Question 1

Figure 19-7 
-Refer to Figure 19-7.If the Indian government pegs its currency to the dollar at a value below $.02/rupee,we would say the currency is

Accepted Answer

If the Indian government pegs its currency to the dollar at a value below $.02/rupee, it means that the Indian currency is being sold at a lower price than its actual value in the market. This makes the Indian currency undervalued.

Question 2

By 2013,________ members of the European Union were using the euro as their currency.

Accepted Answer

As of 2013, 17 members of the European Union were using the euro as their currency, making option B the correct answer. The remaining 11 EU members have their own currencies or have a special status within the EU regarding the use of the euro.

Question 3

If a country's currency ________ the dollar,its exchange rate is fixed.

Accepted Answer

When a country's currency is "pegged to" the dollar, it means its exchange rate is fixed to a specific value relative to the dollar. This means that the country's central bank sets the exchange rate and adjusts its currency supply accordingly to maintain the fixed rate.

Question 4

If,at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar,the rand is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

Accepted Answer

If the rand is undervalued, it means that it is cheaper than it should be. Therefore, more people will want to buy the rand because it is a good deal, increasing the demand for the rand. At the same time, because the rand is undervalued, people will want to sell their dollars to get more rand for their money, increasing the supply of the dollar.

Question 5

Article Summary
Cuba has announced its intentions to end its dual currency system which has been in place since 1994. Presently, Cuba has two official currencies, the national peso (CUP) and the convertible peso (CUC). The national peso is the currency used by most businesses and citizens, and the convertible peso was designed to be used primarily in the tourism industry and for foreign trade. The coveted convertible peso is pegged to the U.S. dollar and is worth 25 times the national peso, despite the government treating them as having equal value in official accounts, trading on a one-for-one basis for official state entities. Few Cubans other than those with government ties have access to convertible pesos, which allows them to enjoy a much improved lifestyle due to the currency's relative value. One exception is people working in the tourist-centered hospitality industries, such as waiters and hotel staff, who receive convertible pesos as tips, often earning them more than medical and legal professionals who are paid in national pesos. The currency unification is expected to be a gradual process, taking up to 18 months, and could involve both a devaluing of the convertible peso and a revaluing of the national peso.
Source: Hannah Strange, "Cuba to end dual currency as part of Castro's economic reforms," Telegraph, October 22, 2013.

-Refer to the Article Summary.The convertible peso (CUC),which is pegged to the U.S.dollar,is worth 25 times the national peso,yet Cuban officials treat the convertible peso and the national peso as being of equal value.This indicates that the national peso is ________ compared to the convertible peso,and would need to be ________ to for the two currencies have equal value in the marketplace.

Accepted Answer

The article states that the government treats the convertible peso and the national peso as having equal value in official accounts, but the convertible peso is worth 25 times more than the national peso. This means that the national peso is undervalued compared to the convertible peso and would need to be revalued in order for the two currencies to have equal value in the marketplace. Therefore, option A) is the correct answer.

Question 6

Fluctuating exchange rates can alter a multinational firm's profits and losses.The U.S.corporation,Motorola,produces cell phones and sells cell phones in Mexico.If the dollar appreciates against the peso,then Motorola's revenues from these operations should ________ and its costs from these operations should ________.

Accepted Answer

The answer of Fluctuating exchange rates can alter a multinational...

Question 7

With a common currency such as the euro,

Accepted Answer

A common currency, such as the euro, means that the participating countries share a single monetary policy. This means that individual countries are no longer able to run independent monetary policies, including setting interest rates or adapting to economic shocks with their own currency.

Question 8

The Latvian currency,the lat,is pegged to the euro at a rate of 0.71 lats to the euro.At the pegged exchange rate,how many euros would be exchanged for one lat?

Accepted Answer

If 0.71 lats equals 1 euro, then 1 lat equals 1/0.71 euros, which is approximately 1.41 euros.

Question 9

If,at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar,the dollar is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

Accepted Answer

The answer of If,at the current exchange rate between the...

