Question 1

The U.S. economic bubble burst after the attacks of September 11, 2001. Which of the following could be considered a contributing factor to the U.S. economic downturn?
A) a negative reassessment of long-term economic growth prospects in the U.S.
B) a newly formed level of political risk
C) lower expected earnings
D) all of the above

Accepted Answer

All of the options listed (a negative reassessment of long-term economic growth prospects, a newly formed level of political risk, and lower expected earnings) were contributing factors to the U.S. economic downturn after the 9/11 attacks. The attacks created uncertainty and fear, causing investors and businesses to become more cautious and lower their expectations for future economic growth. Additionally, the increased political risk and ongoing war on terrorism further contributed to the economic slowdown. Lower expected earnings reflect this overall sense of caution and pessimism in the markets.

Question 2

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

Accepted Answer

The Argentine peso was indeed fixed to the value of the U.S. dollar on a one-to-one basis in 1991 as part of a program aimed at stabilizing the economy and reducing inflation. This system, known as the Convertibility plan, remained in place until 2002.

Question 3

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.

Accepted Answer

The answer of Foreign exchange forecasting can be either long-term,...

Question 4

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.

Accepted Answer

A currency board is a monetary system that guarantees the convertibility of a country's domestic currency into a foreign currency at a fixed exchange rate. This is achieved by maintaining a fixed reserve ratio between the domestic currency and the foreign currency, which acts as a hard constraint on the growth of the domestic money supply. This structure helps to ensure conservative and prudent financial management, while also eliminating the discretion of politicians and ensuring that monetary policy follows an automatic and unbendable rule. Therefore, all of the above options are correct.

Question 5

Assume your country has a balance of payments surplus. How would the government and markets react to "correct" this imbalance under a fixed exchange rate regime? Under a floating exchange rate regime?

Accepted Answer

The answer of Assume your country has a balance of...

Question 6

One of the solutions to the Argentine peso crisis of 2003 was to devalue the peso to the approximate value of $2.00 per Argentine peso.

Accepted Answer

This statement is true. After a prolonged recession and a severe financial crisis, the Argentine government devalued the peso in early 2002, leading to a sharp depreciation in its value against the US dollar. In 2003, the government allowed the peso to float freely in the foreign exchange market and it eventually stabilized at around $2.00 per peso, which improved the country's competitiveness and helped to restore economic growth.

Question 7

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

Accepted Answer

When Argentina's peso was pegged to the U.S. dollar in the 1990s, the country had low rates of inflation due to the fixed exchange rate. However, this also led to high rates of unemployment as the government was unable to adjust the value of their currency to fluctuating economic conditions.

Question 8

The Chinese government announces that on December 31, 2006 the value of the Yuan will officially change from 8.287 Yuan/$ to 7.500 Yuan/$. This would be an official ________ of the Chinese currency of ________.
A) revaluation; 9.50%
B) revaluation; 10.49%
C) devaluation; 9.50%
D) devaluation; 10.49%

Accepted Answer

Revaluation refers to an increase in the value of a currency in terms of foreign exchange. The Yuan's value increased from 8.287 to 7.500 per dollar, which is a revaluation. The percentage change is calculated as ((8.287 - 7.500) / 8.287) * 100 = 9.50%.

Question 9

During the 1990s Argentina's exports became some of the least expensive in all of South America thanks in part to the pegging of the Argentine peso to the U.S. dollar.

Accepted Answer

The answer of During the 1990s Argentina's exports became some...

Question 10

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

Accepted Answer

The answer of Describe the asset market approach to exchange...

Question 11

"Overshooting" exchange rate changes in response to an action of the Federal Reserve would be an example of
A) a market inefficiency.
B) a market efficiency.
C) the Fisher Effect.
D) none of the above.

Accepted Answer

Overshooting exchange rate changes refer to a situation where the exchange rate changes more than what is predicted by economic fundamentals in response to a policy action, such as a change in interest rates by the Federal Reserve. This suggests a market inefficiency where the exchange rate does not fully adjust to economic fundamentals in a rational manner.

Quiz 7: Foreign Exchange Rate Determination and Forecasting

The U.S. economic bubble burst after the attacks of September 11, 2001. Which of the following could be considered a contributing factor to the U.S. economic downturn?

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

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.

A currency board is

Assume your country has a balance of payments surplus. How would the government and markets react to "correct" this imbalance under a fixed exchange rate regime? Under a floating exchange rate regime?

One of the solutions to the Argentine peso crisis of 2003 was to devalue the peso to the approximate value of $2.00 per Argentine peso.

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.

The Chinese government announces that on December 31, 2006 the value of the Yuan will officially change from 8.287 Yuan/$ to 7.500 Yuan/$. This would be an official of the Chinese currency of .

During the 1990s Argentina's exports became some of the least expensive in all of South America thanks in part to the pegging of the Argentine peso to the U.S. dollar.

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

"Overshooting" exchange rate changes in response to an action of the Federal Reserve would be an example of