Deck 6: Government Influence on Exchange Rates

Question 1

If the Fed desires to weaken the dollar without affecting the dollar money supply,it should:

A) exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.
B) exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.
C) exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
D) exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

Answer 1

A

Question 2

A weaker dollar places _______ pressure on U.S.inflation,which in turn places _______ pressure on U.S.interest rates,which places _______ pressure on U.S.bond prices.

A) upward;downward;upward
B) upward;downward;downward
C) upward;upward;downward
D) downward;upward;upward
E) downward;downward;upward

Answer 2

C

Question 3

Under a fixed exchange rate system:

A) a foreign exchange market does not exist.
B) central bank intervention in the foreign exchange market is not necessary.
C) central bank intervention in the foreign exchange market is often necessary.
D) central bank intervention in the foreign exchange market is not allowed.

Answer 3

C

Question 4

To force the value of the British pound to depreciate against the dollar,the Federal Reserve should:

A) sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
B) sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
C) sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
D) sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

Question 5

The euro is the currency:

A) adopted in all western European countries as of 1999.
B) adopted in all eastern European countries as of 1999.
C) adopted in all European countries as of 1999.
D) none of the above

Question 6

Consider two countries that trade with each other,called X and Y.  According to the text,inflation in Country X will have a greater impact on inflation in Country Y under the _______ system.  Now,consider two other countries that trade with each other,called A and B.  Unemployment in Country A will have a greater impact on unemployment in Country B under the _______ system.

A) floating rate;fixed rate
B) floating rate;floating rate
C) fixed rate;fixed rate
D) fixed rate;floating rate

Question 7

Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market,but does not adjust for the resulting change in the money supply.  This is an example of:

A) pegged intervention.
B) indirect intervention.
C) nonsterilized intervention.
D) sterilized intervention.
E) A and D

Question 8

The interest rate of a country with a currency board:

A) is less stable than it would be without a currency board.
B) is typically below the interest rate of the currency to which it is tied.
C) will move in tandem with the interest rate of the currency to which it is tied.
D) is completely independent of the interest rate of the currency to which it is tied.

Question 9

A primary result of the Smithsonian Agreement was:

A) the establishment of the European Monetary System (EMS).
B) establishing that exchange rates of most major countries were to be allowed to fluctuate 2.25% above or below their initially set values.
C) establishing specific rules for when tariffs and quotas could be imposed by governments.
D) establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to inter vene when necessary).

Question 10

The currency of country X is pegged to the currency of country Y.Assume that county Y's currency depreciates against the currency of country Z.It is likely that country X will export _______ to country Z and import _______ from country Z.

A) more;more
B) less;less
C) more;less
D) less;more

Question 11

To force the value of the pound to appreciate against the dollar,the Federal Reserve should:

A) sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
B) sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
C) sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene.
D) sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market.

Question 12

A strong dollar places _______ pressure on inflation,which in turn places _______ pressure on the dollar.

A) upward;upward
B) downward;upward
C) upward;downward
D) downward;downward

Question 13

The value of the Canadian dollar,Japanese yen,and Australian dollar with respect to the U.S.dollar are part of a:

A) pegged system.
B) fixed system.
C) managed float system.
D) crawling peg system.

Question 14

A weak dollar is normally expected to cause:

A) high unemployment and high inflation in the U.S.
B) high unemployment and low inflation in the U.S.
C) low unemployment and low inflation in the U.S.
D) low unemployment and high inflation in the U.S.

Question 15

Under a managed float exchange rate system,the Fed may attempt to stimulate the U.S.economy by _______ the dollar.  Such an adjustment in the dollar's value should _______ the U.S.demand for products produced by major foreign countries.

A) weakening;increase
B) weakening;decrease
C) strengthening;increase
D) strengthening;decrease

Question 16

The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar's value is expected to:

A) remain stable.
B) strengthen.
C) weaken.
D) none of the above will have an impact on inflation.

Question 17

Assume countries A,B,and C produce goods that are substitutes of each other and that these countries engage in trade with each other.  Assume that country A's currency floats against country B's currency,and that country C's currency is pegged to B's.  If A's currency depreciates against B,then A's exports to C should _______,and A's imports from C should _______.

A) decrease;increase
B) decrease;decrease
C) increase;decrease
D) increase;increase

Question 18

A strong dollar is normally expected to cause:

A) high unemployment and high inflation in the U.S.
B) high unemployment and low inflation in the U.S.
C) low unemployment and low inflation in the U.S.
D) low unemployment and high inflation in the U.S.

Question 19

Which of the following is an example of direct intervention in foreign exchange markets

A) lowering interest rates.
B) increasing the discount rate.
C) exchanging dollars for foreign currency.
D) imposing barriers on international trade.

Question 20

A primary result of the Bretton Woods Agreement was:

A) the establishment of the European Monetary System (EMS).
B) establishing specific rules for when tariffs and quotas could be imposed by governments.
C) establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
D) establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to inter vene when necessary).

Question 21

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

A) monetary
B) fiscal
C) worker compensation
D) foreign relations

Question 22

Which of the following is true regarding the euro

A) Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders.
B) It allows for more consistent economic conditions across countries.
C) It prevents each country from conducting its own monetary policy.
D) All of the above are true.

Question 23

The exchange rate mechanism (ERM)crisis in 1992 represents the __________ in German interest rates that caused other European interest rates to __________,and resulted in less aggregate spending.

