Question 1

The figure given below depicts the equilibrium in the foreign exchange market.?Figure 13.1
 
-Refer to Figure 13.1. If the exchange rate is fixed at E2 but the free market equilibrium rate is E1 then:
A) there is a shortage of British pounds at E1.
B) no intervention is necessary to achieve the exchange rate E1.
C) there is a permanent surplus of U.S. dollars at E1.
D) there is a permanent surplus of U.S. dollars at E2.
E) there is a permanent shortage of U.S. dollars at E3.

Accepted Answer

When the exchange rate is fixed above the free market equilibrium (E2 > E1), it means that the price of foreign currency (in this case, British pounds) is set too high, leading to a surplus of the domestic currency (U.S. dollars) at that fixed rate (E2). This is because at the higher exchange rate, fewer people want to buy the foreign currency while more foreign currency holders want to sell, leading to a surplus of the domestic currency.

Question 2

Which of the following is most likely to lead to an increase in the demand for U.S. dollars in the foreign exchange market?
A) U.S. firms purchasing raw materials from Japan
B) U.S. speculators expecting the value of the German mark to rise
C) The Fed intervening in the foreign exchange market and devaluing the dollar
D) Speculative outflows of money from the United States to Britain because of higher interest rates in Britain
E) Japanese cars becoming more popular in the United States

Accepted Answer

The answer of Which of the following is most likely...

Question 3

Which of the following people is most likely to demand U.S. dollars in the foreign exchange market?
A) A United States resident who is traveling to the Greek Islands
B) An American investor who intends to buy Japanese government bonds
C) A resident of Australia who is traveling to Belgium
D) A British importer of U.S. beef
E) A U.S. company that is importing avocados from Mexico

Accepted Answer

The British importer of U.S. beef would need U.S. dollars to pay for the imports, so they are most likely to demand U.S. dollars in the foreign exchange market.

Question 4

Assume that there is an unexpected increase in the demand for U.S. dollars in Switzerland. If the foreign currency price of the U.S. dollar is fixed, the U.S. Federal Reserve must intervene in the foreign exchange market such that:
A) the supply of U.S. dollars increases.
B) the U.S. demand for the Swiss franc falls.
C) the supply of U.S. dollars decreases.
D) Swiss imports from the United States are reduced.
E) the Swiss currency is devalued.

Accepted Answer

If the foreign currency price of the U.S. dollar is fixed, the increased demand for U.S. dollars in Switzerland would lead to excess demand in the foreign exchange market, causing the value of the U.S. dollar to appreciate. To maintain the fixed exchange rate, the U.S. Federal Reserve must intervene by increasing the supply of U.S. dollars in the market, which would reduce its value and prevent the appreciation. Therefore, the correct choice is A, the supply of U.S. dollars increases.

Question 5

When the foreign exchange value of the Mexican peso is above its equilibrium rate, the peso will:
A) tend to be revalued.
B) tend to increase in value over other currencies.
C) be high demand in the foreign exchange market.
D) tend to depreciate.
E) tend to appreciate.

Accepted Answer

When the foreign exchange value of the Mexican peso is above its equilibrium rate, it means that the peso is overvalued, and its price exceeds its real value. This will cause a decrease in demand for pesos as they become relatively expensive compared to other currencies, leading to a surplus of pesos in the foreign exchange market. As a result, the value of the peso will tend to depreciate, i.e., its exchange rate will decrease compared to other currencies.

Question 6

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso.?Figure 13.2
 
-Refer to Figure 13.2. Given a target exchange rate of MXP 11 = $1 with S₁ the relevant supply curve and a decline in Mexican demand for U.S. dollars from D₁ to D₂ the Fed intervenes in the foreign exchange market by:
A) selling Q₃ amount of pesos.
B) selling Q₃ amount of U.S. dollars.
C) buying (Q₂ - Q₁) amount of pesos.
D) buying (Q₁ - Q₃) amount of U.S. dollars.
E) buying (Q₂ - Q₃) amount of U.S dollars.

