Question 1

Given an initial equilibrium in the money market and foreign exchange market,suppose the Federal Reserve increases the money supply of the United States.Under a floating exchange-rate system,the dollar would:

Accepted Answer

When the Federal Reserve increases the money supply, it increases the amount of dollars in circulation. This leads to a decrease in the value of the dollar relative to other currencies due to the increased supply of dollars in the foreign exchange market. Therefore, the dollar would depreciate in value relative to other currencies.

Question 2

Under a floating exchange-rate system,if American exports decrease and American imports rise,the value of the dollar will:

Accepted Answer

Under a floating exchange-rate system, the value of the currency is determined by market forces. If there is a decrease in exports and an increase in imports, it means that there is a higher supply of dollars in the foreign exchange market. This excess supply will lead to a decrease in the value of the dollar (depreciation). Therefore, the best choice is B, which is "Depreciate".

Question 3

Which exchange-rate mechanism is intended to insulate the balance of payments from short-term capital movements while providing exchange rate stability for commercial transactions?

Accepted Answer

Dual exchange rates are designed to separate capital account transactions from current account transactions, thus insulating the balance of payments from short-term capital movements while maintaining exchange rate stability for commercial transactions.

Question 4

Under the historic adjustable pegged exchange-rate system,member countries were permitted to correct persistent and sizable payment deficits (i.e.,fundamental disequilibrium) by:

Accepted Answer

Under the historic adjustable pegged exchange-rate system, member countries were allowed to officially devalue their currencies to correct persistent and sizable payment deficits or fundamental disequilibrium. This meant that the government would reduce the official value of the currency in relation to other currencies, making exports cheaper and imports more expensive, ultimately reducing the trade deficit. Revaluing the currency or allowing it to fluctuate in the free market were also options, but devaluation was the most common approach taken by countries such as the UK in the post-World War II era.

Question 5

Under managed floating exchange rates,if the rate of inflation in the United States is less than the rate of inflation of its trading partners,the dollar will likely:

Accepted Answer

Under managed floating exchange rates, the exchange rate is allowed to fluctuate freely but is also influenced by the government through various policies. If the rate of inflation in the United States is less than the rate of inflation of its trading partners, it means that the purchasing power of the dollar is increasing relative to foreign currencies. This will make US goods more expensive for foreign buyers and foreign goods cheaper for US buyers, leading to an increase in US exports and a decrease in imports, which will increase the demand for dollars and cause its value to appreciate against foreign currencies.

Question 6

Which exchange-rate mechanism calls for frequent redefining of the par value by small amounts to remove a payments disequilibrium?

Accepted Answer

Crawling pegged exchange rates call for frequent redefining of the par value by small amounts to remove a payments disequilibrium.

Question 7

The exchange-rate system that best characterizes the present international monetary arrangement used by industrialized countries is:

Accepted Answer

The present international monetary arrangement used by industrialized countries is a managed floating exchange rate system. In this system, exchange rates are allowed to fluctuate within a certain range, but central banks intervene and manage the fluctuations to prevent extreme volatility. This system provides a balance between the flexibility of freely fluctuating exchange rates and the stability of fixed exchange rates.

Question 8

Small nations (e.g.,Tanzania) with more than one major trading partner tend to peg the value of their currencies to:

Accepted Answer

Small nations with more than one major trading partner tend to peg the value of their currencies to a basket of currencies. This helps to reduce the risk of relying too heavily on one specific trading partner and can provide some stability to the currency's value in the international market. Pegging to a basket of currencies also makes it easier for the government to adjust the exchange rate if necessary.

Question 9

Rather than constructing their own currency baskets,many nations peg the value of their currencies to a currency basket defined by the International Monetary Fund.Which of the following illustrates this basket?

Accepted Answer

Special Drawing Rights (SDRs) are a currency basket defined by the International Monetary Fund (IMF). SDRs are a unit of account that represents a basket of other currencies, such as the US dollar, euro, yen, pound sterling, and the Chinese renminbi. Many nations peg their currencies to this basket to help stabilize the value of their currencies.

Question 10

Small nations (e.g.,the Ivory Coast) whose trade and financial relationships are mainly with a single partner tend to utilize:

Accepted Answer

Small nations whose trade and financial relationships are mainly with a single partner often face high levels of economic uncertainty and vulnerability to external shocks. Therefore, to stabilize their prices and currencies, they tend to use pegged exchange rates, which fix the value of their currency against another currency, such as the US dollar or the euro. This helps them to maintain a stable exchange rate, reduce inflation, and facilitate trade and investment with their main partner.

Question 11

Under adjustable pegged exchange rates,if the rate of inflation in the United States exceeds the rate of inflation of its trading partners:

Accepted Answer

If the rate of inflation in the U.S. exceeds that of its trading partners, the U.S. dollar will be less competitive in the global market, resulting in a decline in exports and an increase in imports. The demand for foreign currencies to purchase these imported products would increase, resulting in a decrease in U.S. foreign exchange reserves. Therefore, option B is the correct answer.

Question 12

Under a floating exchange-rate system,if American exports increase and American imports fall,the value of the dollar will:

Accepted Answer

An increase in exports and a decrease in imports indicates a higher demand for US dollars in the foreign exchange market. This increased demand will cause the value of the dollar to appreciate relative to other currencies in the market. Therefore, the correct choice is A, Appreciate.

Question 13

The Bretton Woods Agreement of 1944 established a monetary system based on:

Accepted Answer

The Bretton Woods Agreement of 1944 established a monetary system based on gold and adjustable pegged exchange rates, where countries pegged their currency to the US dollar, which was in turn pegged to gold. The exchange rates could only be adjusted with the permission of the International Monetary Fund (IMF).

Question 14

Which exchange-rate system involves a "leaning against the wind" strategy in which short-term fluctuations in exchange rates are reduced without adhering to any particular exchange rate over the long run?

Accepted Answer

The exchange-rate system described in the question is managed floating exchange rates. In this system, the central bank intervenes in the foreign exchange market to smooth out short-term fluctuations in the exchange rate without committing to maintaining any particular exchange rate in the long run. This approach is sometimes referred to as "leaning against the wind." Pegged or fixed exchange rates involve a commitment to maintaining a fixed exchange rate with no flexibility for short-term fluctuations. Adjustable pegged exchange rates involve periodic adjustments to the fixed exchange rate. Freely floating exchange rates allow the exchange rate to be determined by market forces with no government intervention.

Question 15

Under a pegged exchange-rate system,which does not explain why a country would have a balance-of-payments deficit?

Accepted Answer

An undervalued domestic currency would typically lead to a balance-of-payments surplus, not a deficit, as it makes domestic goods cheaper for foreigners, boosting exports.

Question 16

A primary objective of dual exchange rates is to allow a country the ability to insulate its balance of payments from net:

Accepted Answer

Dual exchange rates are often used by countries to manage their capital account transactions and insulate their balance of payments from volatility. By having a separate exchange rate for capital account transactions, countries can encourage or discourage capital inflows or outflows, control the demand for foreign currency, and maintain a stable exchange rate for current account transactions. Therefore, the correct answer is D - capital account transactions.

Question 17

During the 1970s,the European Union,in its quest for monetary union,adopted what came to be referred to as the "Community Snake." This device was a:

Accepted Answer

The answer of During the 1970s,the European Union,in its quest...

Question 18

Which exchange-rate system does not require monetary reserves for official exchange-rate intervention?

Accepted Answer

In a floating exchange-rate system, the exchange rate is determined by market forces of supply and demand without any government intervention. Therefore, there is no need for monetary reserves for official exchange-rate intervention.

Question 19

In 1973,the reform of the international monetary system resulted in the change from:

Accepted Answer

The reform of the international monetary system in 1973 resulted in the change from adjustable pegged rates to managed floating rates. Under the adjustable pegged rate system, countries set a fixed exchange rate for their currency in relation to another currency, typically the US dollar, but allowed for adjustments in the exchange rate to account for changes in economic conditions. However, this system was susceptible to speculative attacks and external shocks, which led to a breakdown in the system. In response, the international community shifted towards a more flexible system of managed floating rates, where the exchange rate is determined by market forces while central banks can intervene to smooth out any volatility.

Question 20

Under a floating exchange rate system,an increase in U.S.imports of Japanese goods will cause the demand schedule for Japanese yen to:

Accepted Answer

An increase in U.S. imports of Japanese goods will increase the demand for Japanese yen, as U.S. importers need to exchange dollars for yen to pay for the goods. This increased demand for yen will cause the yen to appreciate.

Quiz 15: Exchange Rate Systems and Currency Crises