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Chapter 06: Government Influence on Exchange Rates
KEYWORDS:
Bloom's: Knowledge
59. The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers.
a.
True
b.
False
60. An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to
increase the value of the yen vs. the dollar.
a.
True
b.
False
61. A strong home currency can harm exports; exporters typically benefit from a weaker home country currency.
a.
True
b.
False
62. An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from
unemployment problems in other countries.
a.
True
b.
False
63. All European countries now use the euro as their currency.
a.
True
b.
False
64. A country with a currency board does not have control over its local interest rates.
a.
True
b.
False
65. Dollarization refers to the replacement of local currency with U.S. dollars.
a.
True
b.
False
66. A country with fixed exchange rates often faces constraints on growth.
a.
True
b.
False
67. The Bretton Woods Agreement called for the establishment of a single European currency.
a.
True
b.
False
68. The European Central Bank is responsible for monetary policy in all countries that adopted the euro as its currency.
a.
True
b.
False
69. A currency peg is insulated from economic or political conditions, such that the exchange rate in the market will only
change if the country's government breaks the peg and sets a new exchange rate.
a.
True
b.
False
70. If foreign investors fear that a peg may be broken because of fund outflows from that country, they may attempt to
purchase more of that currency before the peg is broken.
a.
True
b.
False
71. Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on
the local currency of that country.
a.
True
b.
False
72. Which one of the following is a disadvantage of a fixed exchange rate system:
a.
Importers are insulated from the risk that the currency will appreciate over time.
b.
Management of an MNC is less difficult.
c.
The government might change the value of the currency.
d.
Exporters are insulated from the risk that the currency will depreciate over time.
73. The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.
a.
2.25
b.
6
c.
10
d.
8
74. Which of the following did not occur as a result of Bretton Woods Agreement?
a.
Each currency was valued in terms of gold.
b.
Values of all currencies were fixed with respect to each other.
Chapter 06: Government Influence on Exchange Rates
c.
Currencies were allowed to fluctuate no more than 1% above or below the initially set rates.
d.
The United States experienced no balance-of-trade deficits.
75. Assume that Japan and the United States frequently trade with each other. Under the freely floating exchange rate
system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for
sale, and result in ____ inflation in Japan.
a.
upward; reduce; unchanged
b.
upward; increase; higher
c.
downward; reduce; unchanged
d.
downward; increase; higher
76. Which one is not a disadvantage of a freely floating exchange rate system?
a.
It can adversely affect a country that has high unemployment.
b.
It can adversely affect a country that has high inflation.
c.
The government may intervene to change the value of a given currency.
d.
The exchange rate risk is high and may be costly to manage.
77. A "dirty" float represents a system of:
a.
freely floating exchange rates.
b.
fixed exchange rates.
c.
floating exchange rates, but the central bank can manipulate the currency.
d.
fixed exchange rates, but the central bank can manipulate the currency.
78. If a U.S. firm plans to frequently purchases goods from Hong Kong over the next several years, it does not have to
worry about exchange rate risk.
a.
True
b.
False
79. If the French government wants to decrease inflation in France, it will exchange foreign currency for euros.
a.
True
b.
False
80. The European Central Bank is located in:
a.
London.
b.
Denmark.
c.
Luxembourg.
d.
Frankfurt.
81. Which of the following is not true regarding the eurozone?
a.
Members cannot set unique monetary policy individually.
Chapter 06: Government Influence on Exchange Rates
b.
Members cannot apply their own fiscal policies.
c.
Members have to agree on the ideal monetary policy.
d.
Its creation allowed for greater political union among its members.
82. Assuming no credit risk, the interest rates among countries in the eurozone should be similar.
a.
True
b.
False
83. Which of the following is not a reason for devaluation of a currency?
a.
high inflation.
b.
to reduce balance-of-trade deficit.
c.
to decrease the amount of imports.
d.
high unemployment.
84. Which of the following is the most likely reason for revaluation of a currency?
a.
To reduce inflation.
b.
To stimulate the local economy.
c.
To increase the amount of exports.
d.
To increase balance-of-trade surplus.
85. To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury
securities.
a.
buy; sell
b.
sell; sell
c.
sell; buy
d.
buy; sell
86. The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in
the eurozone.
a.
True
b.
False
87. If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:
a.
exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.
b.
exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.
c.
exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
d.
exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.
88. Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will cause an
____ U.S. dollars and an ____ euros.
Chapter 06: Government Influence on Exchange Rates
a.
inward shift in demand for; outward shift in supply of
b.
inward shift in demand for; inward shift in supply of
c.
outward shift in supply of; outward shift in demand for
d.
outward shift in supply of; inward shift in demand for
89. If the Fed ____ the interest rates when inflationary expectations remain unchanged, the most likely result is that the
value of dollar will ____ and the economy may ____.
a.
increases; appreciate; weaken
b.
decreases; appreciate; weaken
c.
increases; depreciate; strengthen
d.
decreases; appreciate; strengthen
90. A central bank may attempt to stimulate a stagnant economy by weakening the value of the currency.
a.
