Question 1

If, at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar, the dollar is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

Accepted Answer

The answer of If, at the current exchange rate between...

Question 2

Article Summary
Cuba has announced its intentions to end its dual currency system which has been in place since 1994. Presently, Cuba has two official currencies, the national peso (CUP) and the convertible peso (CUC). The national peso is the currency used by most businesses and citizens, and the convertible peso was designed to be used primarily in the tourism industry and for foreign trade. The coveted convertible peso is pegged to the U.S. dollar and is worth 25 times the national peso, despite the government treating them as having equal value in official accounts, trading on a one-for-one basis for official state entities. Few Cubans other than those with government ties have access to convertible pesos, which allows them to enjoy a much improved lifestyle due to the currency's relative value. One exception is people working in the tourist-centered hospitality industries, such as waiters and hotel staff, who receive convertible pesos as tips, often earning them more than medical and legal professionals who are paid in national pesos. The currency unification is expected to be a gradual process, taking up to 18 months, and could involve both a devaluing of the convertible peso and a revaluing of the national peso.
Source: Hannah Strange, "Cuba to end dual currency as part of Castro's economic reforms," Telegraph, October 22, 2013.
-Refer to the Article Summary. The convertible peso (CUC), which is pegged to the U.S. dollar, is worth 25 times the national peso, yet Cuban officials treat the convertible peso and the national peso as being of equal value. This indicates that the national peso is ________ compared to the convertible peso, and would need to be ________ to for the two currencies have equal value in the marketplace.

Accepted Answer

The article states that the convertible peso is worth 25 times the national peso, indicating that the national peso is undervalued compared to the convertible peso. The currency unification process could involve a revaluing of the national peso to bring it closer to the value of the convertible peso in the marketplace.

Question 3

A currency pegged at a value above the market equilibrium exchange rate is

Accepted Answer

A currency pegged above the market equilibrium exchange rate is overvalued because its value exceeds what the market would naturally determine based on supply and demand. This can lead to trade imbalances and potential economic challenges.

Question 4

The Danish currency, the krone, is pegged to the euro at a rate of 7.43 kroner (kroner is the plural of krone) to the euro. At the pegged exchange rate, how many euros would be exchanged for one krone?

Accepted Answer

Since 7.43 kroner are equivalent to 1 euro, we can find the value of one krone in euros by dividing 1 by 7.43. This gives us:

1/7.43 = 0.1346 (rounded to four decimal places)

Therefore, one krone can be exchanged for approximately 0.135 euros. The closest answer choice is A, which is the best choice.

Question 5

You decide to work in London for the next 5 years, accumulate some savings, then move back to the United States and convert your savings from British pounds to dollars. At the time of your move, economists predict that consumers in the United States have lost their affinity for British products, and expect that this declining preference for British products will continue for the next decade. How should this influence your decision to work and save in London?

Accepted Answer

The declining U.S. preference for British goods means less demand for pounds to buy those goods, which should decrease the value of the pound relative to the dollar. This would decrease the value of savings when converted from pounds to dollars, making this scenario discouraging for someone planning to save in pounds and convert to dollars later.

Question 6

If, at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar, the rand is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

Accepted Answer

If the rand is undervalued, it means that it is cheaper than it should be. Therefore, more people will want to buy the rand because it is a good deal, increasing the demand for the rand. At the same time, because the rand is undervalued, people will want to sell their dollars to get more rand for their money, increasing the supply of the dollar.

Question 7

Figure 30-7 
-Refer to Figure 30-7. At what level should the Indian government peg its currency to the dollar to make U.S. imports cheaper in India?

Accepted Answer

The answer of Figure 30-7 
-Refer to Figure 30-7. At...

Question 8

If the purchasing power of the dollar is less than the purchasing power of the British pound, purchasing power parity predicts that the exchange rate will

Accepted Answer

Purchasing power parity states that in the long run, the exchange rate between two currencies will be equal to the ratio of their purchasing power. Therefore, in this scenario, the exchange rate between the dollar and the pound will adjust to reflect the difference in purchasing power between the two currencies, resulting in an exchange rate that reflects their relative purchasing power. Options A and B are incorrect as they assume that exchange rate changes are the only way that purchasing power parity can be achieved, which is not necessarily true.