Question 10

If the purchasing power of the dollar is less than the purchasing power of the British pound,purchasing power parity predicts that the exchange rate will

Accepted Answer

Purchasing power parity theory states that in the long run, the exchange rate between two countries should adjust to reflect the relative purchasing power of their respective currencies. Therefore, if the purchasing power of the dollar is less than the purchasing power of the British pound, the exchange rate should become more favorable for the dollar (i.e. more pounds per dollar) to reflect this difference in purchasing power. This adjustment will continue until the relative purchasing power of the two currencies is equalized and the exchange rate reflects this equalization. Therefore, the best answer is C - the exchange rate will be equal to the relative purchasing power across the currencies in the long run.

Question 11

Compared to a situation in which there is no change in the value of the dollar relative to the peso,in which of the following situations would you be worse off?

Accepted Answer

The answer of Compared to a situation in which there...

Question 12

Figure 19-7 
-Refer to Figure 19-7.At what level should the Indian government peg its currency to the dollar to make U.S.imports cheaper in India?

Accepted Answer

The answer of Figure 19-7 
-Refer to Figure 19-7.At what...

Question 13

The Danish currency,the krone,is pegged to the euro at a rate of 7.43 kroner (kroner is the plural of krone)to the euro.At the pegged exchange rate,how many euros would be exchanged for one krone?

Accepted Answer

To find out how many euros would be exchanged for one krone, we need to take the reciprocal of the exchange rate. 
1/7.43 = 0.1346, which is approximately 0.135. Therefore, the answer is A.

Question 14

The year in which euro coins and paper currency were introduced and participating "euro zone" countries withdrew old domestic currencies from circulation was

Accepted Answer

Euro coins and paper currency were introduced in 2002, and participating countries withdrew their old domestic currencies from circulation at that time.

Question 15

You decide to work in London for the next 5 years,accumulate some savings,then move back to the United States and convert your savings from British pounds to dollars.At the time of your move,economists predict that consumers in the United States have lost their affinity for British products,and expect that this declining preference for British products will continue for the next decade.How should this influence your decision to work and save in London?

Accepted Answer

The declining U.S. preference for British goods means less demand for pounds to buy those goods, which should decrease the value of the pound relative to the dollar. This would decrease the value of savings when converted from pounds to dollars, making this scenario discouraging for someone planning to save in pounds and convert to dollars later.

Question 16

Figure 19-7 
-Refer to Figure 19-7.Which of the following is true?

Accepted Answer

The answer of Figure 19-7 
-Refer to Figure 19-7.Which of...

Question 17

Figure 19-7 
-Refer to Figure 19-7.If the Indian government pegs its currency to the dollar at a value above $.02/rupee,we would say the currency is

Accepted Answer

If the Indian government pegs its currency to the dollar at a value above $.02/rupee, it means that the rupee is artificially stronger compared to its market value. This creates an overvalued currency situation.

Question 18

Pegging a country's exchange rate to the dollar can be advantageous in all of the following situations except

Accepted Answer

If a country wants to conduct independent monetary policy, it cannot tie its exchange rate to the dollar as it will have to follow the monetary policy decisions of the United States Federal Reserve. In all other situations, pegging the exchange rate to the dollar can be advantageous.

Question 19

A currency pegged at a value above the market equilibrium exchange rate is

Accepted Answer

When a currency is pegged at a value above the market equilibrium exchange rate, it means that the exchange rate is artificially high and the currency is overvalued. This often leads to a situation where the country's exports become expensive and less competitive, while imports become cheaper and flood the domestic market, leading to a trade deficit.

Question 20

If a country sets a pegged exchange rate that is below the equilibrium exchange rate,how can the country maintain the peg?

Accepted Answer

If the country sets a pegged exchange rate below the equilibrium exchange rate, demand for domestic currency will exceed supply, resulting in a shortage of foreign currency. To maintain the peg, the country needs to sell surplus domestic currency at the pegged rate to increase supply and decrease demand. Therefore, B is the correct choice. Choices A and C involve purchasing surplus currency, which would only exacerbate the shortage of foreign currency, making it impossible to maintain the peg. Choice D involves decreasing the pegged exchange rate, which would only worsen the situation by lowering the value of the domestic currency even further.

Quiz 19: The International Financial System

Figure 19-7 -Refer to Figure 19-7.If the Indian government pegs its currency to the dollar at a value below $.02/rupee,we would say the currency is