Question 1

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

Accepted Answer

The correct term for the annual membership fees of the IMF is quotas. These quotas are based on each member country's relative size in the global economy and determine their voting power, access to IMF resources, and obligations.

Question 2

The primary function of the World Bank is to:

Accepted Answer

The primary function of the World Bank is to finance economic development in poor countries through lending, policy advice, technical assistance, and knowledge-sharing services. Its goal is to reduce poverty and promote shared prosperity by supporting sustainable and inclusive economic growth. Other options mentioned in the choices are not correct as the World Bank does not provide loans to WTO or governments to stabilize their fiscal programs.

Question 3

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

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 4

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):

Accepted Answer

The policy described is a managed floating exchange-rate policy, as the government actively intervenes in the foreign exchange market to influence the exchange rate without a pre-announced path. In a floating exchange-rate policy, the exchange rate is determined by market forces without government intervention. In a fixed exchange-rate policy, the government fixes the exchange rate to a certain level. A crawling-peg exchange-rate policy involves a pre-announced path of gradual adjustments to the exchange rate. Interventionist exchange-rate policy is not a commonly used term in economics.

Question 5

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 21.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 21.1.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:

Accepted Answer

A decrease in Mexican demand for Brazilian coffee would shift the demand curve to the left (D₁ to D₂). This would result in a new equilibrium exchange rate where the quantity supplied equals the quantity demanded. This new equilibrium exchange rate would be lower than the initial exchange rate. Therefore, the equilibrium exchange rate would move from 10 pesos per real to a lower value, likely in between 6 and 8 pesos per real. Option C is the only option that fits this criteria (8 pesos per real), and the equilibrium quantity would be 150 Brazilian reals.

Question 6

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:

Accepted Answer

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

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.

Accepted Answer

The crawling peg arrangement is characterized by periodic adjustments in the exchange rate at a fixed, pre-announced rate or in response to certain indicators. This is different from the conventional fixed peg arrangement, where the exchange rate is fixed and not adjusted, and the independent float arrangement, where the exchange rate is freely determined by market forces. The currency board arrangement involves strict rules and regulations for maintaining a fixed exchange rate, while the reserve currency arrangement involves the use of a major currency (such as the US dollar) as a benchmark for the domestic currency's value.

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:

Accepted Answer

The official gold value of the Brazilian real decreasing from 527 reals per ounce to 508 reals per ounce means that it now takes fewer reals to purchase one ounce of gold. Therefore, the Brazilian real has appreciated in value.

Question 9

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?

Accepted Answer

Currency board systems have a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. In this system, the domestic central bank is required to hold foreign currency reserves equal to the amount of domestic currency in circulation, thereby limiting the ability of the central bank to engage in monetary policy. The gold standard and gold exchange standard have fixed exchange rates but do not involve a legislative commitment to exchange domestic currency for a specified foreign currency. Crawling band and horizontal band systems involve flexible exchange rates.

Question 10

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:

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 11

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

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 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 21.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 21.1.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.

Accepted Answer

The equilibrium exchange rate is where the demand and supply curves intersect. In this case, the intersection point is at a price of 8 pesos per real and a quantity of 250 reals. Therefore, the correct answer is D.

Question 13

Equilibrium in the foreign exchange market occurs:

Accepted Answer

Equilibrium in the foreign exchange market occurs at the point where the foreign exchange demand and supply curves intersect, which represents the exchange rate at which the quantity of currency demanded equals the quantity of currency supplied. This is where the market clears and there is no excess demand or excess supply of currency.

Question 14

What is a currency board?

Accepted Answer

A currency board is a fixed exchange-rate system where the domestic currency is pegged to a foreign currency at a fixed exchange rate. The currency board is required by law to exchange domestic currency for the specified foreign currency at the fixed exchange rate. This means that the central bank can only issue domestic currency if it has the equivalent amount of foreign currency reserves to back it up, thus ensuring a stable exchange rate.

Question 15

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

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. Countries were expected to adjust their domestic policies to maintain the fixed exchange rate, but if the market pushed the exchange rate away from the fixed rate, countries had to buy or sell their own currency to maintain the fixed rate. This often resulted in a drain on the country's reserves and ultimately led to the demise of the Bretton Woods system.

Question 16

The IMF mostly receives its funds from:

Accepted Answer

The IMF mostly receives its funds from the subscription fees paid by the member nations. These fees are based on a quota system, which takes into account the economic size and openness of each member country. In addition to these fees, the IMF can also borrow from the market or member countries, although this is a much smaller source of funding.

Question 17

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:

Accepted Answer

A horizontal band, also known as a fixed exchange rate regime with horizontal bands, allows for a moderate amount of fluctuation while tying the currency to a central target rate. The exchange rate is allowed to vary within a specific range, or band, around the central rate.

Question 18

Foreign exchange market intervention is most effective when:

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 a temporary discrepancy can be corrected through intervention, whereas a permanent discrepancy may require a different approach. Additionally, it is important to note that the success of intervention also depends on other factors such as the size and timing of the intervention, market sentiment, and the overall economic conditions in the respective countries.

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 21.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 21.1.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?

Accepted Answer

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

Question 20

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

Accepted Answer

The exchange rate that is established in the absence of government intervention is the free market equilibrium exchange rate. This is because the exchange rate will be determined solely by the forces of supply and demand in the foreign exchange market, without any external influence from government policies or interventions. The other answer choices are either different types of exchange rate regimes or unrelated to the question.

Quiz 39: Exchange Rates and Financial Links Between Countries