Question 1

What is a currency board?
A)A fixed exchange rate that,by law,exchanges domestic currency for a specified foreign currency at a fixed exchange rate.
B)A floating exchange rate.
C)A managed floating exchange-rate policy that the government adjusts periodically according to some economic indicator.
D)A laissez-faire exchange-rate policy.
E)An interventionist exchange-rate policy.

Accepted Answer

A currency board is a monetary authority that issues and maintains a fixed exchange rate with a foreign currency. It is required by law to exchange domestic currency for the specified foreign currency at a fixed exchange rate. This helps to maintain a stable currency and prevent inflationary pressures.

Question 2

Which of the following exchange rate systems have a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate?
A)Gold standard
B)Gold exchange standard
C)Crawling band
D)Horizontal band
E)Currency board

Accepted Answer

The currency board system is the only exchange rate system among the options given that has a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. In a currency board system, the central bank holds foreign currency reserves equal to the amount of local currency in circulation, and stands ready to exchange domestic currency for the specified foreign currency at a fixed exchange rate. This guarantees the convertibility of the local currency into the specified foreign currency at a fixed exchange rate, providing a high degree of exchange rate stability.

Question 3

Equilibrium in the foreign exchange market occurs:
A)at the point where the foreign exchange demand and supply curves intersect.
B)at the point where the foreign exchange demand and supply curves reach maximum separation.
C)when two nations' economic leaders agree on the appropriate exchange rate.
D)when two nations' diplomatic leaders agree on an exchange rate that meets both countries' needs.
E)only by chance,if at all,because they change very frequently.

Accepted Answer

Equilibrium in the foreign exchange market occurs at the point where the foreign exchange demand and supply curves intersect. This is the point where the quantity of currency demanded equals the quantity of currency supplied, and there is no excess demand or excess supply in the market. The market mechanism works to adjust the exchange rate to reach this equilibrium point.

Question 4

The IMF mostly receives its funds from:
A)the subscription fees paid by the member nations.
B)selling of bonds.
C)the loans given by the World Bank.
D)the central banks of the major industrialized nations.
E)the gold reserves available with the Fed.

Accepted Answer

The IMF receives its funds from the subscription fees paid by the member nations. These fees are based on each country's quota or share in the organization, which is determined by their economic size and importance in the global economy. In addition, the IMF may also receive funds from borrowing on capital markets, but these are typically only used in exceptional circumstances.

Question 5

Suppose the official gold value of the Brazilian real changes from 457 reals per ounce to 528 reals per ounce.We can then say that:
A)the Brazilian real has been devalued.
B)the Brazilian economy is expected to experience rapid inflation.
C)gold has been devalued.
D)the Brazilian real has appreciated in value.
E)gold is now cheaper to purchase in Brazil than it was before.

Accepted Answer

A change from 457 to 528 reals per ounce implies that it now takes more reals to purchase an ounce of gold. This means that the currency has been devalued, as it now has a lower value relative to gold.

Question 6

Foreign exchange market intervention is most effective when:
A)each country's political leaders agree to cooperate fully with the process.
B)leading economists in each country concur that intervention is needed.
C)permanent differences between the free market exchange rate and the fixed exchange rate are expected.
D)temporary differences between the free market exchange rate and the fixed exchange rate are expected.
E)all the countries restrict the international movement of goods and services.

Accepted Answer

Foreign exchange market intervention is most effective when there are temporary differences between the free market exchange rate and the fixed exchange rate. In this situation, intervention can help stabilize the exchange rate and prevent sudden and large fluctuations. However, if there are permanent differences between the free market rate and the fixed rate, intervention may not be effective in the long run. Cooperation among political leaders and agreement among leading economists can be helpful but are not necessary for intervention to be effective. Restrictions on the international movement of goods and services are not directly related to the effectiveness of intervention.

Question 7

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market.Assume that the market operates under a flexible exchange rate regime. Figure 22.1  In the figure:
DS1U1B11S1U1B0 and DS1U1B12S1U1B0: Demand for Brazilian reals
SS1U1B11S1U1B0 and SS1U1B12S1U1B0: Supply of Brazilian reals
-Refer to Figure 22.1.Assume that the initial equilibrium exchange rate is 8 Mexican pesos per Brazilian real and 150 brazilian reals are traded in the market.Suppose,there is an increase in the Brazilian demand for Mexican exports.Other things remaining equal,which of the following can be concluded?
A)The demand curve for Brazilian reals will shift to the the right.
B)The supply curve of Brazilian reals will shift to the the right.
C)The Mexican pesos will depreciate in value.
D)The Brazilian reals will appreciate in value.
E)Around 100 Brazilian reals will be traded in the forex market.

Accepted Answer

An increase in Brazilian demand for Mexican exports means Brazilians need more pesos, so they supply more reals, shifting the supply curve of Brazilian reals to the right.

Question 8

Suppose the official gold value of the Brazilian real changes from 527 reals per ounce to 508 reals per ounce.We can then say that:
A)the Brazilian real has depreciated in value as a consequence of free market fluctuations.
B)the Brazilian real has appreciated in value.
C)gold is now more expensive to purchase in Brazil than it was before.
D)the Brazilian real has been devalued.
E)the Brazilian economy is expected to experience rapid inflation.

