Macroeconomics 2017 (Hubbard)
Chapter 19 The International Financial System
19.1 Exchange Rate Systems
1) The gold standard is an example of
A) a floating exchange rate system.
B) a managed float exchange rate system.
C) a fixed exchange rate system.
D) a flexible exchange rate system.
E) the Bretton Woods System.
2) China’s exchange rate system from 1994 through 2005 is an example of
A) a floating exchange rate system.
B) a managed float exchange rate system.
C) a fixed exchange rate system.
D) a flexible exchange rate system.
E) the Bretton Woods System.
3) During what period of time did the United States most consistently adhere to the gold standard?
A) from the nineteenth century until the 1930s
B) from the eighteenth century until the nineteenth century
C) from 1914 until 1929
D) from 1944 until 1980
4) When the value of a currency is determined mostly by demand and supply, but with occasional
government intervention, the exchange rate system is defined as
A) fixed.
B) floating.
C) managed float.
D) Bretton Woods.
5) Suppose an economy’s exchange rate system is the gold standard and vast tracks of gold are
discovered, as is what happened in the United States in 1849. If the economy is at full employment,
what should this discovery do?
A) It should raise the money supply but have no impact on the price level.
B) It should raise the money supply and cause inflation.
C) It should raise the money supply and cause disinflation.
D) It should lower the money supply and cause deflation.
E) it should not change the money supply.
6) If a country’s currency is determined only by the demand and supply for that country’s currency, the
country is said to have a
A) floating exchange rate.
B) fixed exchange rate.
C) gold standard.
D) managed float.
7) If currencies around the world are based on the gold standard, and Japan raises the amount of gold
for which the yen will trade, then holding all else constant,
A) the yen will depreciate against the dollar.
B) the yen will appreciate against the dollar.
C) the value of the yen relative to the dollar will stay constant.
D) the value of U.S. exports to Japan in terms of the yen will increase.
8) Under the Bretton Woods exchange rate system, set up in 1944, which of the following was true?
A) Americans could sell their dollars to the American government in exchange for gold.
B) Americans could sell their dollars to the American government in exchange for silver.
C) Americans could sell their dollars to foreign central banks in exchange for gold.
D) Foreign central banks could sell their dollars to the American government in exchange for gold.
9) The United States abandoned the Bretton Woods system of exchange rates in
A) the 1920s.
B) the 1940s.
C) the 1970s.
D) the 1990s.
10) Why did the United States abandon the gold standard in the 1930s?
A) The government wanted to rapidly expand the money supply in response to the Great Depression.
B) The government wanted to move away from a floating exchange rate system to a fixed exchange rate
system.
C) The Treasury Department in the United States found it was cheaper to print paper money instead of
gold coins.
D) New sources of gold were discovered, so the price of gold plummeted, dramatically reducing the
value of the dollar.
11) The current exchange rate system in the United States is best described as a
A) silver standard.
B) managed float exchange rate system.
C) fixed exchange rate system.
D) gold standard.
12) In what year was the Bretton Woods system of currency exchange set up?
A) 1912
B) 1924
C) 1944
D) 1969
13) Under which exchange rate system was a dollar redeemable for gold only if the dollar was
presented by a foreign central bank?
A) the gold standard
B) a managed float exchange rate system
C) the Bretton Woods System
D) a fiat system
14) In the United States today, how much gold will the Federal Reserve give you in exchange for $1?
A) none
B) $1 worth of gold (based on the market price of an ounce of gold at the time you exchange the $1)
C) 1 ounce of gold
D) 1/35th of an ounce of gold
15) The exchange rate system agreed to in 1944, in which the U.S. government agreed to buy or sell gold
at a fixed price of $35 per ounce, is referred to as
A) the gold standard.
B) the Bretton Woods System.
C) a floating currency standard.
D) a flexible exchange rate system.
16) Under the gold standard, to increase the money supply in the country, the government must
A) simply print more currency.
B) have enough gold to back up the increase in the money supply.
C) buy foreign currencies with dollars to increase foreign currency reserves.
D) increase the value of the country’s currency on foreign exchange markets.
17) From the nineteenth century until the 1930s, the United states most consistently adhered to
A) the gold standard.
B) the Bretton Woods system.
C) a freely-floating exchange rate.
D) a managed-float exchange rate system.
18) The Bretton Woods exchange rate system was a
A) floating exchange rate system.
B) managed float exchange rate system.
C) fixed exchange rate system.
D) flexible exchange rate system.
19) When the value of a currency is determined ________, the exchange rate system is defined as
managed float.
A) only by supply and demand
B) by its issuing government
C) mostly by supply and demand, but with occasional government intervention
D) by its issuing government, with occasional readjustments in value
20) When the value of a currency is determined ________, the exchange rate system is defined as a
floating exchange rate system.
A) only by supply and demand
B) by its issuing government
C) mostly by supply and demand, but with occasional government intervention
D) by its issuing government, with occasional readjustments in value
21) Under the Bretton Woods exchange rate system, ________ could sell their dollars to the American
government in exchange for gold.
A) foreign central banks
B) American citizens
C) foreign citizens
D) all of the above
22) Under a floating exchange rate, the exchange rate
A) will change whenever the price of gold changes.
B) is controlled by central bank intervention.
C) is determined by the interaction of supply of the currency and demand for the currency.
D) is pegged against the euro.
23) The fixed exchange rate system set up in the 1940s was the
A) purchasing power parity exchange system.
B) gold standard.
C) Bretton Woods system.
D) European Union euro system.
24) The United States abandoned the ________ because the government wanted to rapidly expand the
money supply in response to the Great Depression.
A) gold standard
B) Bretton Woods system
C) managed float
D) floating exchange rate system
25) The ________ in the United States is best described as a managed float exchange rate system.
A) earliest used exchange rate system
B) current exchange rate system
C) exchange rate system used prior to the Great Depression
D) exchange rate system set up at the end of World War II
26) The ________ system of currency exchange was set up in 1944.
A) gold standard
B) Bretton Woods
C) managed float
D) flexible
27) Under the Bretton Woods system, U.S. dollars were redeemable for ________ only if the dollars were
presented by a foreign central bank.
A) silver
B) foreign currency
C) gold
D) U.S. Treasury bonds
28) In the United States today, the U.S. dollar is backed by
A) gold.
B) silver.
C) U.S. Treasury securities.
D) none of the above
29) Under the Bretton Woods exchange rate system, the U.S. government agreed to buy or sell gold at a
fixed price of ________ per ounce.
A) $1
B) $35
C) $100
D) $400
30) Under the gold standard, the government must have enough gold to back up any
A) increase in money demand.
B) increase in the money supply.
C) change in its currency’s exchange rate.
D) foreign currency deposits in its central bank.
31) If currencies around the world are based on the gold standard, and the EU lowers the amount of
gold for which the euro will trade, then holding all else constant,
A) the euro will depreciate against the dollar.
B) the euro will appreciate against the dollar.
C) the value of the euro relative to the dollar will stay constant.
D) the value of U.S. exports to EU countries in terms of the euro will decrease.
32) The gold in Fort Knox backs all U.S. currency.
33) If two countries adhere to a gold standard, the exchange rate for their currencies is fixed.
34) Managed float exchange systems were abandoned with the implementation of the gold standard.
35) Expanding, contracting, and managing the money supply is easier for a central bank under the gold
standard.
36) Foreign currency prices of the U.S. dollar are currently determined by a managed float exchange
rate system.
37) U.S. dollars can currently be exchanged for gold by foreign central banks, but not by U.S. citizens.
38) U.S. currency continues to be backed by the gold standard to this day.
39) Exchange rates under the Bretton Woods system were determined by relative supplies of gold held
by countries within the system.
40) The Bretton Woods system was established in 1944 and remained in place until the early 1970s.