Question 9

Pegging a country's exchange rate to the dollar can be advantageous in all of the following situations except

Accepted Answer

If a country wishes to conduct independent monetary policy, pegging their exchange rate to the dollar would limit their ability to adjust interest rates and other monetary policies to address domestic economic issues. A peg to the dollar would mean that the country's currency would move in lockstep with the dollar, regardless of the country's economic conditions. Therefore, maintaining an independent monetary policy will be difficult with a fixed exchange rate.

Question 10

The year in which euro coins and paper currency were introduced and participating "euro zone" countries withdrew old domestic currencies from circulation was

Accepted Answer

Euro coins and paper currency were introduced in 2002 and participating "euro zone" countries withdrew old domestic currencies from circulation.

Question 11

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

Accepted Answer

If a country sets a pegged exchange rate below the equilibrium exchange rate, there will be excess supply of domestic currency in the foreign exchange market, i.e. there will be excess demand for foreign currency. To maintain the peg, the central bank of the country needs to sell the excess domestic currency in exchange for foreign currency at the pegged exchange rate. This will reduce the excess supply of domestic currency and increase the foreign reserves of the central bank, which can be used to defend the peg in the future. Therefore, option B is the correct choice. Option A is incorrect because purchasing surplus domestic currency at the pegged rate will increase the excess supply and put further pressure on the peg. Option C is incorrect because purchasing surplus domestic currency at the equilibrium rate will increase the excess supply and put further pressure on the peg. Option D is incorrect because decreasing the pegged exchange rate will exacerbate the excess supply and lead to a larger deviation from the equilibrium rate.

Question 12

If a country's currency ________ the dollar, its exchange rate is fixed.

Accepted Answer

If a country's currency is pegged to the dollar, then its exchange rate is fixed.

Question 13

With a common currency such as the euro,

Accepted Answer

With a common currency such as the euro, individual countries using the currency are no longer able to run independent monetary policies. Monetary policy decisions are made at the Eurozone level by the European Central Bank, which means that individual countries cannot adjust their interest rates or exchange rates to address their specific economic challenges.

Question 14

Fluctuating exchange rates can alter a multinational firm's profits and losses. The U.S. corporation, Motorola, produces cell phones and sells cell phones in Mexico. If the dollar appreciates against the peso, then Motorola's revenues from these operations should ________ and its costs from these operations should ________.

Accepted Answer

The answer of Fluctuating exchange rates can alter a multinational...

Question 15

Figure 30-7 
-Refer to Figure 30-7. If the Indian government pegs its currency to the dollar at a value above $.02/rupee, we would say the currency is

Accepted Answer

If the Indian government pegs its currency to the dollar at a value above $.02/rupee, it means that the Indian rupee is valued higher than its actual value in the market. This would lead to a situation where the currency is overvalued.

Question 16

The Latvian currency, the lat, is pegged to the euro at a rate of 0.71 lats to the euro. At the pegged exchange rate, how many euros would be exchanged for one lat?

Accepted Answer

The answer of The Latvian currency, the lat, is pegged...

Question 17

By 2013, ________ members of the European Union were using the euro as their currency.

Accepted Answer

As of 2013, 17 members of the European Union were using the euro as their currency.

Question 18

Figure 30-7 
-Refer to Figure 30-7. Which of the following is true?

Accepted Answer

The diagram shows that at an exchange rate greater than $.02/rupee, Indian exports to the United States are more expensive than at the equilibrium exchange rate. Therefore, D is the correct answer. A is incorrect because the diagram shows that U.S imports are cheaper at exchange rates greater than $.02/rupee compared to the equilibrium exchange rate. B is incorrect because the diagram does not provide information on whether the rupee is overvalued or undervalued. C is incorrect because the diagram does not show the actions required by the Reserve Bank of India to achieve a specific exchange rate.

Question 19

Compared to a situation in which there is no change in the value of the dollar relative to the peso, in which of the following situations would you be worse off?

Accepted Answer

The answer of Compared to a situation in which there...

Question 20

Figure 30-7 
-Refer to Figure 30-7. If the Indian government pegs its currency to the dollar at a value below $.02/rupee, we would say the currency is

Accepted Answer

If the Indian government pegs its currency to the dollar at a value below $.02/rupee, it means that the rupee is worth less than its actual value in relation to the dollar. This makes the currency undervalued.

Quiz 30: The International Financial System