Accepted Answer

When the official gold value of the Brazilian real changes from 527 reals per ounce to 508 reals per ounce, it means that the Brazilian real has appreciated in value. This is because it now takes fewer reals to buy the same amount of gold. If the Brazilian real had depreciated in value, it would have taken more reals to buy the same amount of gold. Therefore, the correct answer is B.

Question 9

The annual membership fees of the 185 member countries of the IMF are called:
A)annuities.
B)quotas.
C)vetos.
D)conditionalities.
E)petrodollars.

Accepted Answer

The annual membership fees of the 185 member countries of the IMF are called quotas. Quotas are determined based on a country’s economic size, and they give countries voting power within the organization.

Question 10

Assume that you have just returned to the United States from a summer vacation in Russia,where you exchanged American dollars for Russian rubles.Your economic actions can be said to have:
A)increased the supply of American dollars in Russia.
B)decreased the supply of Russian rubles in America.
C)decreased the supply of American dollars in Russia.
D)increased the demand for American dollars in America.
E)increased the supply of Russian rubles in Russia.

Accepted Answer

The answer of Assume that you have just returned to...

Question 11

Assume that a country's government influences the exchange rate through active central bank intervention,with no pre-announced path.This policy is known as a(n):
A)floating exchange-rate policy.
B)managed floating exchange-rate policy.
C)fixed exchange-rate policy.
D)crawling-peg exchange-rate policy.
E)interventionist exchange-rate policy.

Accepted Answer

The policy described, in which a government actively intervenes in the exchange rate but does not pre-announce a specific path, is known as a managed floating exchange-rate policy. This option allows for some degree of flexibility in the exchange rate while also giving the government the ability to influence it through intervention when necessary.

Question 12

When the exchange rate fluctuates around a fixed central target,allowing for a moderate amount of fluctuation,while tying the currency to the target central rate,the exchange rate is under:
A)a horizontal band.
B)a crawling peg.
C)a managed float.
D)an independent float.
E)a currency board.

Accepted Answer

A horizontal band is a system in which the exchange rate is allowed to fluctuate within a fixed range or band, while still being tied to a central target rate. This system allows for some flexibility in the exchange rate, but also provides a degree of stability and predictability. This is achieved by central bank intervention in the foreign exchange market, buying or selling domestic currency as needed to maintain the exchange rate within the target band.

Question 13

An upward-sloping supply curve of Korean won in terms of Canadian dollars indicates that:
A)the higher the dollar price of Korean won,the more won will be demanded.
B)the higher the dollar price of Korean won,the fewer won will be supplied.
C)the lower the dollar price of Korean won,the more won will be demanded.
D)the lower the dollar price of Korean won,the fewer won will be supplied.
E)the Korean economy is stronger than the Canadian economy.

Accepted Answer

An upward-sloping supply curve indicates that as the price increases, the quantity supplied also increases. Therefore, if the dollar price of Korean won decreases, fewer won will be supplied, as suppliers are less willing to exchange their currency at lower prices.

Question 14

Which of the following had resulted from the Smithsonian agreement of 1971?
A)Devaluation of the U.S.dollar
B)Dissolution of a fixed exchange rate regime
C)Appreciation of the U.S.dollar
D)Establishment of an equilibrium exchange rate
E)Laissez-faire in the foreign exchange market

Accepted Answer

The Smithsonian agreement of 1971 resulted in the devaluation of the U.S. dollar against other currencies by approximately 8%. This was done in an effort to correct the balance of payments deficit that the U.S. was experiencing at the time.

Question 15

The exchange rate that is established in the absence of foreign exchange market intervention by the government is known as a(n):
A)historical anachronism.
B)fixed exchange rate.
C)"dirty float" exchange rate.
D)unmanaged exchange rate.
E)free market equilibrium exchange rate.

Accepted Answer

The exchange rate that is established in the absence of government intervention is determined by the supply and demand in the foreign exchange market, which is known as a free market equilibrium exchange rate.

Question 16

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market.Assume that the market operates under a flexible exchange rate regime. Figure 22.1 In the figure: DS1U1B11S1U1B0 and DS1U1B12S1U1B0: Demand for Brazilian reals SS1U1B11S1U1B0 and SS1U1B12S1U1B0: Supply of Brazilian reals -Refer to Figure 22.1.Determine the equilibrium exchange rate and equilibrium quantity of Brazilian reals,if D₁ and S₁ are the relevant demand and supply curves for Brazilian reals in this market. A)10 pesos per real and a quantity of 150 reals B)6 pesos per real and a quantity of 250 reals C)8 pesos per real and a quantity of 150 reals D)8 pesos per real and a quantity of 250 reals E)6 pesos per real and a quantity of 200 reals

Accepted Answer

The equilibrium exchange rate is where the demand and supply curves intersect. In this case, the intersection of D₁ and S₁ occurs at an exchange rate of 8 pesos per real and a quantity of 250 reals. Therefore, option D is the correct choice.

Question 17

The Bretton Woods system required countries to actively buy and sell dollars to maintain fixed exchange rates when:
A)a country experienced a severe bout of inflation.
B)the free market equilibrium exchange rate differed from the fixed rate.
C)a country experienced serious unemployment.
D)the threat of recession began to spread from one country to another.
E)worldwide trade began to deteriorate.

Accepted Answer

The Bretton Woods system required countries to actively buy and sell dollars to maintain fixed exchange rates when the free market equilibrium exchange rate differed from the fixed rate. This was to ensure that the exchange rates remained stable and did not fluctuate too much. If the free market equilibrium rate differed from the fixed rate, it could cause currency imbalances and destabilize the system.

Question 18

Under the _____ arrangement,the exchange rate is adjusted periodically by small amounts at a fixed,pre-announced rate or in response to certain indicators.
A)currency board
B)crawling peg
C)reserve currency
D)conventional fixed peg
E)independent float

Accepted Answer

This describes the crawling peg exchange rate system, where the exchange rate is allowed to fluctuate within a certain band or margin, and is adjusted periodically (crawl) by small amounts at a fixed, pre-announced rate or in response to certain indicators.

Question 19

The primary function of the World Bank is to:
A)lend money to the World Trade Organization.
B)provide loans to countries experiencing huge budget deficit.
C)finance economic development in poor countries.
D)assist countries experiencing balance of payments deficits.
E)finance the fiscal stabilization program of the U.S.government.

Accepted Answer

The World Bank's primary function is to finance economic development in poor countries. This is achieved through loans, grants, and technical assistance. The aim is to reduce poverty and promote sustainable economic growth. The organization also provides policy advice and conducts research on development issues. While it does provide loans to countries experiencing budget deficits and balance of payments deficits, these are not its primary functions. The other options are not correct as they are not associated with the World Bank's mandate.

Question 20

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market.Assume that the market operates under a flexible exchange rate regime. Figure 22.1  In the figure:
DS1U1B11S1U1B0 and DS1U1B12S1U1B0: Demand for Brazilian reals
SS1U1B11S1U1B0 and SS1U1B12S1U1B0: Supply of Brazilian reals
-Refer to Figure 22.1.Suppose the initial equilibrium exchange rate is 10 pesos per real.A decrease in the Mexican demand for Brazilian coffee,other things equal,is most likely to result in a new equilibrium exchange rate of:
A)6 pesos per real and an equilibrium quantity of 200 Brazilian reals.
B)6 pesos per real and an equilibrium quantity of 250 Brazilian reals.
C)8 pesos per real and an equilibrium quantity of 150 Brazilian reals.
D)8 pesos per real and an equilibrium quantity of 100 Brazilian reals.
E)10 pesos per real and an equilibrium quantity of 200 Brazilian reals.

Accepted Answer

A decrease in Mexican demand for Brazilian coffee, other things equal, indicates that the demand for Brazilian reals will decrease. This is shown by a leftward shift in the demand curve from DS1U1B11 to DS1U1B12. The initial equilibrium exchange rate at 10 pesos per real is no longer valid as the demand and supply have changed. The new equilibrium exchange rate will be where the new demand and supply curves intersect.

From the graph, we can see that the new equilibrium exchange rate is likely to be around 8 pesos per real where the new demand (DS1U1B12) and supply (SS1U1B12) curves intersect. At this new equilibrium, the equilibrium quantity of Brazilian reals traded is likely to be around 150 Brazilian reals. Therefore, the best choice is C.

Quiz 22: Exchange Rates and Financial Links Between Countries

What is a currency board?

Which of the following exchange rate systems have a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate?

Equilibrium in the foreign exchange market occurs:

The IMF mostly receives its funds from:

Suppose the official gold value of the Brazilian real changes from 457 reals per ounce to 528 reals per ounce.We can then say that:

Foreign exchange market intervention is most effective when:

Suppose the official gold value of the Brazilian real changes from 527 reals per ounce to 508 reals per ounce.We can then say that:

The annual membership fees of the 185 member countries of the IMF are called:

Assume that you have just returned to the United States from a summer vacation in Russia,where you exchanged American dollars for Russian rubles.Your economic actions can be said to have:

Assume that a country's government influences the exchange rate through active central bank intervention,with no pre-announced path.This policy is known as a(n) :

When the exchange rate fluctuates around a fixed central target,allowing for a moderate amount of fluctuation,while tying the currency to the target central rate,the exchange rate is under:

An upward-sloping supply curve of Korean won in terms of Canadian dollars indicates that:

Which of the following had resulted from the Smithsonian agreement of 1971?

The exchange rate that is established in the absence of foreign exchange market intervention by the government is known as a(n) :

The Bretton Woods system required countries to actively buy and sell dollars to maintain fixed exchange rates when:

Under the _____ arrangement,the exchange rate is adjusted periodically by small amounts at a fixed,pre-announced rate or in response to certain indicators.

The primary function of the World Bank is to: