Question 1

Under the _____ arrangement, the exchange rate is adjusted periodically by small amounts at a fixed, pre-announced rate or in response to certain indicators.
A)currency board
B)crawling peg
C)reserve currency
D)conventional fixed peg
E)independent float

Accepted Answer

The crawling peg arrangement involves the exchange rate being adjusted periodically by small amounts at a fixed, pre-announced rate or in response to certain indicators. This allows for greater flexibility than a conventional fixed peg, while still maintaining some level of predictability in the exchange rate movements.

Question 2

Which of the following exchange rate systems have a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate?
A)Gold standard
B)Gold exchange standard
C)Crawling band
D)Horizontal band
E)Currency board

Accepted Answer

The exchange rate system with a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate is called a currency board. It is characterized by a fixed exchange rate, a low level of foreign exchange reserves, and a high degree of monetary discipline. The domestic currency is fully backed by a foreign reserve currency, and the central bank commits to maintaining the fixed exchange rate by buying or selling domestic currency with the reserve currency.

Question 3

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market.Assume that the market operates under a flexible exchange rate regime. Figure 22.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 22.1.Determine the equilibrium exchange rate and equilibrium quantity of Brazilian reals, if D₁ and S₁ are the relevant demand and supply curves for Brazilian reals in this market. A)10 pesos per real and a quantity of 150 reals B)6 pesos per real and a quantity of 250 reals C)8 pesos per real and a quantity of 150 reals D)8 pesos per real and a quantity of 250 reals E)6 pesos per real and a quantity of 200 reals

Accepted Answer

The equilibrium exchange rate and equilibrium quantity of Brazilian reals can be determined where the demand and supply curves intersect. In this case, the intersection point is at 8 pesos per real and a quantity of 250 reals. Therefore, the answer is D.

Question 4

Foreign exchange market intervention is most effective when:
A)each country's political leaders agree to cooperate fully with the process.
B)leading economists in each country concur that intervention is needed.
C)permanent differences between the free market exchange rate and the fixed exchange rate are expected.
D)temporary differences between the free market exchange rate and the fixed exchange rate are expected.
E)all the countries restrict the international movement of goods and services.

Accepted Answer

Intervention is most effective when temporary differences between the free market exchange rate and the fixed exchange rate are expected. This means that the exchange rate is expected to deviate from its target rate in the short term and needs to be corrected through intervention. Permanent differences between the exchange rates may indicate that the fixed exchange rate needs to be adjusted, rather than relying on intervention. The other options listed are not necessarily factors that determine the effectiveness of intervention.

Question 5

The exchange rate that is established in the absence of foreign exchange market intervention by the government is known as a(n):
A)historical anachronism.
B)fixed exchange rate.
C)"dirty float" exchange rate.
D)unmanaged exchange rate.
E)free market equilibrium exchange rate.

Accepted Answer

The exchange rate that is established in the absence of foreign exchange market intervention by the government is a free market equilibrium exchange rate. This is the rate that would be established through the forces of supply and demand in a free market system.

Question 6

The annual membership fees of the 185 member countries of the IMF are called:
A)annuities.
B)quotas.
C)vetos.
D)conditionalities.
E)petrodollars.

Accepted Answer

The annual membership fees of the 185 member countries of the International Monetary Fund (IMF) are called quotas. The IMF uses these quotas to determine each member country's financial commitment and voting power within the organization. The quotas are calculated based on the country's relative size and importance in the global economy.

Question 7

Assume that a country's government influences the exchange rate through active central bank intervention, with no pre-announced path.This policy is known as a(n):
A)floating exchange-rate policy.
B)managed floating exchange-rate policy.
C)fixed exchange-rate policy.
D)crawling-peg exchange-rate policy.
E)interventionist exchange-rate policy.

Accepted Answer

A managed floating exchange-rate policy allows for some central bank intervention to influence the exchange rate without committing to a fixed exchange rate. The other options do not allow for this type of intervention.

Question 8

What is a currency board?
A)A fixed exchange rate that, by law, exchanges domestic currency for a specified foreign currency at a fixed exchange rate.
B)A floating exchange rate.
C)A managed floating exchange-rate policy that the government adjusts periodically according to some economic indicator.
D)A laissez-faire exchange-rate policy.
E)An interventionist exchange-rate policy.

Accepted Answer

A currency board is a monetary system that maintains a fixed exchange rate by backing domestic currency with a foreign currency at a specified exchange rate. This means that the central bank of the country sets a specific exchange rate and then commits to exchanging domestic currency units for a certain amount of foreign currency at that rate. The exchange rate is fixed and does not change, providing stability for businesses and investors.