True
b.
False
91. A common way to reduce inflation is to weaken the value of the domestic currency.
a.
True
b.
False
92. If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would most likely ____
to capitalize on this intervention.
a.
purchase yen put options
b.
sell yen futures contracts
c.
purchase yen call options
d.
buy U.S. Treasury bonds
93. If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to
capitalize on this intervention.
a.
purchase euro put options
b.
purchase euro futures contracts
c.
purchase yen call options
d.
sell U.S. Treasury bonds
94. If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may
backfire because it will increase money supply and thus increase inflation.
a.
True
b.
False
95. A strong dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which
Chapter 06: Government Influence on Exchange Rates
in turn place ____ pressure on U.S. bond prices.
a.
downward; upward; upward
b.
downward; downward; upward
c.
upward; upward; downward
d.
upward; downward; upward
96. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency appreciates
against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from
Country Z.
a.
more; more
b.
more; less
c.
less; less
d.
less; more
97. If the Bank of England announces that it will start to frequently intervene in order to reduce the fluctuations of British
pound, the premiums on call and put options will increase.
a.
True
b.
False
98. Under the ____________ from 1979-1992 (before the euro existed), the currencies of many European countries were
currencies of most of these member countries were allowed to fluctuate by no more than 2.25 percent (6 percent
for some currencies) from the initially established values.
a.
European Monetary System (EMS).
b.
snake agreement.
Chapter 06: Government Influence on Exchange Rates
c.
Maastricht Treaty.
d.
Bretton Woods agreement.
99. Direct intervention is usually more effective than indirect intervention.
a.
True
b.
False
100. Currency devaluations have the potential to reduce unemployment, while currency revaluations have the potential to
reduce inflation.
a.
True
b.
False
101. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it
would under a freely floating exchange rate system.
a.
True
b.
False
102. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the
foreign exchange market to maintain exchange rates within specified boundaries.
a.
True
b.
False
103. In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation
of the dollar would result in more expensive foreign imports, thus reducing foreign competition.
a.
True
b.
False
104. Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than
they are under a fixed exchange rate system.
a.
True
b.
False
105. In order to stimulate a stagnant economy, a government operating under a managed float may attempt to weaken its
currency.
a.
True
b.
False
106. Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is
an example of sterilized intervention.
a.
True
b.
False
107. Using indirect intervention, the Fed attempts to affect the dollar's value indirectly by influencing the factors that
determine it, such as interest rates.
a.
True
b.
False
108. While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are
better able to raise prices.
a.
True
b.
False
109. While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive
foreign prices that result from a strong home currency.
a.
True
b.
False
110. Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major
political or economic problems.
a.
True
b.
False
111. Which of the following is not true regarding the Mexican peso crisis?
a.
Mexico encouraged firms and consumers to buy an excessive amount of imports because the peso was
stronger than it should have been.
b.
Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in
Mexico.
c.
In December of 1994, the central bank of Mexico allowed the peso to float freely.
d.
The central bank of Mexico increased interest rates after the peso declined in value in order to prevent
investors from withdrawing their investments in Mexico's debt securities.
e.
All of the above are true.
112. Which of the following is true regarding the euro?
a.
Exchange rate risk between participating European currencies is completely eliminated, encouraging more
trade and capital flows across European borders.
b.
It allows for more consistent economic conditions across countries.
c.
It prevents each country from conducting its own monetary policy.
d.
All of the above are true.
113. Among the reasons for government intervention are:
a.
to smooth exchange rate movement.
b.
to establish implicit exchange rate boundaries.
c.
to respond to temporary disturbances.
d.
all of the above
114. Which of the following is not true regarding government intervention?
a.
Under the direct method of intervention, an appreciation of the dollar would be accomplished by exchanging
dollars for foreign currencies.
b.
Under nonsterilized intervention, the Fed would intervene in the foreign exchange market without adjusting
the money supply.
c.
Under sterilized intervention, the Fed would intervene simultaneously in the foreign exchange and Treasury
markets.
d.
Under indirect intervention, the Fed would attempt to affect the dollar's value by indirectly influencing the
factors that determine it, such as interest rates.
e.
All of the above are true.
115. Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this
movement by intervening in the foreign exchange market using sterilized intervention. The Fed would
a.
buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
b.
buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
c.
sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
d.
sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
e.
none of the above
116. Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this
movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would
a.
buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
b.
buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
c.
sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
d.
sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
e.
none of the above
