Question 1

A potential limitation of freely floating exchange rates is that

Accepted Answer

Freely floating exchange rates can result in wide and frequent fluctuations in exchange rates, which can create uncertainty and volatility in international markets. This can be a potential limitation for businesses and governments that rely on stable exchange rates for trade and investment.

Question 2

The "impossible trinity" explains the relationship between

Accepted Answer

The "impossible trinity" refers to the concept that it is impossible for a country to simultaneously have free movements of international capital, independent monetary policies, and a fixed exchange rate system. Therefore, all three choices listed in the answer are correct in explaining the relationship between the elements of the "impossible trinity."

Question 3

Countries tend to be less served by a fixed exchange rate system when

Accepted Answer

Countries that are highly exposed to international capital movements tend to be less served by a fixed exchange rate system because capital flows can put pressure on the exchange rate and make it difficult to maintain a fixed rate. Small, open economies (A) may benefit from a fixed exchange rate system as it can provide stability and mitigate external shocks. Modest inflation differentials (B) may also be supportive of a fixed exchange rate as it reduces the need for frequent adjustments. Flexible wages (D) can also support a fixed exchange rate as it allows for greater adjustment to changing market conditions.

Question 4

Proponents of freely floating exchange rates maintain that

Accepted Answer

Proponents of freely floating exchange rates argue that the system allows policy makers the freedom to pursue domestic economic goals without being constrained by exchange rate targets. They do not believe that central banks can easily modify fluctuations in exchange rates or that the inelastic supply and demand schedules prevent large fluctuations in exchange rates.

Question 5

When the United States abandoned the Bretton Woods system in 1973, it adopted a system of

Accepted Answer

The answer of When the United States abandoned the Bretton...

Question 6

Members of the International Monetary Fund agree that

Accepted Answer

All three statements are correct according to the agreement among members of the International Monetary Fund. These agreements are designed to promote fair and stable international economic relations among member countries.

Question 7

Under a floating exchange rate system, other things equal, if there occurs a fall in the dollar price of the Swiss franc

Accepted Answer

The answer of Under a floating exchange rate system, other...

Question 8

Under a system of fixed exchange rates, the purpose of currency revaluation is to cause the exchange value of a currency to ______, thus counteracting a balance-of-payments ______.

Accepted Answer

Currency revaluation under a fixed exchange rate system is intended to increase the value of the currency (appreciate) to address a balance-of-payments surplus, where the country's currency is in high demand.

Question 9

Under a system of floating exchange rates, other things equal, a U.S.trade deficit with Japan will cause

Accepted Answer

Under a system of floating exchange rates, a U.S. trade deficit with Japan means that there is an excess demand for yen relative to the supply of dollars. As a result, the value of the yen will appreciate (i.e. the dollar price of yen will increase) to balance the market.

Question 10

Other things equal, to temporarily offset a depreciation in the dollar's exchange value, the Federal Reserve could ____ the U.S.money supply, which would promote a (an) ____ in U.S.interest rates and a (an) ____ in investment flows to the United States.

Accepted Answer

To offset a depreciation in the dollar's exchange value, the Fed can decrease the US money supply, which would increase interest rates due to a decrease in the supply of money. Higher interest rates would attract foreign investment flows to the US, prompting an increase in investment flows to the country.

Question 11

Other things equal, a market-determined increase in the dollar price of the pound is associated with

Accepted Answer

An increase in the dollar price of the pound means that it takes more dollars to buy one pound, which means the dollar has depreciated relative to the pound. Therefore, the correct choice is D, depreciation of the dollar.

Question 12

Assume that interest rates in London increase relative to those in Switzerland.Other things equal, under a floating exchange rate system one would expect the pound (relative to the Swiss franc) to

Accepted Answer

When interest rates in London increase relative to those in Switzerland, investors are likely to move their capital to London to take advantage of the higher returns. This increases the demand for pounds as investors need to convert their currency into pounds to invest in London, leading to an appreciation of the pound relative to the Swiss franc.

Question 13

Under a system of fixed exchange rates, the purpose of currency devaluation is to cause the exchange value of a currency to ______, thus counteracting a balance-of-payments ______.

Accepted Answer

Currency devaluation under a fixed exchange rate system is aimed at causing the currency to depreciate in order to counteract a balance-of-payments deficit. This makes exports cheaper and imports more expensive, potentially improving the balance-of-payments situation.

Question 14

A potential disadvantage of freely floating exchange rates is that there would

Accepted Answer

Freely floating exchange rates can encourage destabilizing speculation, leading to increased volatility in exchange rates. This can potentially harm the competitiveness of firms in global markets, leading to economic instability.

Question 15

Other things equal, to temporarily offset an appreciation in the dollar's exchange value, the Federal Reserve could ____ the U.S.money supply, which would promote a (an) ____ in U.S.interest rates and a ____ in investment flows to the United States.

Accepted Answer

Increasing the U.S. money supply would typically lead to a decrease in U.S. interest rates, which in turn would decrease investment flows to the United States, countering the appreciation of the dollar.

Question 16

Which of the following is not a potential disadvantage of freely floating exchange rates?

Accepted Answer

Freely floating exchange rates do not require larger amounts of international reserves than other exchange systems. In fact, one of the advantages of a freely floating exchange rate system is that it reduces the need for a country to hold large reserves for the purpose of maintaining a fixed exchange rate.

Question 17

In recent years, members of the International Monetary Fund have adopted exchange rate systems including

Accepted Answer

Members of the International Monetary Fund have adopted various exchange rate systems, including currency board arrangements, fixed exchange rates, and crawling pegged exchange rates. Therefore, the correct answer is D, as all of these options are correct.

Question 18

Under a floating exchange rate system, other things equal, which of the following best leads to a depreciation in the value of the Canadian dollar?

Accepted Answer

A decrease in the Canadian interest rate makes Canadian assets less attractive to investors, leading to a decrease in demand for the Canadian dollar and causing its depreciation.

Question 19

A market-determined decrease in the dollar price of the pound is associated with

Accepted Answer

A market-determined decrease in the dollar price of the pound means the dollar is gaining value relative to the pound, which is known as appreciation of the dollar.

Question 20

In recent years, members of the International Monetary Fund have adopted exchange rate systems including

Accepted Answer

Members of the International Monetary Fund have adopted different exchange rate systems in recent years including independently floating exchange rates, managed floating exchange rates, and crawling pegged exchange rates. Therefore, option D is correct.

Quiz 14: Exchange Rate Adjustments and the Balance of Payments

A potential limitation of freely floating exchange rates is that

The "impossible trinity" explains the relationship between

Countries tend to be less served by a fixed exchange rate system when

Proponents of freely floating exchange rates maintain that

When the United States abandoned the Bretton Woods system in 1973, it adopted a system of

Members of the International Monetary Fund agree that

Under a floating exchange rate system, other things equal, if there occurs a fall in the dollar price of the Swiss franc

Under a system of fixed exchange rates, the purpose of currency revaluation is to cause the exchange value of a currency to , thus counteracting a balance-of-payments .

Under a system of floating exchange rates, other things equal, a U.S.trade deficit with Japan will cause

Other things equal, to temporarily offset a depreciation in the dollar's exchange value, the Federal Reserve could the U.S.money supply, which would promote a (an) in U.S.interest rates and a (an) in investment flows to the United States.

Other things equal, a market-determined increase in the dollar price of the pound is associated with

Assume that interest rates in London increase relative to those in Switzerland.Other things equal, under a floating exchange rate system one would expect the pound (relative to the Swiss franc) to

Under a system of fixed exchange rates, the purpose of currency devaluation is to cause the exchange value of a currency to , thus counteracting a balance-of-payments .

A potential disadvantage of freely floating exchange rates is that there would

Other things equal, to temporarily offset an appreciation in the dollar's exchange value, the Federal Reserve could the U.S.money supply, which would promote a (an) in U.S.interest rates and a in investment flows to the United States.

Which of the following is not a potential disadvantage of freely floating exchange rates?

In recent years, members of the International Monetary Fund have adopted exchange rate systems including

Under a floating exchange rate system, other things equal, which of the following best leads to a depreciation in the value of the Canadian dollar?

A market-determined decrease in the dollar price of the pound is associated with

In recent years, members of the International Monetary Fund have adopted exchange rate systems including