Question 9

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market.Assume that the market operates under a flexible exchange rate regime. Figure 22.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 22.1.Suppose the initial equilibrium exchange rate is 10 pesos per real.A decrease in the Mexican demand for Brazilian coffee, other things equal, is most likely to result in a new equilibrium exchange rate of: A)6 pesos per real and an equilibrium quantity of 200 Brazilian reals. B)6 pesos per real and an equilibrium quantity of 250 Brazilian reals. C)8 pesos per real and an equilibrium quantity of 150 Brazilian reals. D)8 pesos per real and an equilibrium quantity of 100 Brazilian reals. E)10 pesos per real and an equilibrium quantity of 200 Brazilian reals.

Accepted Answer

A decrease in Mexican demand for Brazilian coffee will reduce the demand for Brazilian reals, shifting the demand curve to the left from D₁ to D₂. As a result, the exchange rate will decrease and the quantity of Brazilian reals exchanged will decrease. The new equilibrium occurs at the intersection of the new demand curve and the supply curve S₁, which suggests an exchange rate of 8 pesos per real and an equilibrium quantity of 150 Brazilian reals. Therefore, the correct answer is C.

Question 10

The IMF mostly receives its funds from:
A)the subscription fees paid by the member nations.
B)selling of bonds.
C)the loans given by the World Bank.
D)the central banks of the major industrialized nations.
E)the gold reserves available with the Fed.

Accepted Answer

The primary source of funding for the IMF is the subscription fees paid by its 189 member countries. These fees are based on each member's quota, which reflects its relative size in the global economy.

Question 11

The Bretton Woods system required countries to actively buy and sell dollars to maintain fixed exchange rates when:
A)a country experienced a severe bout of inflation.
B)the free market equilibrium exchange rate differed from the fixed rate.
C)a country experienced serious unemployment.
D)the threat of recession began to spread from one country to another.
E)worldwide trade began to deteriorate.

Accepted Answer

The Bretton Woods system required countries to actively buy and sell dollars to maintain fixed exchange rates when the free market equilibrium exchange rate differed from the fixed rate. This was done to ensure that the value of a country's currency remained stable and did not fluctuate too much. Countries would buy dollars if their currency was appreciating too much and sell dollars if their currency was depreciating too much, in order to maintain the fixed exchange rate.

Question 12

When the exchange rate fluctuates around a fixed central target, allowing for a moderate amount of fluctuation, while tying the currency to the target central rate, the exchange rate is under:
A)a horizontal band.
B)a crawling peg.
C)a managed float.
D)an independent float.
E)a currency board.

Accepted Answer

A horizontal band is a foreign exchange rate system in which a currency is maintained within a specific range or fluctuation band against a widely used currency, such as the U.S. dollar or euro. The currency is allowed to move within that band, but the central bank or government will intervene if it moves too far from the central target rate. This is also known as a managed float.

Question 13

Suppose the official gold value of the Brazilian real changes from 527 reals per ounce to 508 reals per ounce.We can then say that:
A)the Brazilian real has depreciated in value as a consequence of free market fluctuations.
B)the Brazilian real has appreciated in value.
C)gold is now more expensive to purchase in Brazil than it was before.
D)the Brazilian real has been devalued.
E)the Brazilian economy is expected to experience rapid inflation.

Accepted Answer

The Brazilian real has appreciated in value as the official gold value has decreased. This means it now takes fewer reals to purchase an ounce of gold, indicating a stronger Brazilian real.

Question 14

Suppose the official gold value of the Brazilian real changes from 457 reals per ounce to 528 reals per ounce.We can then say that:
A)the Brazilian real has been devalued.
B)the Brazilian economy is expected to experience rapid inflation.
C)gold has been devalued.
D)the Brazilian real has appreciated in value.
E)gold is now cheaper to purchase in Brazil than it was before.

Accepted Answer

A change from 457 to 528 reals per ounce implies that it now takes more reals to purchase an ounce of gold. This means that the currency has been devalued, as it now has a lower value relative to gold.

Question 15

Which of the following had resulted from the Smithsonian agreement of 1971?
A)Devaluation of the U.S.dollar
B)Dissolution of a fixed exchange rate regime
C)Appreciation of the U.S.dollar
D)Establishment of an equilibrium exchange rate
E)Laissez-faire in the foreign exchange market

Accepted Answer

The Smithsonian agreement of 1971 resulted in the devaluation of the U.S. dollar against other currencies by approximately 8%. This was done in an effort to correct the balance of payments deficit that the U.S. was experiencing at the time.

