Question 1

Which of the following scenarios exemplifies the purchasing power parity (PPP)theory?

Accepted Answer

Purchasing power parity (PPP) theory suggests that in the absence of transportation costs and other barriers, identical goods should have the same price in different countries when expressed in a common currency.

Question 2

According to the Bretton Woods system,which of the following statements is true?

Accepted Answer

Under the Bretton Woods system, only the US dollar was directly convertible to gold, while other currencies were pegged to the dollar.

Question 3

Lumeria,a country,headquarters many multinational enterprises.Its inflation rate is high relative to other countries.In this case,which of the following is most likely to happen?

Accepted Answer

High inflation typically leads to a decrease in the value of a country's currency, causing its exchange rate to drop.

Question 4

Lumberne,a country,reviews its international transaction statement to assess its performance in international trade.This transaction statement contains accurate details on merchandise trade,service trade,and capital movement.Such a transaction statement is called the _____.

Accepted Answer

The balance of payments (BOP) is a comprehensive statement that records all economic transactions between residents of a country and the rest of the world, including merchandise trade, service trade, and capital movement.

Question 5

Which of the following is true of the theory of purchasing power parity (PPP)?

Accepted Answer

The theory of purchasing power parity (PPP) posits that in the long run, exchange rates should adjust so that identical goods cost the same in different countries, equalizing the purchasing power of different currencies.

Question 6

Grenasia is a developed country.The exchange rate of Grenasia's currency is higher than other currencies in the world.In this case,which of the following is the effect of such a high exchange rate?

Accepted Answer

A high exchange rate means that Grenasia's currency is worth more than other currencies. This will make Grenasia's exports more expensive and its imports cheaper. As a result, demand for Grenasia's exports will decrease and demand for its imports will increase. This will lead to a decrease in Grenasia's exports and an increase in its imports, which will in turn lead to an inflow of foreign funds.

Question 7

The _____ consists of exports minus imports of merchandise and services,plus income on a country's assets abroad minus payments on foreign assets in the focal country,plus unilateral government transfers and private remittances.

Accepted Answer

The current account balance includes exports minus imports of goods and services, net income from abroad, and net current transfers.

Question 8

In a fixed exchange rate policy,which of the following involves setting the exchange rate of the domestic currency in terms of another currency?

Accepted Answer

Pegging involves setting the exchange rate of the domestic currency in terms of another currency.

Question 9

Which of the following statements is NOT true of the IMF?

Accepted Answer

The IMF operates on a quota system where a member's financial commitment determines its borrowing capacity and voting power, meaning not all countries have equal borrowing capacity or voting power.

Question 10

Which of the following is true of the gold standard used from 1870 to 1914?

Accepted Answer

The gold standard system used from 1870 to 1914 involved using gold as the common denominator for all currencies, meaning that currencies were valued in terms of a specific amount of gold.

Question 11

Investors-currency traders,foreign portfolio investors,and average citizens-may move in the same direction at the same time,like a herd,resulting in the _____.

Accepted Answer

The bandwagon effect refers to the phenomenon where people do something primarily because others are doing it, regardless of their own beliefs, similar to herd behavior.

Question 12

Which of the following statements is NOT a criticism of the IMF?

Accepted Answer

The statement in option D is not a criticism of the IMF itself but rather a criticism of the countries that rely on the IMF. The other options are direct criticisms of the IMF's policies and operations.

Question 13

Mexico recently printed more currency,causing the supply of the peso to increase while demand stayed the same.Which of the following is NOT a likely outcome of this scenario?

Accepted Answer

When the supply of a currency increases while demand remains constant, the value of the currency typically decreases, not appreciates. Therefore, investor sell-offs would not cause the peso to appreciate.

Question 14

The Bretton Woods system was centered on _____ as the common denominator.

Accepted Answer

The Bretton Woods system established the US dollar as the central currency, pegged to gold, with other currencies pegged to the dollar.

Question 15

The Bretton Woods system came to an end because:

Accepted Answer

The Bretton Woods system ended due to a combination of rising productivity in other countries and inflationary policies in the US, which made it difficult to maintain fixed exchange rates and the dollar's convertibility to gold.

Question 16

Which of the following is true of a floating exchange rate policy?

Accepted Answer

A floating exchange rate policy allows the free market to determine the exchange rates without direct government intervention.

Question 17

In the context of balance of payments (BOP),a country experiencing a current account surplus:

Accepted Answer

A current account surplus indicates that a country is exporting more than it is importing, leading to higher demand for its currency, which typically causes the currency to appreciate.

Question 18

In the context of exchange rate policies,_____ is a pure market solution to determine exchange rates.

Accepted Answer

A free float is a system where exchange rates are determined by the market forces of supply and demand without direct government or central bank intervention.

Question 19

What is the difference between a clean float and a dirty float?

Accepted Answer

A dirty float involves selective government interventions to influence exchange rates, whereas a clean float relies solely on market forces without government intervention.

Question 20

In the context of interest rates and money supply,quantitative easing:

Accepted Answer

Quantitative easing involves increasing the money supply by purchasing government bonds, which tends to stimulate inflation by increasing the amount of currency in circulation.

Quiz 7: Dealing With Foreign Exchange

Which of the following scenarios exemplifies the purchasing power parity (PPP) theory?