Question 1

Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.

Accepted Answer

Under a fixed exchange rate system, other countries' currencies are pegged to the U.S. dollar, so any inflation in the U.S. would be transmitted to those countries through higher import prices. In contrast, under a floating exchange rate system, exchange rates adjust to reflect changes in inflation rates, which would mitigate the impact of U.S. inflation on other countries.

Question 2

As foreign exchange activity has grown, a given degree of central bank intervention has become:

Accepted Answer

As foreign exchange activity has grown, central bank intervention has become less effective. The increased size and liquidity of forex markets make it harder for a central bank to influence exchange rates in the long term. Additionally, market participants have become more sophisticated and can anticipate central bank actions, limiting their impact.

Question 3

Which of the following are true about the Southeast Asian currency crisis?

Accepted Answer

The Southeast Asian currency crisis was preceded by several years of large capital inflows to Asia, which resulted in an overvaluation of currencies and unsustainable growth. Option B is incorrect as there was no five-year recession in Asia before the crisis. Option C is also incorrect as interest rates actually increased during the crisis as countries tried to defend their currencies. Option D is incorrect as the pegging to the Japanese yen was a policy implemented by some countries before the crisis, not as a resolution to it.

Question 4

Which of the following is true regarding the euro?

Accepted Answer

A) The introduction of the euro has eliminated exchange rate risk between participating European currencies, making it easier to conduct trade and investment across borders.
B) The euro allows for more consistent economic conditions and policies across participating countries, reducing discrepancies between national economies.
C) Each country that uses the euro is subject to the monetary policy set by the European Central Bank, ensuring a coordinated approach to managing the currency and economy.

Therefore, all of the options are true regarding the euro.

Question 5

During the period 1944-1971, the U.S. used a ____ system.

Accepted Answer

During the period 1944-1971, the U.S. used a fixed exchange rate system known as the Bretton Woods system.

Question 6

The risk-free interest rates among countries that have adopted the euro should:

Accepted Answer

The answer of The risk-free interest rates among countries that...

Question 7

China's yuan is presently:

Accepted Answer

The Chinese yuan is not allowed to fluctuate freely without central bank intervention. It is allowed to fluctuate, but the central bank, People's Bank of China, intervenes to manage the currency within a certain range. This range is determined by a basket of currencies, not solely pegged to the dollar or the euro.

Question 8

It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?

Accepted Answer

By weakening the dollar, U.S. exports become cheaper, which can increase demand for American products and thus stimulate domestic production and employment.

Question 9

Countries that have adopted the euro tend to have very similar ____.

Accepted Answer

The answer of Countries that have adopted the euro tend...

Question 10

Which of the following countries have not adopted the euro?

Accepted Answer

Switzerland has not adopted the euro.

Question 11

To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities.

Accepted Answer

The answer of To strengthen the dollar using sterilized intervention,...

Question 12

Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?

Accepted Answer

China was the least affected by the Asian crisis, as it maintained a fixed exchange rate and had strict controls on capital flows, which shielded it from the turbulence experienced by other countries in the region.

Question 13

The euro has not been adopted by:

Accepted Answer

The U.K. has not adopted the euro as their official currency.

Question 14

From a financial management perspective, which of the following is true regarding the introduction of the Euro?

Accepted Answer

With the introduction of the Euro, transactions costs decline for MNCs that conduct transactions within Europe as they no longer have to deal with multiple currencies and exchange rates. However, US-based MNCs are still subject to exchange rate risk when conducting transactions in euros, as the exchange rate between the euro and the US dollar can still fluctuate. The Euro is not pegged to all other European currencies, and it did not replace the British pound (the UK opted not to adopt the Euro).

Question 15

Which of the following are examples of currency controls?

Accepted Answer

All the options given are examples of currency controls.

A) Import restrictions: These are measures that limit the goods and services that can be imported into a country in order to encourage domestic production and preserve foreign exchange.

B) Prohibition of remittance of funds: This is a restriction on the transfer of money out of a country. It is a common currency control measure used to prevent capital flight.

C) Ceilings on granting credit to foreign firms: This refers to the imposition of restrictions on the amount of credit that can be extended to foreign firms by domestic banks. This measure is aimed at controlling the outflow of foreign exchange.

Question 16

Countries that have adopted the euro must agree on a single ____ policy.

Accepted Answer

Countries that have adopted the euro share a common currency and are therefore subject to the same monetary policy set by the European Central Bank (ECB). Fiscal policy, on the other hand, remains the sole responsibility of individual countries, although there are certain limits and rules that must be followed to ensure economic stability within the eurozone. Worker compensation and foreign relations are not directly related to the adoption of the euro.

Question 17

When using indirect intervention, a central bank is likely to focus on:

Accepted Answer

Indirect intervention through monetary policy usually involves adjusting interest rates to influence economic activity and currency valuation. The central bank adjusts the interest rate to affect the level of borrowing and lending in the economy, which affects inflation and ultimately the exchange rate. Therefore, the most likely focus of a central bank when considering indirect intervention is on interest rates.

Question 18

Which of the following is not true regarding Thailand?

Accepted Answer

Thailand was one of the fastest growing countries before the Asian crisis, not one of the slowest growing countries.

Question 19

It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario?

Accepted Answer

Buying dollars with foreign currency increases the value of the dollar relative to other currencies. This makes imports cheaper, which can help to reduce inflation by lowering the cost of goods and services in the U.S. market.

Question 20

The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries.

Accepted Answer

The exchange rate mechanism (ERM) refers to the method of linking European currencies to each other within boundaries.

Quiz 6: Government Influence on Exchange Rates