Question 1

If a country moves from fixed to flexible exchange rates,its macroeconomic policy

Accepted Answer

When a country moves from fixed to flexible exchange rates, it gains more autonomy over its macroeconomic policy, including the ability to use both fiscal and monetary policy tools more freely, without the need to maintain a fixed exchange rate.

Question 2

If a central bank wants to keep the value of its home currency fixed in the foreign exchange market,then an increase in the demand for its home currency will lead the central bank to

Accepted Answer

The answer of If a central bank wants to keep...

Question 3

Assume the U.S.government wants to hold the value of the dollar at $1.00 U.S.equals 10 Chinese yuan,but it finds that the value of yuan is depreciating against the U.S.dollar.What would be an appropriate policy to reverse this trend?

Accepted Answer

The answer of Assume the U.S.government wants to hold the...

Question 4

Suppose the Canadian central bank wants to keep the exchange rate of the Canadian dollar with the U.S.dollar constant over time.An increase in the demand for Canadian goods by American residents will lead the Canadian central bank to

Accepted Answer

To keep the exchange rate constant in the face of increased demand for Canadian goods (and thus Canadian dollars), the Canadian central bank would increase the supply of Canadian dollars in the foreign exchange market. This action counteracts the upward pressure on the Canadian dollar's value by making more Canadian dollars available to meet the increased demand.

Question 5

One problem that investors in foreign countries face is the possibility of a decline in the value of that foreign country's currency.Which of the following would be an effective way to offset this problem?

Accepted Answer

Hedging through currency swaps is an effective way to offset the risk of currency fluctuations. It involves exchanging the foreign currency for dollars at an agreed-upon exchange rate, which locks in the value of the investment in dollars. This protects the investor from losses due to currency depreciation. The other options, pulling out at the first sign of trouble, converting all dollars to the foreign country's currency, or financing outside of the country, do not address the problem of currency fluctuations and may not provide adequate protection for the investment.

Question 6

A financial strategy that reduces the chance of suffering losses arising from foreign exchange risk is referred to as

Accepted Answer

Hedging involves taking measures to reduce the risk of suffering losses due to fluctuations in foreign exchange rates. This can include using financial instruments such as options or futures contracts to lock in exchange rates or diversifying currency holdings. The other options are not commonly used terms in finance and do not refer to specific strategies for managing foreign exchange risk.

Question 7

A currency swap can

Accepted Answer

Currency swaps are used to reduce foreign exchange risk by allowing two parties to exchange fixed or floating interest rate payments in different currencies. This helps to reduce uncertainty and volatility in international financial transactions. The other choices listed are not accurate descriptions of the effects of currency swaps.

Question 8

A hedge is

Accepted Answer

A hedge is a financial strategy meant to reduce the risks of financial losses originating from currency exchange rate movements. This can be done by taking on a second offsetting position in the market that can help mitigate or nullify the effects of unfavorable exchange rate fluctuations.

Question 9

Foreign exchange risk is

Accepted Answer

Foreign exchange risk is the possibility of experiencing losses due to changes in the value of a nation's currency, which can result in variations in the market value of assets. Option A refers to risk management strategies rather than the risk itself. Option B is referring to a fixed exchange rate, not foreign exchange risk. Option D is referring to government intervention to manage the exchange rate, which may impact foreign exchange risk but is not foreign exchange risk itself.

Question 10

The possibility that changes in the value of a nation's currency will result in variations in the market value of a business's assets is referred to as

Accepted Answer

Foreign exchange risk refers to the possibility that changes in the value of a nation's currency will result in variations in the market value of a business's assets. Hedge risk refers to using financial instruments to offset potential losses, conversion risk refers to the risk of a delay or error in the conversion of currencies, and transaction risk refers to the risk associated with the timing of completing a financial transaction.

Question 11

Suppose the Chinese central bank wants to keep the exchange rate of its currency value constant over time.An increase in the demand for Chinese goods by American residents will lead the Chinese central bank to

Accepted Answer

An increase in the demand for Chinese goods by American residents implies an increase in the demand for Chinese currency in order to pay for those goods. In order to keep the exchange rate of its currency value constant, the Chinese central bank needs to decrease the supply of Chinese currency in the foreign exchange market which can be accomplished by selling the Chinese currency in exchange for U.S. dollars.

Question 12

Which of the following best describes exchanges rates that are determined by the demand and supply foreign exchange in the absence of official intervention?

Accepted Answer

Floating exchange rates refer to exchange rates that are determined by the demand and supply of foreign exchange in the absence of official intervention. The exchange rate is free to fluctuate according to changes in demand and supply, making it more responsive to market forces. The gold standard, target zones, and the Bretton Woods system all involve some form of official intervention or fixed exchange rates.

Question 13

If an exporter wants to limit the effect of possible changes in the exchange rate on the value of her exports,then she can adopt a strategy known as

Accepted Answer

Hedging is a strategy where the exporter uses financial instruments such as options, forwards, or futures contracts to protect themselves against any potential losses due to fluctuations in the exchange rate. This helps them mitigate the risk of adverse exchange rate movements and ensure that the value of their exports remains stable. Floating involves allowing the exchange rate to fluctuate freely, while speculating involves taking a position in the exchange rate with the hope of making a profit from future changes. Appreciating refers to an increase in the value of a currency relative to another.

Question 14

If a country wants to keep the value of its currency fixed,then its central bank should

Accepted Answer

The answer of If a country wants to keep the...

Question 15

Which of the following is an advantage of fixing exchange rates?

Accepted Answer

Fixing exchange rates can limit foreign exchange risk for businesses and investors, as they can have more certainty and stability in their transactions and investments. However, fixing exchange rates does not necessarily eliminate trade deficits, and it may not make residents more mobile across countries or make the prices of foreign goods more flexible in the domestic market.

Question 16

Suppose the currency price of the U.S.dollar in terms of the Japanese yen starts to fall.To prevent that from occurring,the U.S.central bank should

Accepted Answer

To prevent the U.S. dollar from falling in value against the Japanese yen, the U.S. central bank should use its yen reserves to buy U.S. dollars in the foreign exchange market. This action increases the demand for U.S. dollars relative to the yen, thereby supporting or potentially increasing the value of the U.S. dollar against the yen.

Question 17

The foreign exchange system that has the highest foreign exchange risk is

Accepted Answer

The answer of The foreign exchange system that has the...

Question 18

If a country wants to keep its exchange rate fixed,it must

Accepted Answer

To keep its exchange rate fixed, a country must vary the amount of its national currency supplied at any given exchange rate in foreign exchange markets when necessary. This means that the country must intervene in foreign exchange markets by buying or selling its currency to maintain the fixed exchange rate. The amount of currency supplied may need to be adjusted depending on market conditions and demand for the country's currency. A fixed exchange rate regime requires active management by the country's central bank, rather than allowing the currency value to vary freely with market supply and demand. Membership in the IMF is not required to fix the exchange rate, and eliminating foreign exchange reserves would make it difficult to intervene in foreign exchange markets if necessary.

Question 19

Assume the U.S.government wants to hold the value of the dollar at $1.00 U.S.equals 100 Japanese yen,but it finds that the value of yen is appreciating against the U.S.dollar.What would be an appropriate policy to reverse this trend?

Accepted Answer