Question 1

The par values of most developing-country currencies are currently defined in terms of gold.

Accepted Answer

The par values of most developing-country currencies are not defined in terms of gold. Most developing countries have floating exchange rates, meaning their exchange rates are determined by supply and demand in the foreign exchange market. Some may choose to peg their currency to the US dollar or another major currency, but gold is not commonly used as a reference point for defining par values.

Question 2

At the Maastricht Treaty of 1991,members of the European Community established a blueprint for an Economic and Monetary Union with a single currency and a European central bank overseeing a single monetary policy.

Accepted Answer

This is a true statement. The Maastricht Treaty, also known as the Treaty on European Union, established the framework for the creation of the European Union and its Economic and Monetary Union, which included the adoption of a single currency, the Euro, and the establishment of a European Central Bank to oversee monetary policy. The treaty was signed in 1991 and entered into force in 1993.

Question 3

Under an adjustable-pegged system,market exchange rates are intended to be maintained within a narrow band around a currency's official exchange rate.In the case of fundamental disequilibrium,the currency can be devalued or revalued to promote current-account equilibrium.

Accepted Answer

Under an adjustable-pegged system, exchange rates are indeed maintained within a narrow band around a currency's official exchange rate, and if there is fundamental disequilibrium, the currency can be devalued or revalued to promote current-account equilibrium.

Question 4

When pursued over the long run,a policy of increasing the domestic money supply to offset an appreciation of the home country's currency results in inflation and a decrease in home-country competitiveness in key industries.

Accepted Answer

Increasing the domestic money supply leads to more money chasing the same amount of goods and services, resulting in inflation. This inflation can make the home country's industries less competitive as their costs increase, making their products more expensive compared to those of foreign competitors.

Question 5

Because there is no exchange stabilization fund under floating exchange rates,any holdings of international reserves serve as working balances rather than to maintain a given exchange rate for any currency.

Accepted Answer

Under floating exchange rates, the exchange rate is determined by market forces of supply and demand without government intervention. Therefore, there is no need for an exchange stabilization fund to maintain a fixed exchange rate. International reserves held by a country would only serve as working balances to facilitate international trade and finance.

Question 6

Under managed floating exchange rates,central bank intervention is used to offset temporary fluctuations in exchange rates that contribute to uncertainty in carrying out transactions in international trade and finance.

Accepted Answer

Managed floating exchange rates allow for some flexibility in exchange rates, but central banks may intervene to prevent extreme fluctuations that could disrupt international trade and finance.

Question 7

Under the gold standard,the official exchange rate would be $2.80 per pound as long as the United States bought and sold gold at a fixed price of $35 per ounce and Britain bought and sold gold at 12.5 pounds per ounce.

Accepted Answer

This is true based on the fixed exchange rates set under the gold standard between the US and Britain.

Question 8

If Uganda sets its par value at 400 shillings per SDR and Burundi sets its par value at 200 francs per SDR,the official exchange rate is 1 franc = o.5 shillings.

Accepted Answer

The calculation is as follows: 
1 SDR = (400 shillings/1) + (200 francs/0.5 shillings) 
1 SDR = 400 shillings + 400 shillings 
1 SDR = 800 shillings 
1 franc = 0.5 shillings 
Therefore, the official exchange rate is indeed 1 franc = 0.5 shillings.

Question 9

Under managed-floating exchange rates,market forces are allowed to determine exchange rates in the short run while central bank intervention is used to stabilize exchange rates in the long run.

Accepted Answer

The answer of Under managed-floating exchange rates,market forces are allowed...

Question 10

To keep the pound's exchange value from depreciating against the franc,the British exchange stabilization fund would sell pounds for francs on the foreign exchange market.

Accepted Answer

The answer of To keep the pound's exchange value from...

Question 11

To keep the yen's exchange value from appreciating against the dollar,Japan's exchange stabilization fund would buy yen for dollars on the foreign exchange market.

Accepted Answer

The answer of To keep the yen's exchange value from...

Question 12

Unlike floating exchange rates,fixed exchange rates are not characterized by par values and central bank intervention in the foreign exchange market.

Accepted Answer

Fixed exchange rates are characterized by par values and central bank intervention in the foreign exchange market.

Question 13

The purpose of currency devaluation is to cause the home country's exchange value to appreciate,thus reducing a balance of trade surplus.

Accepted Answer

The purpose of currency devaluation is actually to cause the home country's exchange value to depreciate, which makes exports cheaper and more competitive in foreign markets, thus increasing exports and reducing a balance of trade deficit.

Question 14

A "dirty float" occurs when a nation used central bank intervention in the foreign exchange market to promote a depreciation of its currency's exchange value,thus gaining a competitive advantage compared to its trading partners.

Accepted Answer

This is the definition of a dirty float. It involves using central bank intervention to manipulate the value of a currency in order to gain a competitive advantage.

Question 15

To offset an appreciation in the dollar's exchange value,the Federal Reserve can nudge interest rates down in the United States which results in net investment outflows.

Accepted Answer

When the Federal Reserve reduces interest rates, it makes U.S. investments less attractive, which can lead to net investment outflows as investors seek higher returns in other countries with higher interest rates. This can help offset the impact of an appreciation in the dollar's exchange rate.

Question 16

If Uganda revalues its shilling by 20 percent and Burundi devalues its franc by 5 percent,the shillings exchange value will appreciate by 25 percent against the franc.

Accepted Answer

If Uganda revalues its shilling by 20%, it means that the shilling will become stronger or appreciate in value. On the other hand, if Burundi devalues its franc by 5%, it means that the franc will become weaker or depreciate in value.

To calculate the new exchange rate between the two currencies after these changes, we can use the following formula:

New exchange rate = Old exchange rate * (1 + change in shilling) / (1 + change in franc)

Plugging in the values, we get:

New exchange rate = Old exchange rate * (1 + 0.20) / (1 - 0.05) = Old exchange rate * 1.25

This means that the shilling's exchange value will appreciate by 25% against the franc, which makes statement A true.

Question 17

The purpose of an exchange stabilization fund is to ensure that the market exchange rate does not deviate beyond unacceptable levels from the official exchange rate.

Accepted Answer

The purpose of an exchange stabilization fund is to manage fluctuations in the exchange rate and to prevent the market exchange rate from deviating too far from the official exchange rate. This is done to maintain stability in the foreign exchange market and prevent sudden movements in exchange rates that could harm the economy.

Question 18

In 1973 the major industrial countries terminated managed-floating exchange rates and adopted an adjustable-pegged exchange rates.

Accepted Answer

In 1973, the major industrial countries terminated the adjustable-pegged exchange rates and adopted a system of floating exchange rates.

Question 19

Most nations currently allow their currencies' exchange values to be determined solely by the forces of supply and demand in a free market.

Accepted Answer

Most nations do not allow their currencies' exchange values to be determined solely by the forces of supply and demand in a free market. Instead, they intervene through their central banks or follow a managed exchange rate system to control or influence their currencies' values for economic stability.

Question 20

If Uganda devalues its shilling by 10 percent and Burundi devalues its franc by 5 percent,the shilling's exchange value appreciates 10 percent against the franc.

Accepted Answer

When Uganda devalues its shilling by 10 percent and Burundi devalues its franc by 5 percent, the shilling does not appreciate by 10 percent against the franc. The percentage change in exchange value cannot be directly inferred from the percentage devaluation of each currency without considering their initial exchange rates. The actual appreciation or depreciation would depend on the new exchange rates after devaluation.

Quiz 15: Exchange-rate Systems and Currency Crises