Question 1

Firms in Thailand that had borrowed dollars while the baht was pegged to the dollar faced interest payments that were ________ than they had planned while the Thai government continued trying to defend the peg,because the baht had been pegged ________ the equilibrium exchange rate for the baht.

Accepted Answer

The answer of Firms in Thailand that had borrowed dollars...

Question 2

If purchasing power parity tells us that if the exchange rate is a pound for a dollar,then price of a haircut in London should cost the same as a haircut in New York.

Accepted Answer

The answer of If purchasing power parity tells us that...

Question 3

Although the pegged exchange rate between the yuan and the dollar has undervalued the yuan,China has been reluctant to abandon the peg for fear that abandoning the peg would

Accepted Answer

The answer of Although the pegged exchange rate between the...

Question 4

A depreciation of a country's currency always lowers the domestic firm's profits.

Accepted Answer

A depreciation of a country's currency can actually benefit domestic firms by making their exports cheaper and more competitive in the global market. Additionally, it can also make imported goods more expensive, increasing demand for domestic products. However, it can also increase the cost of imported inputs used in the production process, potentially lowering profits. Overall, the effect on domestic firm profits depends on various factors and cannot be generalized.

Question 5

Destabilizing speculation refers to

Accepted Answer

Destabilizing speculation refers to investors who sell a country's currency in anticipation of buying it back later at a lower price, creating volatility and instability in the currency market. This can lead to a decrease in a currency's value and negatively impact the economy of the affected country.

Question 6

How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar?

Accepted Answer

Countries whose industries competed with Chinese industry were affected by the yuan being pegged to the dollar because the undervalued yuan allowed Chinese exports to remain more competitive than they would have been if the exchange rate was allowed to float freely. This put pressure on competing firms from other countries.

Question 7

When foreign investors in Thailand began to realize that Thailand could not maintain its peg to the dollar indefinitely,they began to sell off their investments in Thailand and exchange the baht they received for dollars.This reduction in investment by foreigners is termed

Accepted Answer

Capital flight refers to the large-scale exodus of capital and assets from a country due to political or economic instability, or in this case, the expectation of the devaluation of its currency. In this scenario, foreign investors are selling off their investments and exchanging baht for dollars, leading to a reduction in investment in Thailand.

Question 8

South Korea recovered from the exchange rate crisis much more quickly than Thailand and Indonesia.Which of the following is not a reason why South Korea recovered quickly?

Accepted Answer

The answer of South Korea recovered from the exchange rate...

Question 9

Thailand's experience with pegging the baht to the dollar failed because the baht was ________ relative to the dollar,and China's experience with pegging the yuan to the dollar has run into difficulties because the yuan has been ________ relative to the dollar.

Accepted Answer

Thailand's experience with pegging the baht to the dollar failed because the baht was overvalued relative to the dollar, meaning it was set at a higher exchange rate than its true market value. China's experience with pegging the yuan to the dollar has run into difficulties because the yuan has been undervalued relative to the dollar, meaning it was set at a lower exchange rate than its true market value. Therefore, the best choice is D.

Question 10

Both countries involved in a pegging of currency must agree to the terms of the pegging.

Accepted Answer

Currency pegging is typically a unilateral decision by one country to fix its exchange rate to the currency of another country, and does not require formal agreement from the country whose currency is being pegged to.

Question 11

The fact that the prices for McDonald's Big Mac sandwich are not the same around the world illustrates one reason why purchasing power does not hold: Many goods are not traded internationally.

Accepted Answer

The statement is true. The prices for McDonald's Big Mac sandwich vary around the world due to differences in local factors such as labor costs, rent, and taxes. This demonstrates that purchasing power does not hold universally, as goods are subject to local market conditions and are not always traded internationally.

Question 12

An easy way to determine if a currency is undervalued at a point in time is to use the model of purchasing power parity.

Accepted Answer

The answer of An easy way to determine if a...

Question 13

What three real-world complications keep purchasing power parity from being a complete explanation of exchange rate fluctuations in the long run? Explain.

Accepted Answer

The answer of What three real-world complications keep purchasing power...

Question 14

One reason purchasing power parity does not exactly hold is that many goods are not traded internationally.

Accepted Answer

Purchasing power parity assumes that goods are perfectly tradable across international borders, but in reality, this is not always the case. Some goods may only be available in certain countries or regions, which can affect the prices and therefore the exchange rates.

Question 15

Under pressure from Japan,the United States and Europe,China announced it switched from pegging the yuan against the dollar to linking the value of the yuan to a 'basket' of currencies.The result of this change was

Accepted Answer

By linking the value of the yuan to a basket of currencies, the yuan's value became less dependent on the dollar, resulting in a slight increase in value relative to the dollar. The change also made the yuan more responsive to changes in demand and supply in the foreign currency market. However, it did not have a dramatic impact on the trade imbalance between the United States and China.

Question 16

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.In July 2011,the Economist reported that the average price of a Big Mac in the United States was $4.07.In Mexico,the average price of a Big Mac at that time was 32 pesos.If the exchange rate between the dollar and the peso was 13.60 pesos per dollar,how would purchasing power parity predict the exchange rate will change in the long run? Support your answer graphically.

Accepted Answer

The answer of The "Big Mac Theory of Exchange Rates"...

Question 17

China began pegging its currency,the yuan,to the dollar in 1994.Because the yuan has been ________ at the pegged exchange rate,the Chinese government ________ its reserves of dollars as the government purchased more ________ to maintain the pegged exchange rate.

Accepted Answer

When a currency is undervalued, it means that it is worth less than its true value. In this case, the yuan was kept undervalued at the pegged exchange rate, which helped to boost Chinese exports by making them cheaper for foreign buyers. However, to maintain the pegged exchange rate, the Chinese government had to purchase more dollars, which led to an increase in its reserves of dollars.

Question 18

Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?

Accepted Answer

Foreigners selling off new investments in Thailand would have increased the supply of baht on the foreign exchange market, putting downward pressure on its value, and thereby making it more difficult for Thailand to maintain its peg against the dollar. A, B, and C would have all been possible measures for Thailand to try to maintain the peg, by either increasing its foreign currency reserves (A and B) or making investments in Thai assets more attractive (C).

Question 19

South Korea suffered a destabilizing speculation in the late 1990s.This had the effect of ________ for the won.South Korean government tried to counteract this by raising interest rates which should have ________ the won.

Accepted Answer

The speculation decreased demand for the won, leading to its depreciation. Raising interest rates would typically increase demand for the currency by attracting foreign investment.

Question 20

As foreign investors began to sell off investments they had made in Thailand,they traded in their baht for dollars.The result of this was

Accepted Answer

When foreign investors begin to sell off their investments in a country, they typically exchange the local currency (in this case, baht) for their own currency (dollars). This creates an increase in the supply of the local currency in foreign exchange markets, which puts downward pressure on its value. Therefore, the result of foreign investors selling off their investments in Thailand is likely to be pressure for the value of the baht to decline (choice A). Additionally, this would result in an increase in the supply of baht in foreign exchange markets (not a decrease as in choice D).

Quiz 19: The International Financial System

Firms in Thailand that had borrowed dollars while the baht was pegged to the dollar faced interest payments that were than they had planned while the Thai government continued trying to defend the peg,because the baht had been pegged the equilibrium exchange rate for the baht.