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9.3 Disequilibrium: Exchange Rates in Emerging Markets
1) Which of the following was NOT an international currency crisis in the 1990s and early
2000s?
A) the Asian Crisis
B) the Canadian Crisis
C) the Argentine Crisis
D) All of the above were currency crises in the 1990s and 2000s.
2) The Asian Currency crisis appeared to begin in:
A) South Korea.
B) Taiwan.
C) Thailand.
D) Japan.
3) The "tequila effect" is a slang term used to describe a form of financial panic called:
A) run on the market.
B) speculation.
C) contrary investing.
D) contagion.
4) Prior to July 2, 1997, the Thai government:
A) allowed the Thai Bhat to float against major currencies.
B) fixed the Bhat's value against the Korean won only.
C) fixed the Bhat's value against major currencies especially the U.S. dollar.
D) none of the above
5) The authors did NOT identify which of the following as a root of the Asian currency crisis?
A) the collapse of some Asian currencies
B) the rate of inflation in the United States
C) corporate socialism
D) banking stability and management
6) The authors refer to the practice of many Asian firms being largely controlled by families of
groups related to the governing body of the country as:
A) illegal.
B) insider trading.
C) cronyism.
D) not in my back yard.
7) The principle focus of the IMF bailout efforts during the Asian financial crisis was:
A) banking liquidity.
B) shareholder's wealth.
C) reestablishing fixed currency exchange rates in Asia.
D) dollarization of Asian currencies.
8) The ________ is the Argentine currency unit.
A) peso
B) dollar
C) real
D) peseta
9) A currency board is:
A) a structure, rather than a mere commitment, to limiting the growth of the money supply in the
economy.
B) a recipe for conservative and prudent financial management.
C) designed to eliminate the power of politicians to exercise judgment by relying on an
automatic and unbendable rule.
D) all of the above
10) Argentina's economic performance in the 1990s while their peso was pegged to the U.S.
dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.
A) high; high
B) low; low
C) low; high
D) high; low
11) By 2001, crisis conditions had revealed three very important underlying problems
Argentina's economy EXCEPT:
A) The Argentine peso was overvalued.
B) The currency board regime had eliminated monetary policy alternatives for macroeconomic
policy.
C) The printing of paper money without restrictions, resulting in hyperinflation.
D) The Argentina government budget deficit was out of control - government spending
continued to increased but tax receipts did not.
12) Which of the following did NOT contribute to the Russian currency crisis of 1998?
A) an accelerated flight of capital
B) generally deteriorating economic conditions
C) a surprisingly healthy government surplus that was neither funding internal investment nor
external debt service
D) all of the above
13) In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a one-to-one basis.
14) Leading up to the Russian currency collapse of 1998, Russia followed a currency policy of
managed float that allowed their currency to slide daily at a 1.5% per month rate.
15) The large and liquid capital and currency markets follow many of the principles outlined by
the different schools of thought on exchange rate determination (parity conditions, balance of
payments approach, and asset approach) relatively well in the medium to long term.
16) The smaller and less liquid markets and currency markets frequently demonstrate behaviors
that follow the principles outlined by the different schools of thought on exchange rate
determination (parity conditions, balance of payments approach, and asset approach) relatively
well in the medium to long term.
17) The roots of the Asian currency crisis extended from a fundamental change in the economics
of the region, the transition of many Asian nations from being net importers to net exporters.
18) The most visible roots of the crisis were in the excesses of capital inflows into Thailand
extending credit to a variety of domestic investments and enterprises beyond what the Thai
economy could support and creating an investment "bubble."
19) As economic conditions continued to deteriorate in Argentina by the end of 2001, banks
suffered increasing runs. The government, fearing that the increasing financial drain on banks
would cause their collapse, closed the banks for weeks.
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20) In 1991, Argentina adopted a currency board (the Argentine peso had been pegged to the
U.S. dollar at a one-to-one rate of exchange) to fight hyperinflation. This currency board lasted
for a decade until the economic crisis of 2001. Discuss : 1) the pros and cons of a currency board
policy, 2) the crisis condition of the Argentina's economy by 2001, and 3) the lessons to be
drawn from the the Argentina story.
Answer: Under a currency board, the central bank may increase the money supply in the
banking system only with increases in its holdings of hard currency reserves. By removing the
ability of government to expand the rate of growth of the money supply, Argentina believed it
9.4 Forecasting in Practice
1) ________, traditionally referred to as chartists, focus on price and volume data to determine
past trends that are expected to continue into the future.
A) Mappists
B) Trappist monks
C) Filibusters
D) Technical analysts
2) Examples of a business motivation for long-run exchange rate forecasts include all but which
of the following?
A) a major capital investment in a foreign country
B) the desire to hedge a 90-day security
C) a portfolio manager considering investing in foreign securities
D) All of the above are examples of a business motivation for long-run exchange rate forecast.
3) Short-term foreign exchange forecasts are often motivated by such activities as ________
whereas long-term forecasts are more likely motivated by ________.
A) long-term investment; long-term capital appreciation
B) long-term capital appreciation; desire to hedge a receivable
C) the desire to hedge a payable; the desire for long-term investment
D) the desire for long-term investment; the desire to hedge a payable
4) A major U.S. multinational firm has forecast the euro/dollar rate to be €1.10/$ one year hence,
and an exchange rate of $1.40 for the British pound (£) in the same time period. What does this
imply the company's expected rate for the euro per pound to be in one year?
A) €1.40/£
B) £1.40/€
C) £1.54/€
D) €1.54/£
5) The longer the time horizon of the technical analyst the more accurate the prediction of
foreign exchange rates is likely to be.
6) The single most important element of technical analysis is that future exchange rates are based
on the current exchange rate.
7) The more efficient the foreign exchange market is, the more likely it is that exchange rate
movements are random walks.
8) Technical analysts, traditionally referred to as chartists, focus on fundamental data to
determine past trends that are expected to continue into the future.
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9) Foreign exchange forecasting can be either long-term, or short-term in duration. Compare and
contrast the motivation for and the techniques a forecaster might use for each of the time periods.
Answer: Short-run forecasts are usually more tactical in nature as a firm may desire to reduce
exchange rate risk associated with foreign receivable or payables. Technical factors and short-