Question 16

Equilibrium in the foreign exchange market occurs:
A)at the point where the foreign exchange demand and supply curves intersect.
B)at the point where the foreign exchange demand and supply curves reach maximum separation.
C)when two nations' economic leaders agree on the appropriate exchange rate.
D)when two nations' diplomatic leaders agree on an exchange rate that meets both countries' needs.
E)only by chance, if at all, because they change very frequently.

Accepted Answer

Equilibrium in the foreign exchange market occurs where the foreign exchange demand and supply curves intersect, as this is where the quantity of foreign currency demanded equals the quantity of foreign currency supplied. This is the point where the market clears and there is no excess supply or demand.

Question 17

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market.Assume that the market operates under a flexible exchange rate regime. Figure 22.1 In the figure: D₁ and D₂: Demand for Brazilian reals S₁ and S₂: Supply of Brazilian reals Refer to Figure 22.1.Assume that the initial equilibrium exchange rate is 8 Mexican pesos per Brazilian real and 150 brazilian reals are traded in the market.Suppose, there is an increase in the Brazilian demand for Mexican exports.Other things remaining equal, which of the following can be concluded? A)The demand curve for Brazilian reals will shift to the the right. B)The supply curve of Brazilian reals will shift to the the right. C)The Mexican pesos will depreciate in value. D)The Brazilian reals will appreciate in value. E)Around 100 Brazilian reals will be traded in the forex market.

Accepted Answer

The answer of The figure given below depicts the demand...

Question 18

An upward-sloping supply curve of Korean won in terms of Canadian dollars indicates that:
A)the higher the dollar price of Korean won, the more won will be demanded.
B)the higher the dollar price of Korean won, the fewer won will be supplied.
C)the lower the dollar price of Korean won, the more won will be demanded.
D)the lower the dollar price of Korean won, the fewer won will be supplied.
E)the Korean economy is stronger than the Canadian economy.

Accepted Answer

An upward-sloping supply curve indicates that as the price increases, the quantity supplied also increases. Therefore, if the dollar price of Korean won decreases, fewer won will be supplied, as suppliers are less willing to exchange their currency at lower prices.

Question 19

Assume that you have just returned to the United States from a summer vacation in Russia, where you exchanged American dollars for Russian rubles.Your economic actions can be said to have:
A)increased the supply of American dollars in Russia.
B)decreased the supply of Russian rubles in America.
C)decreased the supply of American dollars in Russia.
D)increased the demand for American dollars in America.
E)increased the supply of Russian rubles in Russia.

Accepted Answer

The answer of Assume that you have just returned to...

Question 20

The primary function of the World Bank is to:
A)lend money to the World Trade Organization.
B)provide loans to countries experiencing huge budget deficit.
C)finance economic development in poor countries.
D)assist countries experiencing balance of payments deficits.
E)finance the fiscal stabilization program of the U.S.government.

Accepted Answer

The World Bank's primary function is to finance economic development in poor countries through loans, technical assistance, and other resources.

Quiz 42: Exchange Rates and Financial Links Between Countries

Under the _____ arrangement, the exchange rate is adjusted periodically by small amounts at a fixed, pre-announced rate or in response to certain indicators.

Which of the following exchange rate systems have a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate?

Foreign exchange market intervention is most effective when:

The exchange rate that is established in the absence of foreign exchange market intervention by the government is known as a(n) :

The annual membership fees of the 185 member countries of the IMF are called:

Assume that a country's government influences the exchange rate through active central bank intervention, with no pre-announced path.This policy is known as a(n) :

What is a currency board?

The IMF mostly receives its funds from:

The Bretton Woods system required countries to actively buy and sell dollars to maintain fixed exchange rates when:

When the exchange rate fluctuates around a fixed central target, allowing for a moderate amount of fluctuation, while tying the currency to the target central rate, the exchange rate is under:

Suppose the official gold value of the Brazilian real changes from 527 reals per ounce to 508 reals per ounce.We can then say that:

Suppose the official gold value of the Brazilian real changes from 457 reals per ounce to 528 reals per ounce.We can then say that:

Which of the following had resulted from the Smithsonian agreement of 1971?

Equilibrium in the foreign exchange market occurs:

An upward-sloping supply curve of Korean won in terms of Canadian dollars indicates that:

Assume that you have just returned to the United States from a summer vacation in Russia, where you exchanged American dollars for Russian rubles.Your economic actions can be said to have:

The primary function of the World Bank is to: