Question 1

Refer to Figure 18.1.What would happen to the value of the U.S.dollar if there were a perception that the value of Thai assets would decrease?
A)The dollar would depreciate against the baht.
B)The dollar would appreciate against the baht.
C)The dollar would remain at the same value against the baht.
D)The dollar would appreciate depending on the elasticity of demand for bahts.
E)The dollar would depreciate depending on the elasticity of demand for bahts.

Accepted Answer

If there is a perception that the value of Thai assets would decrease, investors would likely sell Thai assets and convert their holdings back to U.S. dollars, increasing the demand for dollars and causing the dollar to appreciate against the baht.

Question 2

International trade constantly increased throughout the twentieth century.

Accepted Answer

International trade experienced fluctuations throughout the twentieth century, with periods of growth and decline due to events such as the Great Depression, World Wars, and economic recessions.

Question 3

There are certain variables that are so obviously related to past crises that they may serve as warning indicators of potential future crises.Identify one such variable from the following.
A)Barriers to trade
B)Short-term international investment
C)Flexible exchange rates
D)Rising international reserves
E)Fluctuating share prices

Accepted Answer

Short-term international investments were a significant factor in past financial crises such as the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008. These types of investments are vulnerable to sudden shifts in investor sentiment and can cause panic in financial markets, leading to widespread market instability and potential economic collapse. Therefore, monitoring short-term international investments can serve as a warning indicator of potential future financial crises.

Question 4

Globalization is an economic issue and does not involve political and social dimensions.

Accepted Answer

Globalization involves not only economic factors but also political and social dimensions. The interconnection and interdependence among different countries and cultures can affect political relationships and the distribution of power, as well as social norms, values, and behaviors. Also, globalization can have both positive and negative impacts on human rights, labor standards, and cultural diversity, which are not purely economic concerns.

Question 5

Refer to Figure 18.1.If there were a perception that the value of Thai assets would decrease, the equilibrium exchange rate would move to _____.
A)A
B)B
C)F
D)E
E)G

Accepted Answer

If there is a perception that the value of Thai assets would decrease, investors would likely sell Thai assets, leading to an increase in the supply of the Thai currency in the foreign exchange market. This would cause the currency to depreciate, moving the equilibrium exchange rate to a lower level, such as point E.

Question 6

Which of the following is a probable consequence of the presence of accounting rules that allow firms to hide the financial impact of actions that would harm investors?
A)Investors may be able to enforce market efficiency.
B)The WTO will disenfranchise the country that allows this to happen.
C)Investors will immediately organize a speculative attack and the price of stocks will inflate.
D)The balance-of-payments deficit will increase leading the economy into a debt trap.
E)Investors may not be able to adequately judge when the risk of investing in a firm rises.

Accepted Answer

When accounting rules allow firms to hide the financial impact of actions that would harm investors, it becomes harder for investors to judge the true risk of investing in a firm. This can lead to misjudgments about the value of investments, which can result in financial losses.

Question 7

Refer to Figure 18.1.Assume that there is a market perception that the value of Thai assets will decrease in the near future.This affects the current equilibrium exchange rate.What can the Thai central bank do to restore the previous value of the baht?
A)Increase the demand for U.S.dollars
B)Sell Thai bahts in the foreign exchange market
C)Sell dollars in the foreign exchange market
D)Appeal to the WTO for help
E)Buy back outstanding Thai bonds in open market operations

Accepted Answer

The Thai central bank can sell dollars in the foreign exchange market to buy baht, which increases the demand for baht and helps restore its value.

Question 8

Globalization benefits all the participating nations equally.

Accepted Answer

Globalization may benefit some nations more than others depending on their level of development, access to resources, trade policies, and other factors. Some countries may experience job loss and economic disadvantages while others may enjoy increased opportunities for growth and trade.

Question 9

Barriers to immigration are much higher in most countries today, than it was in the twentieth century.

Accepted Answer

Due to various reasons such as security concerns, economic factors and changing political landscapes, many countries have implemented stricter immigration policies and border control measures, making it harder for people to immigrate than it was in the twentieth century.

Question 10

Suppose, before the Asian financial crisis, the Thai baht was fixed against the dollar at a rate of 26 bahts for one U.S.dollar.If the exchange rate were allowed to float freely, the market would then set the rate at 35 bahts for one dollar.Under these circumstances, we say that the baht was:
A)about to appreciate.
B)fixed below its par value.
C)overvalued.
D)undervalued.
E)revalued.

Accepted Answer

If the market rate for the Thai baht is greater than its fixed rate against the dollar, it means that the baht is overvalued, meaning that its value is artificially high. This is the case in this scenario where the market rate is 35 bahts for one dollar, which is higher than the fixed rate of 26 bahts for one dollar. Therefore, the correct answer is C, overvalued.

Question 11

Which of the following increases the possibility of depreciation of the domestic currency in the foreign exchange market?
A)An increase in the demand for domestic goods in the foreign market
B)A decrease in total imports made by the domestic country
C)A decrease in the interest rates in the domestic country
D)An increase in the short-term foreign investments
E)An increase in domestic production of import substitutes

Accepted Answer

The answer of Which of the following increases the possibility...

Question 12

The deleveraging of financial institutions led to the financial crisis of 2007-2008 sometimes also referred to as the _____.
A)stock crisis
B)debt crisis
C)stock market bubble
D)bank run
E)credit crisis

Accepted Answer

The deleveraging of financial institutions resulted in a reduction in credit availability, leading to a credit crunch and a subsequent credit crisis. This led to the collapse of several financial institutions and ultimately to the global financial crisis of 2007-2008. Therefore, the best choice is E, the credit crisis.

Question 13

After a speculative attack has been successful, and the country is forced to devalue its currency, it is common to see many local business firms driven to bankruptcy.This most commonly occurs because _____.
A)nobody ever wants to invest in a country that just suffered a devaluation
B)many local firms had foreign loans (denominated in, say, dollars), and they cannot repay them at the new exchange rate
C)the WTO forces troubled firms to show profits or make way for new, more efficient firms
D)local firms cannot compete with their foreign competitors at the new prices after the devaluation
E)many local firms do not know how to deal with the complicated financial operations involved in a speculative attack

Accepted Answer

When a country is forced to devalue its currency after a speculative attack, local firms that had foreign loans denominated in stronger currencies (such as dollars) will find it difficult to repay those loans at the new exchange rate. This can lead to bankruptcy as they struggle to meet their debt obligations.

Question 14

Which of the following resulted in the financial crisis in 2007-08?
A)Falling international reserves
B)Short-term investments made by China in the US
C)Lack of transparency
D)Bad loans on U.S.mortgages
E)Fixed rates of interest

Accepted Answer

The financial crisis in 2007-08 was largely caused by bad loans on U.S. mortgages, particularly subprime mortgages. These loans were packaged into mortgage-backed securities and sold to investors, which led to a chain reaction of defaults and foreclosures ultimately leading to the collapse of major financial institutions.

Question 15

The financial crisis of 2007-2008 illustrated how important the integration of international financial markets could be in contributing to the spread of financial problems from one country to another.What solution is cited to curb the spread of financial problems from one country to another?
A)Better regulation of financial institutions to ensure prudent risk taking
B)Lower the fiscal budget
C)Less international investment
D)Paying off debts from the Federal Reserve
E)Mitigate lack of government transparency

Accepted Answer

Better regulation of financial institutions to ensure prudent risk taking is considered a potential solution to curb the spread of financial problems from one country to another. This could prevent financial institutions from taking excessive risks, thereby reducing the likelihood of a crisis spreading across borders.

Question 16

To counteract the depreciation of national currency against the U.S.dollar, the central bank of a country can intervene in the foreign exchange market.Which of the following imposes a restriction on this ability of the central banks to maintain the fixed exchange rate?
A)The central banks have a limited amount of international reserve.
B)The central banks have a limited amount of domestic currency.
C)Unrestricted sale of foreign currency will cause inflation in the domestic economy.
D)The supply of dollars is perfectly elastic in the foreign exchange market.
E)The central banks need to maintain a certain amount of its assets in the form of gold.

Accepted Answer

The central bank's ability to intervene in the foreign exchange market and maintain a fixed exchange rate depends on the amount of international reserve it holds. If the central bank has a limited amount of international reserve, it may not be able to sustain the intervention for long periods, leading to fluctuations in the exchange rate. Therefore, the limited amount of international reserve imposes a restriction on the ability of central banks to maintain a fixed exchange rate.

Question 17

What is a speculative attack on a currency?
A)National governments decide to engage in competitive devaluations against a given country.
B)International organizations such as the WTO and the IMF attempt to reorder the currency's system.
C)Private investors sell domestic currency and buy foreign currency, betting that the domestic currency will soon be devaluated.
D)Casinos in Las Vegas allow the proliferation of bets for and against a given currency.
E)A country is at war, and the enemy country "freezes" all the accounts denominated in the local currency.

Accepted Answer

A speculative attack on a currency occurs when private investors sell the domestic currency and buy foreign currency, which leads to a decrease in the value of the domestic currency. This speculation is often based on market expectations that the domestic currency will be devalued, leading to a profitable investment decision. It is a form of currency market manipulation where investors seek to profit from fluctuations in exchange rates. Other options mentioned, such as competitive devaluations by governments or international organizations' attempts to reorder a currency system, do not necessarily involve speculative attacks by private investors.

