Question 1

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

Accepted Answer

The pegging of the yuan to the dollar made the yuan undervalued, making Chinese exports cheaper and more competitive in the international market. This had a negative impact on countries whose industries competed with Chinese industries, as the high demand for cheaper Chinese goods resulted in a decrease in demand for their own goods.

Question 2

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 destabilizing speculation in the late 1990s led to a decrease in demand for the South Korean won. To counteract this, the South Korean government raised interest rates, which should have increased demand for the won by making investments in won more attractive.

Question 3

Figure 15.5  Alt text for Figure 15.5: In figure 15.5,a graph illustrates the quantity of yuan traded against the exchange rate.
Long description for Figure 15.5: The x-axis is labelled,quantity of yuan traded in millions per day.The y-axis is labelled,exchange rate,Canadian dollar against the yuan.Supply curve S,is a straight line which slopes up from the bottom left corner to the top right corner.Demand curve D,is a straight line which slopes down from the top left corner to the bottom right corner.The curves intersect at point A,(600,0.13).Point A,and unmarked points (800,0.11),(500,$0.14),(700,$0.14),and (400,0.11)are all connected to their corresponding values on the x and y-axes with dotted lines.
-Refer to Figure 15.5.Suppose the pegged exchange rate is $0.11/yuan.Because of safety concerns and numerous product recalls,U.S.consumers lower their demand for Chinese products.Using the figure above,this would

Accepted Answer

The answer of Figure 15.5  Alt text for Figure...

Question 4

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

Accepted Answer

Foreigners selling off of new investments in Thailand puts downward pressure on the value of the baht relative to the dollar, making it harder for Thailand to maintain its peg. The other options all helped Thailand maintain its peg against the dollar.

Question 5

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 became less tied to the value of the dollar and therefore increased slightly relative to the dollar. This change was made in order to address concerns about China's currency manipulation and trade imbalances with other countries.

Question 6

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 the baht was that it was overvalued relative to the dollar, so pegging it to the dollar caused difficulties. China's experience with the yuan has been that it is undervalued relative to the dollar, but they have been trying to peg it to the dollar, causing further issues. Therefore, the best answer is D - overvalued; undervalued.

Question 7

In the late 1990s,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

The reduction in investment by foreigners and their exchanging of baht for dollars is known as capital flight. Foreign direct investment (A) refers to a company investing in and managing operations in a foreign country. Capital inflow (C) is the increase in the amount of capital coming into a country, while stabilizing capitalization (D) refers to the process of ensuring stable capital levels within a company or market. A bank run (E) is a situation where many depositors try to withdraw their money from a bank at once due to concerns about the bank's solvency.

Question 8

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 9

Why would the Chinese government want the yuan to worth less than its market determined value?

Accepted Answer

An undervalued currency gives Chinese exporters an advantage over foreign competitors, as their products become cheaper for foreign buyers. This can increase demand for Chinese products and ultimately boost economic growth in China.

Question 10

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

Accepted Answer

The question states that the yuan has been pegged to the U.S. dollar, which means that the Chinese government has maintained a fixed exchange rate between the two currencies. If the yuan is undervalued at the pegged exchange rate, it means that it has less value than it should relative to the U.S. dollar. Therefore, to maintain the fixed exchange rate, the Chinese government would have to buy more U.S. dollars, which would increase its reserves of dollars. Therefore, the best choice is A) undervalued; increased; dollars.

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

Different factors such as taxes, transportation costs, and local market competition can affect the pricing of goods, including the Big Mac, in different countries. This shows that purchasing power does not hold due to the lack of international trade for many goods.

Question 12

Destabilizing speculation refers to

Accepted Answer

Destabilizing speculation refers to actions taken by investors who sell a country's currency in anticipation of buying it back later at a lower price. This can lead to a large-scale sell-off of a currency, causing its value to plummet and creating economic instability.

Question 13

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

Accepted Answer

Abandoning the pegged exchange rate, which keeps the yuan artificially low, would make Chinese goods more expensive abroad, thus reducing exports and potentially slowing economic growth.

Question 14

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 necessarily require agreement from the country whose currency is being pegged to.

Question 15

If a country sets a pegged exchange rate that is above the equilibrium exchange rate,how can the country maintain the peg?

Accepted Answer

To maintain a pegged exchange rate that is above the equilibrium exchange rate, a country can purchase surplus domestic currency at the pegged rate. This action helps to support the domestic currency's value, ensuring it remains at the artificially set level despite market pressures that might otherwise lower its value.

Question 16

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 Toronto.

Accepted Answer

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

Question 17

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

Accepted Answer

Purchasing power parity assumes that identical goods are traded internationally and have the same prices across countries, but in reality, many goods are not easily traded or are subject to different taxes, regulations, and distribution costs that affect their prices. Therefore, the actual exchange rates may deviate from what the PPP model predicts.

Question 18

In the late 1990s,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

As foreign investors sold their baht and traded it for dollars, there was an increase in the supply of baht in exchange markets. This led to a decrease in demand for the baht and an increase in supply, causing pressure for the value of the baht to decline.

Question 19

In the late 1990s,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 In the late 1990s,firms in Thailand that...

Question 20

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 increase the profits of domestic firms that export products, as their goods become cheaper for foreign buyers. On the other hand, firms that import goods may see a decrease in profitability, as it becomes more expensive to purchase goods from abroad. Overall, the impact on domestic firms' profits depends on the specifics of their business operations and the industry they operate in.

Quiz 15: The International Financial System