Accepted Answer

The answer of The figure given below depicts the equilibrium...

Question 7

The use of domestic open market operations to counteract the effects of a foreign exchange market intervention on the domestic money supply is known as:
A) normalization.
B) quantitative easing.
C) sterilization.
D) volatilization.
E) depreciation.

Accepted Answer

Sterilization refers to the use of domestic open market operations to counteract the effects of a foreign exchange market intervention on the domestic money supply. This is done to prevent the intervention from affecting domestic interest rates and inflation.

Question 8

The FOMC carries out its policies through directives to the bond-trading desk at the:
A) Federal Reserve Bank of Dallas.
B) Chicago Fed.
C) Federal Reserve of Philadelphia.
D) Los Angeles Fed.
E) Federal Reserve Bank of New York.

Accepted Answer

The Federal Reserve Bank of New York is the bond-trading desk for the FOMC and carries out open market operations to implement monetary policy decisions.

Question 9

To keep the U.S. dollar from depreciating against the euro, the U.S. Federal Reserve must:
A) buy euros and sell U.S. dollars.
B) buy both euros and U.S. dollars.
C) sell euros and buy U.S. dollars.
D) sell both euros and U.S. dollars.
E) buy U.S. government bonds

Accepted Answer

To keep the U.S. dollar from depreciating against the euro, the U.S. Federal Reserve must sell euros and buy U.S. dollars. This will increase the demand for U.S. dollars and decrease the supply of euros, which will cause the value of the dollar to appreciate against the euro. Buying euros and selling U.S. dollars would have the opposite effect and cause the dollar to depreciate. Buying both euros and U.S. dollars, or selling both euros and U.S. dollars, would not have any effect on the exchange rate between the two currencies. Buying U.S. government bonds would also not have a direct impact on the exchange rate.

Question 10

To fix the foreign currency price of domestic currency below the free market equilibrium rate, a government must:
A) sell both its own currency and foreign exchange.
B) buy its own currency and sell foreign exchange.
C) buy both its own currency and foreign exchange.
D) sell its own currency and buy foreign exchange.
E) revalue its own currency.

Accepted Answer

To fix the foreign currency price of domestic currency below the free market equilibrium rate, a government must buy its own currency and sell foreign exchange. This action increases the demand for the domestic currency, thereby raising its value relative to foreign currencies.

Question 11

The supply of the U.S. dollar on the foreign exchange market is generated by:
A) demand for U.S. exports.
B) the U.S. demand for the products and financial assets of other countries.
C) the U.S. demand for domestic goods and services.
D) foreign demand for U.S. products.
E) foreign demand for U.S. financial assets.

Accepted Answer

The answer of The supply of the U.S. dollar on...

Question 12

In foreign exchange markets, a U.S. resident who imports New Zealand apples is:
A) a demander and supplier of New Zealand dollars.
B) a demander and supplier of U.S. dollars.
C) a demander of New Zealand dollars and a supplier of U.S. dollars.
D) a supplier of both New Zealand dollars and U.S. dollars.
E) a supplier of New Zealand dollars and a demander of U.S. dollars.

Accepted Answer

The U.S. resident is importing goods from New Zealand, therefore they need to pay in New Zealand dollars, making them a demander of New Zealand dollars. To obtain New Zealand dollars, the U.S. resident must supply U.S. dollars, making them a supplier of U.S. dollars. Therefore, the U.S. resident is a demander of New Zealand dollars and a supplier of U.S. dollars.

Question 13

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso.?Figure 13.2
 
-Refer to Figure 13.2. Assume that the exchange rate is fixed at MXP 11 = $1 and the free market equilibrium rate is MXP 10 = $1. This means that at MXP 11 = $1,
A) there will be a permanent shortage of U.S. dollars.
B) there will be a surplus of Mexican pesos.
C) there will be a permanent surplus of U.S. dollars.
D) U.S. net exports to Mexico will be positive.
E) the U.S. budget deficit will fall.

