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Chapter 20: International Finance
88. The demand curve for foreign exchange:
a.
slopes downward.
b.
slopes upward.
c.
is horizontal, because no individual country can influence the price of foreign exchange.
d.
is vertical, because no individual country can influence the price of foreign exchange.
e.
may slope downward or upward depending on the volume of imports and exports of the trading countries.
89. Which of the following statements is true?
a.
The demand for foreign currency in the United States increases as the volume of imports increases.
b.
The demand for foreign currency in the United States increases as the volume of exports increases.
c.
The demand for foreign currency in the United States decreases with a decrease in the inflation rate abroad.
d.
The demand for foreign currency in the United States decreases as foreign interest rates rise.
e.
The demand for foreign currency in the United States is unaffected by U.S. demand for foreign goods and
services.
90. The demand for U.S. dollars by foreign nations increases as:
a.
more Americans travel abroad.
b.
foreigners increase their purchase of American goods.
c.
Americans increase their purchase of foreign goods.
d.
Americans increase their investments in foreign stocks or bonds.
e.
Americans send more gifts abroad.
91. If the dollar per pound exchange rate falls from $1.50 per pound to $1.25 per pound, ______.
a.
U.S. imports of British goods will increase
b.
U.S. exports of goods to Great Britain will increase
c.
U.S. exports of services to Great Britain will fall because the price of the pound has increased
d.
British demand for American goods will remain unchanged, but American demand for British goods will fall
e.
U.S. demand for British goods will remain unchanged, but British demand for American goods will increase
92. If the U.S. dollar appreciates in the foreign exchange market, then:
a.
American goods will become more expensive for foreign buyers and foreign goods will be cheaper for
Americans.
b.
American goods will become less expensive for foreign buyers and foreign goods will be more expensive for
Americans.
c.
more U.S. dollars will be required to buy a foreign currency.
d.
U.S. exports will increase.
e.
neither the price of U.S. exports nor the price of U.S. imports will change.
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93. As the price of foreign exchange decreases relative to the U.S. dollar, the:
a.
products made in the U.S. become cheaper for foreigners.
b.
goods made in foreign countries become cheaper for Americans.
c.
amount of foreign currency required to purchase a unit of U.S. dollar increases.
d.
U.S. demand curve for foreign exchange shifts to the right.
e.
supply curve of foreign exchange to U.S. markets decreases.
94. If the U.S. dollar depreciates in the foreign exchange market, American exports will _____ and American imports will
_____.
a.
be more expensive; be more expensive
b.
be more expensive; be less expensive
c.
be less expensive; be less expensive
d.
be less expensive; be more expensive
e.
decrease; increase
95. If the U.S. dollar depreciates relative to the Swiss franc, then:
a.
Swiss goods become more expensive in the U.S.
b.
U.S. goods become more expensive in Switzerland.
c.
Swiss investors will pay more Swiss francs to buy one unit of U.S. dollar.
d.
the U.S. import of Swiss goods will increase.
e.
the U.S. dollar per Swiss franc exchange rate will decrease.
96. If the U.S. dollar appreciates relative to the Brazilian real, then:
a.
the U.S. dollar per real exchange rate will increase.
b.
U.S. goods become less expensive in Brazil.
c.
Brazilian goods become more expensive in the U.S.
d.
Brazilian investors will pay fewer reals to buy one unit of U.S. dollar.
e.
the U.S. will import more goods and services from Brazil.
97. Suppose U.S. consumers start buying more English shoes and fewer American shoes. Which of the following will be a
likely impact on the foreign exchange market?
a.
U.S. demand for British pounds will increase.
b.
U.S. demand for British pounds will decrease.
c.
U.S. demand for British pounds will increase, but the demand for foreign exchange will decrease.
d.
U.S. demand for British pounds will decrease, but the demand for foreign exchange will increase.
e.
There would be no effect on the demand for foreign exchange in the U.S.