41) What are the three main exchange rate systems, and how do they operate?
42) How were exchange rates determined under the gold standard? How did the Bretton Woods system
differ from the gold standard?
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43) What is the difference between a fixed exchange rate system and a managed float exchange rate
system?
44) What is the connection between the gold held at the Fort Knox Bullion Depository in Kentucky and
the U.S. money supply?
19.2 The Current Exchange Rate System
1) The currency adopted by most countries in Western Europe is referred to as the
A) euro.
B) Eurodollar.
C) yen.
D) pound.
2) The current exchange rate system has which of the following characteristics?
A) The United States allows the dollar to float against other major currencies.
B) All developing countries allow their currencies to float against the dollar and other major currencies.
C) The countries of the European Union have adopted the gold standard.
D) Several developing countries in Asia have adopted the Bretton Woods system.
E) The current global foreign exchange system is a fixed system.
3) From the beginning of 1973 until August 2015, the value of the dollar has ________ relative to the
Canadian dollar and ________ relative to the Japanese yen.
A) appreciated; appreciated
B) appreciated; depreciated
C) depreciated; appreciated
D) depreciated; depreciated
4) If one U.S. dollar could be exchanged for one Canadian dollar in 1970, and one U.S. dollar can now be
exchanged for 1.13 Canadian dollars, which of the following is true?
A) The U.S. dollar lost value against the Canadian dollar.
B) The Canadian dollar lost value against the U.S. dollar.
C) The Canadian dollar gained value against the U.S. dollar.
D) Both A and C are true.
5) In 2011, a number of Canadians purchased homes in Arizona. Which of the following would not be a
logical explanation for this?
A) The value of the Canadian dollar relative to the U.S. dollar increased during this time.
B) The U.S. dollar depreciated during this time.
C) The Canadian dollar appreciated during this time.
D) The U.S. dollar appreciated relative to the Canadian dollar during this time.
6) Ariel is a Canadian citizen who works in Montreal, Canada and owns a winter home in Palm Beach,
Florida. When Ariel spends the winters in Palm Beach, an increase in the value of the Canadian dollar
relative to the U.S. dollar should
A) help Ariel as each Canadian dollar of her salary is now worth more U.S. dollars.
B) hurt Ariel as each Canadian dollar of her salary is now worth less U.S. dollars.
C) hurt Ariel as it is now more expensive to live in Palm Beach since the Canadian dollar appreciation.
D) help Ariel as it is now less expensive to live in Canada since the Canadian dollar appreciation.
7) An increase in the value of the U.S. dollar will
A) reduce Canadian demand for winter homes in Florida.
B) increase Canadian demand for winter homes in Florida.
C) reduce the cost of homes in Florida for Canadian buyers.
D) increase the cost of homes in Florida for American buyers.
8) Fluctuating exchange rates can alter a multinational firm’s profits and losses. German company
Bayer produces products in Germany and sells them in the United States. If the dollar depreciates
against the euro, then Bayer’s sales in the United States should ________ because it will take ________
U.S. dollars to purchase the German-made products.
A) rise; more
B) rise; fewer
C) fall; more
D) fall; fewer
9) You decide to work in Japan for the next 10 years, accumulate some savings, then move back to the
United States and convert your savings from yen to dollars. At the time of your move, economists
predict that consumers in the United States have reignited their love of Japanese products, especially
hybrid cars, and expect that this strong preference for Japanese products will continue for the next
decade. How should this influence your decision to work and save in Japan?
A) You should be discouraged as the growing U.S. preference for Japanese goods should increase the
value of the yen to the dollar and decrease the value of your savings when converted to dollars.
B) You should be discouraged as the growing U.S. preference for Japanese goods should decrease the
value of the yen to the dollar and decrease the value of your savings when converted to dollars.
C) You should be encouraged as the growing U.S. preference for Japanese goods should decrease the
value of the yen to the dollar and raise the value of your savings when converted to dollars.
