Question 1

Other things equal, 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

To keep the yen's exchange value from appreciating against the dollar, Japan's exchange stabilization fund would sell yen for dollars on the foreign exchange market, increasing the supply of yen and decreasing its value relative to the dollar.

Question 2

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

Given that the par value of Uganda is 400 shillings per SDR and the par value of Burundi is 200 francs per SDR, we can calculate the official exchange rate between the two currencies as follows:
1 SDR = (400 shillings/Uganda) / (200 francs/Burundi) = 2 shillings/franc
Therefore, 1 franc = 0.5 shillings, which is true according to the given information.

Question 3

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 specific par values and central bank intervention in the foreign exchange market to maintain that value.

Question 4

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 percent, the exchange rate between the shilling and franc will change. If Burundi devalues its franc by 5 percent, the exchange rate between the franc and other currencies will change. The net effect is that the shilling will appreciate by 25 percent against the franc, since the shilling is increasing in value while the franc is decreasing in value relative to other currencies.

Question 5

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 6

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

Under the gold standard, the exchange rate between two countries would be determined by their respective gold prices. In this case, the US bought and sold gold at a fixed price of $35 per ounce and Britain bought and sold gold at 12.5 pounds per ounce, resulting in an official exchange rate of $2.80 per pound.

Question 7

Today, special drawing rights (SDRs) represent the most important currency basket against which developing countries maintain pegged exchange rates.

Accepted Answer

SDRs are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF), but they do not represent the most important currency basket for developing countries to peg their exchange rates against. Many developing countries peg their currencies to major currencies like the US dollar or the euro, or use a basket of currencies that typically includes the major currencies rather than SDRs.

Question 8

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 to cause the home country's exchange value to depreciate, thus making exports cheaper and imports more expensive, potentially increasing a balance of trade surplus.

Question 9

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

An exchange stabilization fund is created by governments to intervene in the foreign exchange market to maintain the stability of their currency's exchange rate. Its purpose is to stabilize the exchange rate and prevent significant deviations from the official exchange rate.

Question 10

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.

Question 11

Most developing countries have chosen to allow their currencies to float independently in the foreign exchange market.

Accepted Answer

Most developing countries do not allow their currencies to float freely due to concerns about volatility and the potential negative impacts on their economies. They often adopt managed exchange rate systems or peg their currencies to a major currency or basket of currencies.

Question 12

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

This is a correct description of how an adjustable pegged system works.

Question 13

The special drawing right is a currency basket of five major industrial country currencies.

Accepted Answer

The statement is correct. The special drawing right (SDR) is a currency basket of five major industrial country currencies, including the US dollar, euro, Japanese yen, British pound, and Chinese yuan.

Question 14

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

Accepted Answer

The statement is incorrect. The par values of most developing-country currencies are defined in terms of the US dollar, not gold.

Question 15

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

Accepted Answer

In 1973, the major industrial countries moved away from the adjustable pegged exchange rate system and adopted managed floating exchange rates, marking the end of the Bretton Woods system.

Question 16

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

Accepted Answer

To keep the pound's exchange value from depreciating against the Swiss franc, the British exchange stabilization fund would buy pounds with Swiss francs on the foreign exchange market, not sell them. This action would increase demand for the pound, supporting its value.

Question 17

The U.S.dollar is generally regarded as the major "key currency" of the international monetary system.

Accepted Answer

The U.S. dollar is widely accepted and used as the primary currency for international transactions and is considered the key currency of the international monetary system.

Question 18

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, there is no fixed exchange rate to maintain, so international reserves serve as working balances rather than for exchange rate stabilization.

Question 19

The Australian dollar is currently regarded as the key currency of the international monetary system.

Accepted Answer

The statement is false. The US dollar is currently regarded as the key currency of the international monetary system.

Question 20

A "key currency" is one that is widely traded on world money markets, has demonstrated relatively stable values over time, and has widely been accepted as a means of international settlement.

Accepted Answer

This is an accurate definition of a key currency.

Quiz 14: Exchange Rate Adjustments and the Balance of Payments