98. Imagine that there are only two nations in the world, the United States and Mexico. If Americans buy more goods
made in Mexico, other things constant, the:
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Chapter 20: International Finance
a.
U.S. demand curve for Mexican pesos will shift rightward.
b.
U.S. demand curve for Mexican pesos will shift leftward.
c.
U.S. supply curve of Mexican pesos will shift leftward.
d.
U.S. supply curve of Mexican pesos will shift rightward.
e.
U.S. supply curve of Mexican pesos will become perfectly inelastic.
99. If the U.S. demand for British pounds increases, then:
a.
the dollar price of British pounds will increase.
b.
the dollar price of British pounds will decrease.
c.
the exchange rate between dollars and pounds will be less than the equilibrium exchange rate.
d.
the pound will fall in value vis-à-vis the dollar.
e.
there will be no change in either the value of the dollar or the pound.
100. The U.S. dollar will appreciate if:
a.
the U.S. demand for foreign exchange decreases.
b.
the U.S. demand for foreign exchange increases.
c.
the supply of foreign exchange increases in the foreign exchange market.
d.
Americans want to buy more foreign goods.
e.
foreigners want fewer American goods.
101. Which of the following would increase the U.S. demand for foreign currency?
a.
An increase in the U.S. demand for foreign goods
b.
An increase in incomes abroad
c.
A decrease in U.S. income
d.
A decrease in the U.S. demand for foreign goods
e.
An increase in U.S. real interest rate
102. A rightward shift of a country’s demand curve for foreign exchange will:
a.
decrease the price of foreign exchange in the country.
b.
decrease the value of its currency.
c.
increase the value of its currency.
d.
make foreign goods less expensive in the domestic market.
e.
make its goods more expensive in foreign markets.
103. A leftward shift of a country’s demand curve for foreign exchange will:
a.
decrease the price of foreign exchange in the country.
b.
increase the price of foreign exchange in the country.
c.
decrease the value of its currency.
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d.
make foreign goods more expensive in the country.
e.
make its goods cheaper in the foreign market.
104. A leftward shift of a country’s demand curve for foreign exchange will:
a.
increase the price of foreign exchange in the country.
b.
decrease the value of its currency.
c.
make foreign goods more expensive in the domestic market.
d.
make foreign goods less expensive in the domestic market.
e.
make its goods less expensive in the foreign market.
105. A rightward shift of the Mexican demand curve for U.S. dollars will:
a.
decrease the price of dollars in terms of pesos.
b.
increase the value of pesos relative to dollars.
c.
make American goods less expensive in terms of pesos.
d.
make American goods more expensive in terms of pesos.
e.
make Mexican goods more expensive in terms of dollars.
106. Which of the following will happen if country A’s currency declines in value against other major currencies?
a.
Country A’s trade deficit will increase.
b.
Country A’s trade deficit will be unaffected.
c.
Country A’s trade deficit will decrease.
d.
Country A’s products will become more expensive in foreign markets.
e.
Foreign goods will become cheaper in country A.
107. Exchange rates:
a.
are always fixed between the currencies of two countries.
b.
fluctuate to equate the quantity of foreign exchange demanded with the quantity supplied.
c.
fluctuate to equate imports and exports.
d.
fluctuate to equate interest rates in various countries.
e.
fluctuate according to agreements between the governments of various countries.
108. The fact that exchange rates are nearly identical in different markets around the world is due to:
a.
the actions of speculators.
b.
official action by central banks around the world.
c.
the actions of arbitrageurs.
d.
the agreement by the policy makers of major industrial countries.
e.
the actions of currency converters.
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109. Foreign exchange rates tend toward equality around the world because of the actions of _____.
a.
central banks
b.
stock markets
c.
commodity markets
d.
the World Bank
e.
arbitrageurs
110. The actions of the arbitrageurs in the foreign exchange markets:
a.
destabilize foreign exchange markets.
b.
are highly risky.
c.
have no effect on exchange rates.
d.
help ensure that exchange rates are equalized across all markets.
e.
are the same as those undertaken by speculators.