Question 18

Generally, which of the following is the most common reason why countries that experienced a financial crisis could not maintain their fixed exchange rate?
A)They were exporting too many commodities.
B)The rates they had established were not in accordance with directives from the IMF.
C)The exchange rate parities established were inconsistent with their corresponding macroeconomic policies.
D)The general public refused to participate.
E)The parities established made their currencies undervalued.

Accepted Answer

The exchange rate parities established were inconsistent with their corresponding macroeconomic policies. This is the most common reason why countries that experienced a financial crisis could not maintain their fixed exchange rate. In simple terms, the exchange rate fixed by a country does not match the fundamental economic conditions of the country, which makes it unsustainable in the long run. For example, a country with a weak economy that fixes a high exchange rate would find it difficult to maintain the exchange rate in the long run as their economy is not strong enough to support it.

Question 19

As the Asian financial crisis of 1997 began to spread, it became obvious to investors that Korean investments would provide lower returns than expected.What was the impact of such a realization on the foreign exchange market?
A)The supply of Korean won decreased as people tried to withdraw their Korean investments.
B)The price of dollar in terms of Korean currency decreased as people invested more in U.S.assets.
C)The demand for dollars decreased as investors realized that there is a worldwide crisis going on.
D)The demand for dollars increased as investors put their money in U.S.and other foreign assets.
E)The demand for Korean won increased as investors decided to invest in Korean assets.

Accepted Answer

When investors realized that Korean investments would provide lower returns than expected due to the Asian financial crisis, they began to look elsewhere for higher returns. This led to an increase in the demand for U.S. and other foreign assets, which in turn increased the demand for dollars and caused the price of the dollar in terms of Korean currency to increase. Therefore, D is the correct choice.

Question 20

The figure given below shows the demand curves for dollars arising out of Thai demand for U.S.goods and services and the supply of dollars arising out of the U.S.demand for Thai goods, services, and financial assets.D₁ and S₁ are the original demand and supply curves. Figure 18.2 Refer to Figure 18.2.Suppose investors predict that the value of Thai assets will decrease in the near future.This affects the current equilibrium exchange rate.To restore the original equilibrium, the Thai government intervenes in the foreign exchange market.How will this government action appear on the graph? A)As a shift in the demand curve from D₂ to D₁ B)As a shift in the demand curve from D₁ to D₃ C)As a shift in the supply curve from S₁ to S₃ D)As a shift in the supply curve from S₁ to S₂ E)As a shift in the demand curve from D₂ to D₃

Accepted Answer

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

Quiz 32: Globalization

Refer to Figure 18.1.What would happen to the value of the U.S.dollar if there were a perception that the value of Thai assets would decrease?

International trade constantly increased throughout the twentieth century.

There are certain variables that are so obviously related to past crises that they may serve as warning indicators of potential future crises.Identify one such variable from the following.

Globalization is an economic issue and does not involve political and social dimensions.

Refer to Figure 18.1.If there were a perception that the value of Thai assets would decrease, the equilibrium exchange rate would move to _____.

Which of the following is a probable consequence of the presence of accounting rules that allow firms to hide the financial impact of actions that would harm investors?

Refer to Figure 18.1.Assume that there is a market perception that the value of Thai assets will decrease in the near future.This affects the current equilibrium exchange rate.What can the Thai central bank do to restore the previous value of the baht?

Globalization benefits all the participating nations equally.

Barriers to immigration are much higher in most countries today, than it was in the twentieth century.

Suppose, before the Asian financial crisis, the Thai baht was fixed against the dollar at a rate of 26 bahts for one U.S.dollar.If the exchange rate were allowed to float freely, the market would then set the rate at 35 bahts for one dollar.Under these circumstances, we say that the baht was:

Which of the following increases the possibility of depreciation of the domestic currency in the foreign exchange market?

The deleveraging of financial institutions led to the financial crisis of 2007-2008 sometimes also referred to as the _____.

After a speculative attack has been successful, and the country is forced to devalue its currency, it is common to see many local business firms driven to bankruptcy.This most commonly occurs because _____.

Which of the following resulted in the financial crisis in 2007-08?

The financial crisis of 2007-2008 illustrated how important the integration of international financial markets could be in contributing to the spread of financial problems from one country to another.What solution is cited to curb the spread of financial problems from one country to another?

To counteract the depreciation of national currency against the U.S.dollar, the central bank of a country can intervene in the foreign exchange market.Which of the following imposes a restriction on this ability of the central banks to maintain the fixed exchange rate?

What is a speculative attack on a currency?

Generally, which of the following is the most common reason why countries that experienced a financial crisis could not maintain their fixed exchange rate?

As the Asian financial crisis of 1997 began to spread, it became obvious to investors that Korean investments would provide lower returns than expected.What was the impact of such a realization on the foreign exchange market?