D) You should be encouraged as the growing U.S. preference for Japanese goods should increase the
value of the yen to the dollar and raise the value of your savings when converted to dollars.
10) What factors are not important in determining exchange rate fluctuations in the long run?
A) relative price levels across countries
B) relative rates of productivity growth across countries
C) preferences for domestic and foreign goods across countries
D) speculating in currency markets
11) Which of the following is most important in explaining exchange rate fluctuations in the short run?
A) relative price levels across countries
B) preferences for domestic and foreign goods
C) interest rates
D) relative rates of productivity growth across countries
12) Purchasing power parity is the theory that, in the long run, exchange rates should be at a level such
that equivalent amounts of any country’s currency
A) will equalize nominal interest rates across countries.
B) are valued inversely relative to the size of its GDP.
C) should earn the same real rate of return.
D) allow one to buy the same amount of goods and services.
13) If the exchange rate between the U.S. dollar and the Indian rupee (rupees per dollar) is greater than
the relative purchasing power between the two countries, which of the following would be true?
A) There are opportunities for profit by purchasing goods in India and then selling them in the United
States.
B) Purchasing power parity predicts that the value of the dollar will rise as traders take advantage of
arbitrage opportunities.
C) Purchasing power parity predicts that the dollar is undervalued as traders take advantage of
arbitrage opportunities.
D) There are no arbitrage opportunities for which traders can take advantage.
14) If the purchasing power of a dollar is greater than the purchasing power of the yen, purchasing
power parity would predict that
A) in the short run, exchange rates will move to equalize the purchasing power of the dollar and the
yen.
B) in the long run, exchange rates will move to equalize the purchasing power of the dollar and the yen.
C) in the long run, interest rates will move to equalize the purchasing power of the dollar and the yen.
D) in the short run, interest rates will move to equalize the purchasing power of the dollar and the yen.
15) A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per
dollar, what is the dollar cost of a Big Mac in Brazil?
A) $0.89
B) $2.25
C) $4.50
D) $8.00
16) A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per
dollar, purchasing power parity predicts that
A) the dollar will appreciate as the demand for dollars falls in the long run.
B) the dollar will appreciate in the long run as the demand for the dollars rises.
C) the dollar will depreciate as the demand for dollars falls in the long run.
D) the dollar will depreciate as the supply of dollars rises in the long run.
17) A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per
dollar, purchasing power parity predicts that
A) the dollar is undervalued.
B) the dollar is overvalued.
C) the real is undervalued.
D) both B and C are correct.
18) If the implied exchange rate between Big Mac prices in the United States and Poland is 2.13 zlotys
per dollar, but the actual exchange rate between the United States and Poland is 3.16 zlotys per dollar,
which of the following would you expect to see?
A) an appreciation of the dollar
B) an increase in the demand for zlotys
C) an increase in the demand for dollars
D) Both A and C are correct.
19) If relative purchasing power between the United States and Argentina is 3.22 pesos per dollar, under
which circumstances would we say that the dollar is “overvalued”?
A) if the actual exchange rate between the dollar and the Argentinean peso is 3.22 pesos per dollar
B) if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar
C) if the actual exchange rate between the dollar and the Argentinean peso is 0.22 pesos per dollar
D) if the actual exchange rate between the dollar and the Argentinean peso is 3 pesos per dollar
20) Which of the following explains why purchasing power parity does not completely explain long-run
fluctuations in exchange rates?
A) Some goods and services produced in any country are not traded internationally.
B) Consumer preferences for goods and services across countries are very similar.
C) Most countries do not impose barriers to trade.
D) Most countries have free markets with little, if any, government regulation.
21) If the GDP deflator in the United States is 114, and the GDP deflator in Ukraine is 142, which of the
following exchange rates would the theory of purchasing power parity predict in the long run? (The
Ukrainian currency is the hryvnia.)
A) 0.80 hryvnias per dollar
B) 1.25 hryvnias per dollar
C) 2.80 hryvnias per dollar
D) 28 hryvnias per dollar