111. Those who simultaneously buy and sell currency to take advantage of exchange rate differences are called _____.
a.
speculators
b.
hedgers
c.
entrepreneurs
d.
arbitrageurs
e.
underwriters
112. Which of the following statements is true of speculators?
a.
There is no risk involved in speculative activity.
b.
They simultaneously buy and sell a currency in different markets.
c.
They hope to profit by trading a currency at a different exchange rate later.
d.
Their actions do not affect exchange rates.
e.
Their actions are exactly like those of arbitrageurs.
113. One difference between arbitrageurs and speculators is that:
a.
arbitrageurs buy and sell foreign exchange; speculators do not.
b.
speculators only buy foreign exchange but do not sell it.
c.
arbitrageurs take more risks than do speculators.
d.
speculators take more risks than do arbitrageurs.
e.
arbitrageurs buy foreign exchange in the hope that its value will increase.
114. Suppose the exchange rate is such that 1 U.S. dollar equals 1 euro in New York and 0.9 euros in Paris. An arbitrageur
would sell euros:
a.
in New York and buy U.S. dollars in Paris.
b.
in both Paris and New York at different prices.
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c.
in New York while buying them in Paris.
d.
in Paris while buying them in New York.
e.
at the same price in both cities.
115. An arbitrageur in foreign exchange is a person who:
a.
buys foreign currency, hoping to profit by selling it at a higher exchange rate at some later date.
b.
earns illegal profit by manipulating foreign exchange.
c.
causes differences in exchange rates in different geographic markets.
d.
simultaneously buys large amounts of a currency in one market and sells it in another market.
e.
mediates disputes when there is no agreement on exchange rates in international currency markets.
116. A speculator in foreign exchange is a person who:
a.
buys foreign currency, hoping to profit by selling it at a higher exchange rate at some later date.
b.
earns illegal profit by manipulating foreign exchange.
c.
causes differences in exchange rates in different geographic markets.
d.
simultaneously buys large amounts of a currency in one market and sells it in another market.
e.
takes no risks in foreign currency exchanges.
117. According to the purchasing power parity theory, in the long run:
a.
the exchange rate between any two currencies should be equal all over the world.
b.
the value of the U.S. dollar should equal the value of the pound which should equal the value of the yen.
c.
inflation rates should equalize around the world.
d.
interest rates should equalize around the world.
e.
the exchange rate between the currencies of two countries should reflect the differences in price levels in the
two countries.
118. The purchasing power parity theory:
a.
is more a predictor of a long-run tendency than of the day-to-day relationship between changes in the price
level and the exchange rate.
b.
predicts that exchange rates between two currencies will adjust in the short run so that the price level is equal
to the exchange rate between two countries.
c.
is more a predictor of a short-run phenomenon than of a long-run relationship between the price level and the
exchange rate between two countries.
d.
is helpful in explaining long-run trends, even though trade barriers and central bank intervention may hinder
the usefulness of the theory.
e.
tells us that a country's currency generally will appreciate if its inflation rate is higher than that of the rest of
the world.
119. The theory of _____ states that changes in the exchange rate reflect only changes in the price levels of two countries.
a.
floating exchange rate
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b.
fixed exchange rate
c.
flexible exchange rate
d.
purchasing power parity
e.
managed exchange rate
120. If the same basket of goods costs $400 in the United States and £200 in Britain, then according to the purchasing
power parity theory, the:
a.
goods and services must cost half as much in Britain as in the U.S.
b.
exchange rate should approach $2 per pound.
c.
exchange rate should approach $0.50 per pound.
d.
goods and services must cost twice as much in Britain as in the U.S.
e.
reason for the difference in price is a difference in the cost of transportation in the two countries.
