Question 1

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 is an exchange rate system where the central bank has a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.

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 exchange rate system allows the currency to fluctuate within a certain range around a fixed central rate, which matches the description given.

Question 3

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:?D₁ and D₂: Demand for Brazilian reals?S₁ and S₂: 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 and quantity are determined by the intersection of the demand curve (D₁) and the supply curve (S₁) for Brazilian reals. Choice D correctly identifies the equilibrium exchange rate as 8 pesos per real and the equilibrium quantity as 250 reals, assuming this is where D₁ and S₁ intersect.

Question 4

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 was done to prevent currency speculation and maintain stability in the global financial system.

Question 5

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 primary function of the World Bank is to finance economic development in poor countries by providing loans, technical assistance, and policy advice. It aims to reduce poverty and promote sustainable economic growth. It does not lend money to the World Trade Organization, provide loans to countries experiencing budget deficits or balance of payments deficits, or finance the fiscal stabilization program of the U.S. government.

Question 6

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 the point where the quantity of currency demanded by buyers is equal to the quantity of currency supplied by sellers, resulting in a stable exchange rate. The other options are not relevant to determining equilibrium in the foreign exchange market.

Question 7

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 its member nations. Member countries contribute funds to the IMF, and these funds are used to provide financial assistance to countries in need. The amount each member contributes is based on a quota system, which takes into account the size of each country's economy.

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

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 is characterized by active central bank intervention in the foreign exchange market to influence the exchange rate. In this policy, there is no pre-announced path for the exchange rate, and the central bank can adjust its intervention tactics as needed. The other options, such as floating, fixed, and crawling-peg exchange-rate policies, do not involve active central bank intervention to influence the exchange rate.

Question 10

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. These quotas determine a country's financial and organizational obligations to the IMF and affects its voting power within the organization.

Question 11

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

When the amount of Brazilian reals needed to purchase an ounce of gold increases from 457 to 528, it means that the value of the real in terms of gold has decreased. This is a classic definition of devaluation of a currency.

Question 12

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 is determined by the supply and demand of currencies in the free market, leading to a free market equilibrium exchange rate. This is the most efficient exchange rate as it reflects the true value of the currency. Choice A is incorrect as historical anachronism refers to something that is outdated or no longer relevant. Choice B is incorrect as a fixed exchange rate is one that is set by the government and does not fluctuate. Choice C is incorrect as a dirty float exchange rate is one where the government occasionally intervenes in the market to influence the exchange rate. Choice D is incorrect as an unmanaged exchange rate is not a commonly used term.

Question 13

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

The change from 527 reals per ounce to 508 reals per ounce means that it now takes fewer reals to purchase an ounce of gold, meaning the Brazilian real has appreciated in value.

Question 14

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 15

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 is most effective when temporary differences between the free market exchange rate and the fixed exchange rate are expected. This is because intervention can help to stabilize the exchange rate in the short term, but cannot completely eliminate long-term discrepancies between market and fixed rates. Additionally, cooperation between political leaders and agreement among leading economists may increase the effectiveness of intervention, but are not essential. The restriction of international movement of goods and services is not directly related to the effectiveness of foreign exchange market intervention.

Question 16

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 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:?D₁ and D₂: Demand for Brazilian reals?S₁ and S₂: 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 would lead to a depreciation of the peso relative to the real, resulting in a higher exchange rate of pesos per real. The equilibrium quantity of reals would also decrease due to the lower demand.

Question 18

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 authority that issues notes and coins that are fully backed by a foreign reserve currency; they have a fixed exchange rate with the foreign reserve currency, and the domestic currency is exchanged for the reserve currency at that fixed rate on demand. Thus, option A is the correct choice as it describes the key feature of a currency board.

Question 19

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 at a fixed, pre-announced rate or in response to certain indicators, making it the best choice for the given definition. The other options are different types of exchange rate regimes, but they do not match the specified characteristics.

Question 20

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:?D₁ and D₂: Demand for Brazilian reals?S₁ and S₂: 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

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

Quiz 21: Exchapterange Rates and Financial Links Between Countries

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?

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:

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

The primary function of the World Bank is to:

Equilibrium in the foreign exchange market occurs:

The IMF mostly receives its funds from:

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

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) :

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 457 reals per ounce to 528 reals per ounce. We can then say that:

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 527 reals per ounce to 508 reals per ounce. We can then say that:

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

Foreign exchange market intervention is most effective when:

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:

What is a currency board?

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