Accepted Answer

The answer of The figure given below depicts the equilibrium...

Question 14

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso.?Figure 13.2
 
-Refer to Figure 13.2. When the Mexican demand for U.S. dollars rises from D₂ to D₁ and the relevant supply curve is S₁:
A) the U.S. dollar depreciates in value relative to the peso.
B) the Mexican peso depreciates in value relative to the U.S. dollar.
C) the Mexican peso appreciates in value relative to the U.S. dollar
D) U.S. imports from Mexico decreases.
E) Mexican net exports to the United States becomes positive.

Accepted Answer

When the Mexican demand for U.S. dollars increases (shifting from D₂ to D₁) with the supply curve remaining at S₁, it indicates a higher demand for U.S. dollars in exchange for Mexican pesos. This increased demand for U.S. dollars makes the dollar appreciate in value relative to the peso, meaning the peso depreciates in value relative to the U.S. dollar.

Question 15

The figure given below depicts the equilibrium in the foreign exchange market.?Figure 13.1
 
-Refer to Figure 13.1. Which of the following is most likely to cause equilibrium to change from point A to point D?
A) A decrease in U.S. demand for British goods and services
B) An increase in U.S. demand for British goods and services
C) An increase in the supply of dollars on the foreign exchange market
D) A decrease in the supply of British pounds on the foreign exchange market
E) An increase in British demand for U.S. exports

Accepted Answer

The answer of The figure given below depicts the equilibrium...

Question 16

The figure given below depicts the equilibrium in the foreign exchange market.?Figure 13.1
 
-Refer to Figure 13.1. If the current equilibrium exchange rate is E1 what action would the Fed have to take to achieve a target exchange rate of E2?
A) Sell (Q₂ - Q₁) amount of U.S. dollars.
B) Buy (Q₁ - Q₃) amount of U.S. dollars.
C) Buy (Q₂ - Q₃) amount of U.S. dollars.
D) Buy (Q₂ - Q₁) amount of U.S. dollars.
E) Sell (Q₁ - Q₃) amount of U.S. dollars.

Accepted Answer

To achieve a target exchange rate of E2 from E1, the Fed would need to increase the value of the U.S. dollar relative to other currencies. This can be done by reducing the supply of dollars in the foreign exchange market, which is accomplished by buying dollars. The correct amount to buy would be the difference in quantity between Q2 and Q1, as this would shift the supply curve leftward to the new equilibrium at E2.

Question 17

Assume that the yen price of one U.S. dollar rises to 80 yen and that the Bank of Japan has a target exchange rate of 75 yen per dollar. As a result, the Bank of Japan will intervene in the foreign exchange market by:
A) selling U.S. dollars and buying yen.
B) selling both U.S. dollars and yen.
C) buying U.S. dollars and selling yen.
D) buying both U.S. dollars and yen.
E) buying U.S. Treasury securities.

Accepted Answer

The answer of Assume that the yen price of one...

Question 18

If the U.S. dollar depreciates against the yen below the targeted exchange rate, the U.S. Federal Reserve has to intervene in the foreign exchange market such that:
A) the U.S. demand for yen rises.
B) the supply of U.S. dollars rises.
C) U.S. exports to Japan fall.
D) the U.S. dollar is devalued.
E) the supply of U.S. dollars falls.

Accepted Answer

If the U.S.dollar depreciates against the yen, it means it takes more U.S.dollars to buy one yen. Therefore, the supply of U.S.dollars in the foreign exchange market has to fall in order to increase the value of the U.S.dollar relative to the yen. This is achieved through intervention by the U.S.Federal Reserve, which sells U.S.dollars in exchange for yen. By reducing the supply of U.S.dollars in the foreign exchange market, the U.S.Federal Reserve can increase the value of the U.S.dollar, bringing it closer to the targeted exchange rate.

