Question 1

If the exchange rate between the Canadian dollar and the Indian rupee (rupees per dollar)is greater than the relative purchasing power between the two countries, which of the following would be true?

Accepted Answer

If the exchange rate is greater than the relative purchasing power, it means that goods are relatively cheaper in India than in Canada. This presents an opportunity for profit by purchasing goods in India and then selling them in Canada.

Question 2

If the current price of a Big Mac is 30,500 rupiahs in Indonesia and $4.79 in the United States, what exchange rate does the Big Mac Theory of exchange rates predict?

Accepted Answer

The Big Mac Theory of exchange rates, also known as the Big Mac Index, predicts the exchange rate by comparing the price of a Big Mac in two countries. The predicted exchange rate is calculated by dividing the price of a Big Mac in one country by the price in another country. Here, 30,500 rupiahs / $4.79 = approximately 6367 rupiahs per dollar.

Question 3

The currency adopted by most countries in Western Europe is referred to as the

Accepted Answer

The euro is the currency adopted by most countries in Western Europe, including Germany, France, Italy, and Spain. The Eurodollar is a different concept referring to U.S. dollars held in banks outside of the United States. Yen is the currency used in Japan, pound is the currency used in the United Kingdom, and the rouble is used in Russia.

Question 4

Under the gold standard, the government must have enough gold to back up any

Accepted Answer

Under the gold standard, the money supply was directly linked to the amount of gold held by the government. Therefore, any increase in the money supply must be backed up by an equivalent amount of gold held by the government. Other options such as changes in exchange rates or foreign currency deposits are not directly linked to the gold standard.

Question 5

Which of the following is most important in explaining exchange rate fluctuations in the short run?

Accepted Answer

In the short run, interest rates have a strong impact on exchange rate fluctuations as they affect the demand and supply of a currency. Higher interest rates increase the demand for a currency, leading to an appreciation in its value, while lower interest rates decrease the demand, leading to a depreciation.

Question 6

Foreign currency prices of the Canadian dollar are currently determined by a managed float exchange rate system.

Accepted Answer

The Canadian dollar operates under a managed float exchange rate system, which means that its value is influenced by market forces, but also can be subject to intervention by the country's central bank.

Question 7

You are a Canadian citizen who works in Toronto and owns a winter home in Phoenix, Arizona.When you spend the winters in Phoenix, an increase in the value of the Canadian dollar relative to the U.S.dollar should

Accepted Answer

When the Canadian dollar appreciates relative to the U.S. dollar, it means that each Canadian dollar can buy more U.S. dollars. Therefore, when you convert your Canadian salary to U.S. dollars to cover your expenses in Phoenix, you will receive more U.S. dollars for each Canadian dollar you earn. This will make it easier for you to cover your expenses in Phoenix and may even allow you to save more money.

Question 8

Purchasing power parity is the theory that, in the long run, exchange rates should be at a level such that equivalent amounts of any country's currency

Accepted Answer

Purchasing power parity states that exchange rates should be at a level such that equivalent amounts of any country's currency will allow one to buy the same amount of goods and services. Therefore, option D is the correct answer.

Question 9

The Bretton Woods system was established in 1944 and remained in place until the early 1970s.

Accepted Answer

The Bretton Woods system was established in 1944 and remained in place until its collapse in 1971 when President Richard Nixon suspended the convertibility of the United States dollar into gold.

Question 10

What factors are not important in determining exchange rate fluctuations in the Canadian dollar in the long run?

Accepted Answer

Speculating in currency markets is generally considered a short-term factor affecting exchange rates rather than a long-term determinant. Long-term exchange rate fluctuations are more influenced by fundamental economic factors such as relative price levels, productivity growth, and trade preferences, rather than short-term speculation.

Question 11

U.S.dollars can currently be exchanged for gold by foreign central banks, but not by Canadian, U.S., or any other foreign citizens.

Accepted Answer

U.S. dollars cannot be directly exchanged for gold by anyone since the gold standard was abandoned in 1971. However, foreign central banks still hold a portion of their reserves in gold and can use U.S. dollars to buy or sell gold in the international market. Canadian, U.S., and other foreign citizens do not have direct access to this market for exchanging U.S. dollars for gold.

Question 12

If one U.S.dollar could be exchanged for one Canadian dollar in 1970, and one U.S.dollar can now be exchanged for 1.13 Canadian dollars, which of the following is true?

Accepted Answer

Since one U.S. dollar can now buy more Canadian dollars than before, it means the Canadian dollar has lost value relative to the U.S. dollar.

Question 13

What is the difference between a fixed exchange rate system and a managed float exchange rate system?

Accepted Answer

The answer of What is the difference between a fixed...

Question 14

Canadian currency continues to be backed by the gold standard to this day.

Accepted Answer

Canadian currency has not been backed by the gold standard since 1931. The Bank of Canada controls the money supply and sets interest rates to maintain the value of the Canadian dollar.

Question 15

If currencies around the world are based on the gold standard and the European Union lowers the amount of gold for which the euro will trade, then holding all else constant,

Accepted Answer

If the amount of gold for which the euro will trade decreases, it means the euro is worth less. Therefore, it will take more euros to buy the same amount of gold as before. This makes the euro less attractive to investors, causing the demand for the currency to decrease, and the value of the euro to decrease relative to currencies such as the Canadian dollar.

Question 16

The current exchange rate system has which of the following characteristics?

Accepted Answer

Canada allows its currency, the dollar, to float against other major currencies. This means that the exchange rate is determined by the market forces of supply and demand, rather than being fixed by a government or a group of countries. The other choices are incorrect because: B is not true – some developing countries have fixed exchange rates or managed floats; C is not true – the European Union does not have a gold standard; D is not true – the Bretton Woods system was abandoned in the 1970s; E is not true – the current global foreign exchange system is a flexible system, with most countries allowing their currencies to float.

Question 17

From the beginning of 2002 until 2015, the value of the Canadian dollar has ________ relative to the U.S.dollar and ________ relative to the Japanese yen.

Accepted Answer

The Canadian dollar appreciated relative to the U.S. dollar in the early to mid-2000s, reaching parity around 2007-2008, and then experienced periods of depreciation afterwards. Against the Japanese yen, the Canadian dollar generally appreciated slightly over the same period, reflecting fluctuations in global currency markets.

Question 18

If the purchasing power of a dollar is greater than the purchasing power of the yen, purchasing power parity would predict that

Accepted Answer

Purchasing power parity is the theory that in the long run, exchange rates will adjust to equalize the purchasing power of different currencies. Therefore, if the purchasing power of the dollar is greater than the purchasing power of the yen, the exchange rate between the two currencies will adjust in the long run to equalize their purchasing power. In the short run, there may be fluctuations in the exchange rate due to various factors such as changes in interest rates, but in the long run, the exchange rate should reflect the relative purchasing power of the currencies. Therefore, option B is the correct choice.

Question 19

Exchange rates under the Bretton Woods system were determined by relative supplies of gold held by countries within the system.

Accepted Answer

Under the Bretton Woods system, exchange rates were fixed to the US dollar, which was then convertible to gold at a fixed rate, rather than being determined by relative supplies of gold held by countries.

Question 20

What is the connection between the gold held at the Canadian Mint in Ottawa and the Canadian money supply?

Accepted Answer

The answer of What is the connection between the gold...

Quiz 15: The International Financial System

If the exchange rate between the Canadian dollar and the Indian rupee (rupees per dollar) is greater than the relative purchasing power between the two countries, which of the following would be true?