A) increase;increase
B) increase;decrease
C) decrease;decrease
D) decrease;increase

Question 24

The term "target zone arrangement" refers to a:

A) situation where countries adjust their national economic policies to maintain exchange rates within some predetermined limits.
B) system where several central banks act in a coordinated intervention to keep the price of one country's currency within reasonable trading ranges.
C) system where currencies are pegged to gold, or to hard currency.
D) system where local currencies are replaced by dollars.

Question 25

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

A) sell dollars for foreign currency.
B) buy dollars with foreign currency.
C) lower interest rates.
D) none of the above

Question 26

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

A) Latin American
B) European
C) Asian
D) North American

Question 27

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

A) Thailand.
B) Indonesia.
C) Russia.
D) China.
E) Malaysia.

Question 28

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

A) U.S.-based MNCs are not subject to exchange rate risk when they have transactions in euros.
B) The euro is pegged to all other European currencies.
C) Transactions costs decline for MNCs that conduct transactions within Europe.
D) The euro replaced the British pound.

Question 29

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

A) are not necessarily similar to risk-free rates in other countries.
B) should equal the U.S. risk-free rate.
C) should equal the risk-free rates in other European countries.
D) should equal the risk-free rates in Asian countries.

Question 30

As foreign exchange activity has grown:

A) central bank intervention has become more effective.
B) central bank intervention has become more frequent.
C) central bank intervention has become less effective.
D) none of the above

Question 31

Which of the following is not true regarding Thailand

A) Thailand was one of the slowest growing countries over the 1985-1994 period.
B) High levels of spending and low levels of saving placed upward pressure on prices of real estate, products, and on Thailand's local interest rate.
C) Thailand's baht was linked to the dollar prior to July 1997, which made Thailand an attractive site for foreign investors.
D) Thai banks provided many loans that were very risky in their attempt to make use of all of their funds.
E) All of the above are true.

Question 32

Which of the following countries have not adopted the Euro as of January 1,2004

A) Germany
B) Italy
C) Iceland
D) Denmark

Question 33

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

A) euro exchange rate
B) fixed
C) dirty float
D) flexible

Question 34

Which of the following are examples of currency controls

A) import restrictions.
B) prohibition of remittance of funds.
C) ceilings on granting credit to foreign firms.
D) all of the above

Question 35

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

A) inflation.
B) interest rates.
C) income levels.
D) expectations of future exchange rates.

Question 36

Assume that Lithuania (a member of the European Union)wishes to adopt the euro as its currency.Which of the following is not a requirement Lithuania must meet

A) restrict the movements of the euro relative to its home currency within a range of plus or minus 15 percent from an initially set exchange rate.
B) limit inflation.
C) limit the Lithuanian budget deficit.
D) increase GDP growth by 3% annually.

Question 37

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

A) weaken the dollar.
B) strengthen the dollar.
C) buy dollars with foreign currency in the foreign exchange market.
D) implement a tight monetary policy.

Question 38

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

A) buy;sell
B) sell;buy
C) buy;buy
D) sell;sell

Question 39

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.

Question 40

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

A) It was preceded by several years of large capital inflows to Asia.
B) It was preceded by a five-year recession in Asia.
C) Asian interest rates declined during the crisis.
D) Asian exchange rates were converted from floating to fixed to resolve the crisis.

Question 41

The Asian crisis is generally believed to have started in Japan.

Question 42

Currency devaluation can boost a country's exports,but currency revaluation can increase foreign competition.

Question 43

An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.

Question 44

Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the change in money supply.

Question 45

The Fed's indirect method of intervention is to trade dollars for or against other currencies.

Question 46

The European countries conforming to the euro are completely insulated from movements in the euro's value with respect to other currencies.

Question 47

The Bretton Woods Agreement created a system under which exchange rates are determined by market forces without intervention by various governments.

Question 48

A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating European countries,which encourages more trade and capital flows within Europe.

Question 49

Under the system known as the "dirty" float,official boundaries for the exchange rate exist,but they are wider than they are under a fixed exchange rate system.

Question 50

The Smithsonian Agreement was reached in September 1985 by seven major industrialized countries to systematically weaken the dollar.

Question 51

A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on private enterprise than the governments of other Asian countries.

Question 52

The euro is pegged to other currencies of European countries that have not adopted the euro.

Question 53

An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the Yen vs.the dollar.

Question 54

Under a pegged exchange rate system,the home currency's value is pegged to a foreign currency or to some unit of account.

Question 55

A potential advantage of exchange rate target zones is that they may stabilize international trade patterns by reducing exchange rate volatility.

Question 56

If a government wishes to stimulate its economy in the form of increased foreign demand for its country's products,it could attempt to weaken its currency.

Question 57

The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro.

Question 58

Market forces are the determinant of exchange rates in a freely floating exchange rate system.

Question 59

In a sterilized exchange rate arrangement,a country's home currency value is pegged to a foreign currency or to some unit of account.

Question 60

The establishment of the euro allows for more consistent economic conditions across countries but eliminates the power of any individual European country to solve local economic problems with its own unique monetary policy.

Question 61

A country with a currency board does not have control over its local interest rates.

Question 62

A strong home currency can harm exports;exporters typically benefit from a weaker home country currency.

Question 63

Dollarization refers to the replacement of local currency with U.S.dollars.

Question 64

All European countries now use the euro as their currency.

Question 65

An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from unemployment problems in other countries.

Question 66

A country with fixed exchange rates often faces constraints on growth.

Question 67

The European Central Bank is responsible for monetary policy in all participating European countries.

Question 68

The Bretton Woods Agreement called for the establishment of a single European currency.