Question 19

The supply curve of U.S. dollars in the foreign exchange market is:
A) downward-sloping because it is negatively related to U.S. exports.
B) downward-sloping because it is negatively related to U.S. imports.
C) upward-sloping because it is positively related to U.S. exports.
D) upward-sloping because it is positively related to U.S. imports.
E) horizontal because it is unrelated to foreign demand for U.S. goods and services.

Accepted Answer

The answer of The supply curve of U.S. dollars in...

Question 20

When more than one central bank attempts to shift the equilibrium exchange rate, we refer to this as:
A) sterilization.
B) a currency crisis.
C) coordinated intervention.
D) an application of special drawing rights.
E) a floating exchange rate system.

Accepted Answer

Coordinated intervention occurs when multiple central banks work together to buy or sell their currencies in order to shift the equilibrium exchange rate in their favor. It is often used as a strategy to combat extreme fluctuations in exchange rates, but it can be difficult to coordinate effectively. Sterilization refers to the offsetting measures taken by a central bank to negate the effects of their intervention on the domestic money supply, while a currency crisis involves a sharp and sudden decline in the value of a country's currency. Special drawing rights are a form of reserve asset used by the International Monetary Fund (IMF), and a floating exchange rate system is one in which exchange rates are determined by market forces rather than government intervention.

Quiz 13: Monetary Policy

The figure given below depicts the equilibrium in the foreign exchange market.?Figure 13.1 -Refer to Figure 13.1. If the exchange rate is fixed at E2 but the free market equilibrium rate is E1 then:

Which of the following is most likely to lead to an increase in the demand for U.S. dollars in the foreign exchange market?

Which of the following people is most likely to demand U.S. dollars in the foreign exchange market?

Assume that there is an unexpected increase in the demand for U.S. dollars in Switzerland. If the foreign currency price of the U.S. dollar is fixed, the U.S. Federal Reserve must intervene in the foreign exchange market such that:

When the foreign exchange value of the Mexican peso is above its equilibrium rate, the peso will:

The use of domestic open market operations to counteract the effects of a foreign exchange market intervention on the domestic money supply is known as:

The FOMC carries out its policies through directives to the bond-trading desk at the:

To keep the U.S. dollar from depreciating against the euro, the U.S. Federal Reserve must:

To fix the foreign currency price of domestic currency below the free market equilibrium rate, a government must:

The supply of the U.S. dollar on the foreign exchange market is generated by:

In foreign exchange markets, a U.S. resident who imports New Zealand apples is:

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso.?Figure 13.2 -Refer to Figure 13.2. Assume that the exchange rate is fixed at MXP 11 = $1 and the free market equilibrium rate is MXP 10 = $1. This means that at MXP 11 = $1,

The figure given below depicts the equilibrium exchange rate between the U.S dollar and the Mexican peso.?Figure 13.2 -Refer to Figure 13.2. When the Mexican demand for U.S. dollars rises from D₂ to D₁ and the relevant supply curve is S₁:

The figure given below depicts the equilibrium in the foreign exchange market.?Figure 13.1 -Refer to Figure 13.1. Which of the following is most likely to cause equilibrium to change from point A to point D?

The figure given below depicts the equilibrium in the foreign exchange market.?Figure 13.1 -Refer to Figure 13.1. If the current equilibrium exchange rate is E1 what action would the Fed have to take to achieve a target exchange rate of E2?

Assume that the yen price of one U.S. dollar rises to 80 yen and that the Bank of Japan has a target exchange rate of 75 yen per dollar. As a result, the Bank of Japan will intervene in the foreign exchange market by:

If the U.S. dollar depreciates against the yen below the targeted exchange rate, the U.S. Federal Reserve has to intervene in the foreign exchange market such that:

The supply curve of U.S. dollars in the foreign exchange market is:

When more than one central bank attempts to shift the equilibrium exchange rate, we refer to this as: