Question 1

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 here is a managed floating exchange-rate policy, as the government is actively intervening to influence the exchange rate without a pre-announced path. This is in contrast to a purely floating exchange-rate policy, where the exchange rate is determined solely by market forces, or a fixed exchange-rate policy, where the government sets a specific exchange rate and intervenes to maintain it. A crawling-peg exchange-rate policy involves regularly adjusting the exchange rate within a predetermined range, while an interventionist exchange-rate policy is a vague term that could encompass any policy involving government intervention in the exchange rate.

Question 2

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, indicating that the quantity of foreign currency demanded equals the quantity of foreign currency supplied. This is determined by market forces and not by agreements between economic or diplomatic leaders. The exchange rate may fluctuate over time as demand and supply conditions change, but at any given point in time, there is an equilibrium exchange rate where demand equals supply.

Question 3

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 necessary to prevent the currency from becoming overvalued or undervalued and to maintain economic stability among participating countries.

Question 4

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 36.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 36.1.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

At the intersection of the demand curve D₁ and the supply curve S₁, the equilibrium exchange rate is 8 pesos per real and the equilibrium quantity is 250 reals. Therefore, option D is the correct answer.

Question 5

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 mostly receives its funds from the subscription fees paid by the member nations. These fees are based on each member country's economic size and are typically paid in the country's own currency. The IMF also earns income from the interest it charges on the loans it provides to member countries in need of financial assistance.

Question 6

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 refers to a fixed exchange rate system where the exchange rate is allowed to fluctuate within a narrow band around a central rate. This allows for some flexibility in the exchange rate, but the currency is still tied to the central rate.

Question 7

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

The crawling peg exchange rate system involves periodic adjustments in the exchange rate in response to certain indicators. This system allows for more flexibility than a conventional fixed peg, where the exchange rate is fixed and does not adjust, but is still more stable than an independent float. Currency board and reserve currency systems also involve fixed exchange rates, but do not allow for periodic adjustments.

Question 8

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 free market equilibrium exchange rate is the exchange rate that would exist if the exchange rate were determined purely by supply and demand in the foreign exchange market, without any government intervention. This is the exchange rate that reflects the relative values of the two currencies and is what would exist in a completely free market.

Question 9

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 10

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 Brazilian reals to purchase an ounce of gold than before.

Question 11

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 12

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 36.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 36.1.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

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

Question 13

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 exchange rate system with a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate is a Currency Board. The other options listed do not have a fixed exchange rate commitment. The gold standard and gold exchange standard both involve a fixed exchange rate, but neither has a legislative commitment. The crawling band and horizontal band both have adjustable exchange rates that fluctuate within a certain range.

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

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 temporary differences between the free market exchange rate and the fixed exchange rate are expected. This is because intervention aims to smooth out short-term fluctuations in the exchange rate, and temporary differences indicate a need for such intervention. Permanent differences may require more significant action, such as a change in the fixed exchange rate. Cooperation between political leaders or agreement from leading economists can be helpful, but it is not necessary for intervention to be effective. Restrictions on international movement of goods and services are not directly related to the effectiveness of intervention.

Question 16

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 system in which a country's central bank is required to exchange domestic currency for a specific foreign currency at a fixed exchange rate. This fixed exchange rate is maintained by the country's central bank holding sufficient reserves of the foreign currency. This system is designed to provide greater stability to a country's currency and reduce the risk of wild swings in exchange rates.

Question 17

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 18

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 through loans, grants, and technical assistance. They aim to reduce poverty, promote private sector growth and investment, and improve infrastructure and public services. Their focus is on aiding development rather than helping countries with specific trade or fiscal issues.

Question 19

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 36.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 36.1.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 would decrease the demand for Brazilian reals in the foreign exchange market. This would cause a leftward shift in the demand curve from D₁ to D₂. As a result, the initial equilibrium exchange rate of 10 pesos per real would be higher than the new equilibrium exchange rate. The new equilibrium exchange rate would be where the reduced demand curve (D₂) intersects the supply curve (S₁), which is at an exchange rate of 8 pesos per real. The equilibrium quantity traded would be the point where the demand and supply curves intersect, which is 150 Brazilian reals. Therefore, the answer is C.

Question 20

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 each country's relative size in the global economy and are used to determine voting power and access to IMF resources.

Quiz 57: Exchange Rates and Financial Links Between Countries

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) :

Equilibrium in the foreign exchange market occurs:

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

The IMF mostly receives its funds from:

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:

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

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:

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:

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

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?

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

Foreign exchange market intervention is most effective when:

What is a currency board?

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:

The primary function of the World Bank is to:

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