Question 1

The gold standard ended in the 1970s because the gold supplies failed to keep pace with the increase in money supplies required for industrialization and rapid economic growth witnessed in this era.

Accepted Answer

The question is not related to the given figure depicting the foreign exchange market for British pounds traded for U.S. dollars. The question is about the gold standard, which is not mentioned or depicted in the figure. However, the statement in the question is false because the gold standard ended primarily due to the difficulties countries faced in maintaining fixed exchange rates and the need for more flexibility in monetary policy. The increase in money supplies for industrialization and economic growth was not the primary reason for the end of the gold standard.

Question 2

A downward-sloping demand curve for Korean won in terms of Canadian dollars indicates that the higher the dollar price of Korean won,the more won will be demanded.

Accepted Answer

A downward-sloping demand curve means that as the price of Korean won in Canadian dollars decreases, the quantity demanded of Korean won increases. Therefore, the statement is false as it is describing an upward-sloping demand curve.

Question 3

Because of their greediness,speculators are considered bad for exchange-rate markets.

Accepted Answer

Speculators are often motivated by short-term profit and can create volatility in exchange-rate markets, which can be harmful to the overall stability of the market.

Question 4

World Bank funds are largely acquired through interest earned on the deposits of member nations.

Accepted Answer

The World Bank funds are primarily raised from the sale of bonds in international capital markets, as well as from contributions from member countries. The interest earned on loans and investments form a smaller component of their funding.

Question 5

The exchange rate affects the trade in goods and services between California and NewYork.

Accepted Answer

The foreign exchange market for British pounds traded for U.S. dollars does not directly affect the trade in goods and services between California and New York as they are both part of the same country and use the same currency (U.S. dollar). However, an increase in the exchange rate between British pounds and U.S. dollars could indirectly affect the trade relationship between California and New York as it could impact the overall strength of the U.S. dollar and the competitiveness of U.S. exports.

Question 6

The exchange-rate arrangement that emerged from the Bretton Woods conference is often called a managed float standard.

Accepted Answer

The figure does not provide any information about the exchange-rate arrangement that emerged from the Bretton Woods conference, so it is not possible to determine whether the statement is true or false based on the given information.

Question 7

No currency ever appreciated or depreciated under the Bretton Woods system as it was based on a system of fixed exchange rates.

Accepted Answer

Under the Bretton Woods system, currencies were allowed to appreciate or depreciate within a narrow band of 1% against their fixed exchange rate. This system eventually collapsed in 1971 due to increasing pressure on the US dollar and the inability of other countries to maintain their fixed exchange rates.

Question 8

Under a floating exchange-rate system,a country needs to pay more attention to the economic policies of the rest of the world.

Accepted Answer

The answer of Under a floating exchange-rate system,a country needs...

Question 9

Demand for U.S.dollars by speculators is likely to increase if the dollar is expected to depreciate in the near future.

Accepted Answer

If the dollar is expected to depreciate, speculators would want to sell their dollars before they lose value, leading to a decrease in demand for U.S. dollars.

Question 10

If the official gold value of the Australian dollar changes from 470 Australian dollars per ounce to 493 Australian dollars per ounce,we can say that the Australian dollar has appreciated in value.

Accepted Answer

The increase in the amount of Australian dollars needed to buy an ounce of gold indicates that the Australian dollar has depreciated in value, as it now takes more dollars to purchase the same amount of gold.

Question 11

The IMF comprises of 50 member countries including all developed countries,and a few countries of Asia and Latin America.

Accepted Answer

The IMF comprises of 190 member countries, including countries from all regions of the world.

Question 12

The euro floats against other currencies,but the member nations of the euro have no separate national money.For this reason,Spain,that uses the euro as its currency is listed under the managed float arrangement.

Accepted Answer

The statement is incorrect as all member nations of the euro use the same currency, so they do not have a separate national money. Therefore, Spain would be listed under the floating exchange rate system like all other Eurozone countries.

Question 13

Appreciation of the dollar means that now it takes more dollars to buy one unit of foreign currency.

Accepted Answer

Appreciation of the dollar means that the dollar has gained value compared to a foreign currency, so it now takes fewer dollars to buy one unit of the foreign currency.

Question 14

Fixed exchange rates allow countries to formulate their economic policies independently of other nations.

Accepted Answer

Fixed exchange rates restrict the ability of countries to formulate their economic policies independently. This is because any changes in the monetary policy of one country will also affect the exchange rate of other countries that are tied to it. This limits the leeway that countries have to pursue their own domestic policies.

Question 15

The World Bank was created to help finance economic development in poor countries.

Accepted Answer

The World Bank was created in 1944 to provide loans and grants to developing countries for infrastructure projects and other initiatives aimed at promoting economic development.

Question 16

When an exchange rate is established as a fixed peg,active intervention may be required to maintain the target-pegged rate.

Accepted Answer

When an exchange rate is fixed to a target peg, active intervention may be necessary to keep the rate at the targeted level. This can involve buying or selling currency in the foreign exchange market to influence supply and demand and maintain the pegged rate.

Question 17

An increase in the demand for rubles causes the ruble to appreciate.

Accepted Answer

When the demand for rubles increases, the demand for foreign currencies decreases, causing the value of the ruble to rise (appreciate) relative to other currencies.

Question 18

Fixed exchange rates serve as a constraint on inflationary government policies.

Accepted Answer

Fixed exchange rates limit the ability of governments to manipulate their currency and implement inflationary policies. This is because any increase in the money supply will lead to an increase in prices, which can lead to a loss of competitiveness and a devaluation of the currency. Therefore, governments are constrained in their ability to inflate their currency under a fixed exchange rate system.

Question 19

A fixed exchange rate can be an equilibrium rate even if there is a permanent shift in the foreign exchange market supply and demand curves.

Accepted Answer

A permanent shift in the foreign exchange market supply and demand curves would result in a new equilibrium exchange rate. A fixed exchange rate would no longer be an equilibrium rate in this scenario.

Question 20

Under both the gold standard and the gold exchange standard countries bought and sold U.S.dollars to maintain a fixed exchange rate with the dollar.

Accepted Answer

Under the gold standard, countries maintained a fixed exchange rate through the direct exchange of gold, not U.S. dollars. The gold exchange standard involved holding U.S. dollars as reserves to maintain a fixed exchange rate, but this was distinct from the direct exchange of gold under the original gold standard.

Quiz 22: Exchange Rates and Financial Links Between Countries