Question 1

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market. Assume that the market operates under a flexible exchange rate regime.
Figure 21.1
 
In the figure:
DS1U1B11S1U1B0 and DS1U1B12S1U1B0: Demand for Brazilian reals
SS1U1B11S1U1B0 and SS1U1B12S1U1B0: Supply of Brazilian reals

-Refer to Figure 21.1. Determine the equilibrium exchange rate and equilibrium quantity of Brazilian reals, if D1 and S1 are the relevant demand and supply curves for Brazilian reals in this market.
A) 10 pesos per real and a quantity of 150 reals
B) 6 pesos per real and a quantity of 250 reals
C) 8 pesos per real and a quantity of 150 reals
D) 8 pesos per real and a quantity of 250 reals
E) 6 pesos per real and a quantity of 200 reals

Accepted Answer

The equilibrium exchange rate is determined where the demand and supply curves intersect. In this case, at the intersection of D₁ and S₁, the exchange rate is 8 pesos per real and the quantity traded is 250 reals. Therefore, the correct answer is D.

Question 2

When the exchange rate fluctuates around a fixed central target, allowing for a moderate amount of fluctuation, while tying the currency to the target central rate, the exchange rate is under:
A) a horizontal band.
B) a crawling peg.
C) a managed float.
D) an independent float.
E) a currency board.

Accepted Answer

A horizontal band is a system in which the exchange rate is allowed to fluctuate within a fixed range or band, while still being tied to a central target rate. This system allows for some flexibility in the exchange rate, but also provides a degree of stability and predictability. This is achieved by central bank intervention in the foreign exchange market, buying or selling domestic currency as needed to maintain the exchange rate within the target band.

Question 3

Foreign exchange market intervention is most effective when:
A) each country's political leaders agree to cooperate fully with the process.
B) leading economists in each country concur that intervention is needed.
C) permanent differences between the free market exchange rate and the fixed exchange rate are expected.
D) temporary differences between the free market exchange rate and the fixed exchange rate are expected.
E) all the countries restrict the international movement of goods and services.

Accepted Answer

Foreign exchange market intervention can be effective in correcting temporary differences between the free market exchange rate and the fixed exchange rate. However, it may not be effective in correcting permanent differences as it may require continuous intervention which may not be sustainable. Cooperation among political leaders and agreement among economists can be helpful but may not necessarily determine the effectiveness of the intervention. Restrictions on international movement of goods and services are not directly related to foreign exchange market intervention.

Question 4

Which of the following exchange rate systems have a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate?
A) Gold standard
B) Gold exchange standard
C) Crawling band
D) Horizontal band
E) Currency board

Accepted Answer

Currency board systems have a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.

Question 5

Assume that you have just returned to the United States from a summer vacation in Russia, where you exchanged American dollars for Russian rubles. Your economic actions can be said to have:
A) increased the supply of American dollars in Russia.
B) decreased the supply of Russian rubles in America.
C) decreased the supply of American dollars in Russia.
D) increased the demand for American dollars in America.
E) increased the supply of Russian rubles in Russia.

Accepted Answer

The answer of Assume that you have just returned to...

Question 6

The annual membership fees of the 185 member countries of the IMF are called:
A) annuities.
B) quotas.
C) vetos.
D) conditionalities.
E) petrodollars.

Accepted Answer

The annual membership fees of the 185 member countries of the IMF are called quotas. Quotas are determined based on each member country's relative size in the global economy and determine the country's voting power and access to IMF resources.

Question 7

Suppose the official gold value of the Brazilian real changes from 527 reals per ounce to 508 reals per ounce. We can then say that:
A) the Brazilian real has depreciated in value as a consequence of free market fluctuations.
B) the Brazilian real has appreciated in value.
C) gold is now more expensive to purchase in Brazil than it was before.
D) the Brazilian real has been devalued.
E) the Brazilian economy is expected to experience rapid inflation.

Accepted Answer

A decrease in the gold value of the Brazilian real means that it takes fewer reals to purchase an ounce of gold. This indicates an increase in the value of the real relative to gold, which is an appreciation in value.

Question 8

Which of the following had resulted from the Smithsonian agreement of 1971?
A) Devaluation of the U.S. dollar
B) Dissolution of a fixed exchange rate regime
C) Appreciation of the U.S. dollar
D) Establishment of an equilibrium exchange rate
E) Laissez-faire in the foreign exchange market

Accepted Answer

The Smithsonian agreement of 1971 resulted in the devaluation of the U.S. dollar against other currencies by approximately 8%. This was done in an effort to correct the balance of payments deficit that the U.S. was experiencing at the time.

Question 9

The exchange rate that is established in the absence of foreign exchange market intervention by the government is known as a(n):
A) historical anachronism.
B) fixed exchange rate.
C) "dirty float" exchange rate.
D) unmanaged exchange rate.
E) free market equilibrium exchange rate.

Accepted Answer

The exchange rate that is established in the absence of government intervention in the foreign exchange market is a free market equilibrium exchange rate. This is the rate that is determined by supply and demand of currencies in the market.

Question 10

Suppose the official gold value of the Brazilian real changes from 457 reals per ounce to 528 reals per ounce. We can then say that:
A) the Brazilian real has been devalued.
B) the Brazilian economy is expected to experience rapid inflation.
C) gold has been devalued.
D) the Brazilian real has appreciated in value.
E) gold is now cheaper to purchase in Brazil than it was before.

Accepted Answer

A change from 457 to 528 reals per ounce implies that it now takes more reals to purchase an ounce of gold. This means that the currency has been devalued, as it now has a lower value relative to gold.

Question 11

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market. Assume that the market operates under a flexible exchange rate regime.
Figure 21.1
 
In the figure:
DS1U1B11S1U1B0 and DS1U1B12S1U1B0: Demand for Brazilian reals
SS1U1B11S1U1B0 and SS1U1B12S1U1B0: Supply of Brazilian reals

-Refer to Figure 21.1. Suppose the initial equilibrium exchange rate is 10 pesos per real. A decrease in the Mexican demand for Brazilian coffee, other things equal, is most likely to result in a new equilibrium exchange rate of:
A) 6 pesos per real and an equilibrium quantity of 200 Brazilian reals.
B) 6 pesos per real and an equilibrium quantity of 250 Brazilian reals.
C) 8 pesos per real and an equilibrium quantity of 150 Brazilian reals.
D) 8 pesos per real and an equilibrium quantity of 100 Brazilian reals.
E) 10 pesos per real and an equilibrium quantity of 200 Brazilian reals.

Accepted Answer

A decrease in Mexican demand for Brazilian coffee will shift the demand curve for Brazilian reals to the left. This will cause a new equilibrium exchange rate that is lower than the initial rate of 10 pesos per real. The new equilibrium exchange rate will be determined at the point where the demand and supply curves intersect after the leftward shift of the demand curve. This point is approximately 8 pesos per real. The equilibrium quantity of Brazilian reals will also decrease to approximately 150 reals. Therefore, the best choice is C, with an equilibrium exchange rate of 8 pesos per real and an equilibrium quantity of 150 Brazilian reals.

Question 12

Assume that a country's government influences the exchange rate through active central bank intervention, with no pre-announced path. This policy is known as a(n):
A) floating exchange-rate policy.
B) managed floating exchange-rate policy.
C) fixed exchange-rate policy.
D) crawling-peg exchange-rate policy.
E) interventionist exchange-rate policy.

Accepted Answer

A managed floating exchange-rate policy involves active central bank intervention to influence the exchange rate, but with no pre-announced path or target. This allows for some flexibility in the exchange rate, but still allows the government to control its movements to some extent. The other options (floating, fixed, crawling-peg, and interventionist) either do not involve central bank intervention or involve more rigid restrictions on the exchange rate.

Question 13

Equilibrium in the foreign exchange market occurs:
A) at the point where the foreign exchange demand and supply curves intersect.
B) at the point where the foreign exchange demand and supply curves reach maximum separation.
C) when two nations' economic leaders agree on the appropriate exchange rate.
D) when two nations' diplomatic leaders agree on an exchange rate that meets both countries' needs.
E) only by chance, if at all, because they change very frequently.

Accepted Answer

Equilibrium in the foreign exchange market occurs at the point where the foreign exchange demand and supply curves intersect. This is where the quantity of currency that buyers want to buy is equal to the quantity of currency that sellers want to sell, resulting in a stable exchange rate.

Question 14

What is a currency board?
A) A fixed exchange rate that, by law, exchanges domestic currency for a specified foreign currency at a fixed exchange rate.
B) A floating exchange rate.
C) A managed floating exchange-rate policy that the government adjusts periodically according to some economic indicator.
D) A laissez-faire exchange-rate policy.
E) An interventionist exchange-rate policy.

Accepted Answer

A currency board is a monetary system that maintains a fixed exchange rate and issues domestic currency that is fully backed by a foreign currency. The domestic currency can be exchanged for the anchor currency at a fixed exchange rate, which is guaranteed by law. This fixed rate provides stability and eliminates the need for a central bank to manage the exchange rate.

Question 15

The IMF mostly receives its funds from:
A) the subscription fees paid by the member nations.
B) selling of bonds.
C) the loans given by the World Bank.
D) the central banks of the major industrialized nations.
E) the gold reserves available with the Fed.

Accepted Answer

The IMF mostly receives its funds from the subscription fees paid by the member nations. These fees are based on each member's economic size and are paid in a combination of currency and Special Drawing Rights (SDRs), which are an international reserve asset created by the IMF.

Question 16

Under the _____ arrangement, the exchange rate is adjusted periodically by small amounts at a fixed, pre-announced rate or in response to certain indicators.
A) currency board
B) crawling peg
C) reserve currency
D) conventional fixed peg
E) independent float

Accepted Answer

The crawling peg arrangement involves periodic adjustments to the exchange rate, usually in small amounts and pre-announced or in response to specific economic indicators. The other options do not fit this description.

Question 17

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market. Assume that the market operates under a flexible exchange rate regime.
Figure 21.1
 
In the figure:
DS1U1B11S1U1B0 and DS1U1B12S1U1B0: Demand for Brazilian reals
SS1U1B11S1U1B0 and SS1U1B12S1U1B0: Supply of Brazilian reals

-Refer to Figure 21.1. Assume that the initial equilibrium exchange rate is 8 Mexican pesos per Brazilian real and 150 brazilian reals are traded in the market. Suppose, there is an increase in the Brazilian demand for Mexican exports. Other things remaining equal, which of the following can be concluded?
A) The demand curve for Brazilian reals will shift to the the right.
B) The supply curve of Brazilian reals will shift to the the right.
C) The Mexican pesos will depreciate in value.
D) The Brazilian reals will appreciate in value.
E) Around 100 Brazilian reals will be traded in the forex market.

Accepted Answer

An increase in Brazilian demand for Mexican exports means Brazilians need more pesos to pay for these exports, leading to an increased supply of Brazilian reals in the forex market.

Question 18

The Bretton Woods system required countries to actively buy and sell dollars to maintain fixed exchange rates when:
A) a country experienced a severe bout of inflation.
B) the free market equilibrium exchange rate differed from the fixed rate.
C) a country experienced serious unemployment.
D) the threat of recession began to spread from one country to another.
E) worldwide trade began to deteriorate.

Accepted Answer

The Bretton Woods system required countries to actively buy and sell dollars to maintain fixed exchange rates when the free market equilibrium exchange rate differed from the fixed rate. This meant that if the market value of a currency went above or below the fixed value, the country's central bank had to intervene and either buy or sell the currency to maintain the fixed rate.

Question 19

An upward-sloping supply curve of Korean won in terms of Canadian dollars indicates that:
A) the higher the dollar price of Korean won, the more won will be demanded.
B) the higher the dollar price of Korean won, the fewer won will be supplied.
C) the lower the dollar price of Korean won, the more won will be demanded.
D) the lower the dollar price of Korean won, the fewer won will be supplied.
E) the Korean economy is stronger than the Canadian economy.

Accepted Answer

An upward-sloping supply curve indicates that as the price increases, the quantity supplied also increases. Therefore, if the dollar price of Korean won decreases, fewer won will be supplied, as suppliers are less willing to exchange their currency at lower prices.

Question 20

The primary function of the World Bank is to:
A) lend money to the World Trade Organization.
B) provide loans to countries experiencing huge budget deficit.
C) finance economic development in poor countries.
D) assist countries experiencing balance of payments deficits.
E) finance the fiscal stabilization program of the U.S. government.

Accepted Answer

The World Bank's primary function is to provide loans and funding to countries for the purpose of promoting economic development, particularly in poorer nations. While the organization also provides assistance in areas such as poverty reduction and disaster relief, its main focus is on financing economic growth and development. Options A, D, and E are incorrect because the World Bank does not lend money to the World Trade Organization, assist countries experiencing balance of payments deficits, or finance the fiscal stabilization program of the U.S. government. Option B is partially correct in that the World Bank does provide loans to countries facing budget deficits, but this is not its primary function.

Quiz 21: Exchange Rates and Financial Links Between Countries

When the exchange rate fluctuates around a fixed central target, allowing for a moderate amount of fluctuation, while tying the currency to the target central rate, the exchange rate is under:

Foreign exchange market intervention is most effective when:

Which of the following exchange rate systems have a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate?

Assume that you have just returned to the United States from a summer vacation in Russia, where you exchanged American dollars for Russian rubles. Your economic actions can be said to have:

The annual membership fees of the 185 member countries of the IMF are called:

Suppose the official gold value of the Brazilian real changes from 527 reals per ounce to 508 reals per ounce. We can then say that:

Which of the following had resulted from the Smithsonian agreement of 1971?

The exchange rate that is established in the absence of foreign exchange market intervention by the government is known as a(n) :

Suppose the official gold value of the Brazilian real changes from 457 reals per ounce to 528 reals per ounce. We can then say that:

Assume that a country's government influences the exchange rate through active central bank intervention, with no pre-announced path. This policy is known as a(n) :

Equilibrium in the foreign exchange market occurs:

What is a currency board?

The IMF mostly receives its funds from:

Under the _____ arrangement, the exchange rate is adjusted periodically by small amounts at a fixed, pre-announced rate or in response to certain indicators.

The Bretton Woods system required countries to actively buy and sell dollars to maintain fixed exchange rates when:

An upward-sloping supply curve of Korean won in terms of Canadian dollars indicates that:

The primary function of the World Bank is to: