables that are so obviously related to past crises that they may serve as warning indicators of potential future crises. Identify one such variable from the following.