121. Suppose a basket of goods that costs $400 in the United States costs only £200 in Britain and the current exchange
rate is $1 per pound. According to the purchasing power parity theory, which of the following statements explains the
reason behind a higher equilibrium exchange rate than $1 per pound?
a.
The same basket of goods could be purchased in Britain for £200 and sold in the United States for $400, and
the $400 could be used to purchase £400 for a £200 profit.
b.
The basket of goods could be purchased in Britain for £200 and sold in the United States for $200, and the
$200 could be used to buy £200 for a £500 profit.
c.
The basket of goods could be purchased in the United States for $400 and sold in Britain for £400, and the
£400 could be used to buy $1,400 for a £1,000 profit.
d.
The basket of goods could be purchased in the United States for $200 and sold in Britain for £400, and the
£400 could be used to buy $800 for a $400 profit.
e.
The basket of goods could be purchased in the United States for $200 and sold in Britain for £400, and the
£400 could be used to buy $900 for a £500 profit.
122. Suppose a basket of goods costs $400 in the United States and £200 in Britain. If the exchange rate is $1 per pound,
which of the following statements is true according to the purchasing power parity theory?
a.
Purchasing the basket of goods from the U.S. and selling it in Britain will lead to a profit.
b.
An increase in the demand for pounds will lead to an increase in the price of pounds.
c.
An increase in the demand for dollars will lead to an increase in the price of dollars.
d.
An increase in the demand for dollars will lead to a decrease in the price of dollars.
e.
An increase in the demand for pounds will lead to a decrease in the price of pounds.
123. If interest rates fall in country A, other things constant, which of the following statements is true?
a.
The demand for country A’s currency will fall and the currency will depreciate.
b.
The demand for country A's currency will fall and the currency will appreciate.
c.
The demand for country A's currency will increase and the currency will depreciate.
d.
The demand for country A's currency will increase and the currency will appreciate.
e.
There will be a net inflow of foreign investments in country A.
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124. The purchasing power parity theory is a good predictor of:
a.
changes in exchange rates between two third world nations.
b.
the long-run relationship between changes in the price level and the exchange rate of two countries.
c.
interest rate differentials between two countries when there are strong barriers preventing trade between the
two countries.
d.
how intervention in exchange markets by central banks influences prices in various countries.
e.
the day-to-day relationship between changes in the price level and the exchange rate of two countries.
125. If the purchasing power parity theory were literally true:
a.
we should see some nations devaluing their currencies relative to the U.S. dollar, while other nations revalue
their currencies.
b.
the price of a traded good should be the same everywhere in the world.
c.
the price of a Big Mac should be the different everywhere in the world.
d.
the exchange rate should be the same between all the countries.
e.
prices should tend toward equality with exchange rates.
126. Suppose a basket of internationally traded goods that sells for $10,000 in the United States sells for €8,000 in the
euro zone. According to the purchasing power parity theory, the equilibrium exchange rate should be equal to _____.
a.
$2.50 per euro
b.
$1.50 per euro
c.
$1.25 per euro
d.
$1.00 per euro
e.
$.50 per euro
127. The purchasing power parity (PPP) theory says that in the long run, the exchange rate between two currencies should
move toward _____ the _____ in each country of an identical basket of internationally traded goods.
a.
equalizing; cost
b.
minimizing; price
c.
maximizing; cost
d.
maximizing; price
e.
minimizing; cost
128. A floating exchange rate:
a.
is determined by the national governments involved.
b.
remains extremely stable over long periods of time.
c.
is determined by the actions of central banks.
d.
is allowed to vary only within a narrow range.
e.
adjusts in response to market forces.
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129. A fixed exchange rate is enforced by:
a.
national governments, who establish appropriate trade barriers for each country they trade with.
b.
national governments, who manipulate gold reserves appropriately.
c.
central banks, who buy and sell appropriate currencies.
d.
the International Monetary Fund, which offers loans to its member countries.
e.
local governments, who manipulate capital reserves appropriately.
130. Devaluation of a domestic currency:
a.
is also called revaluation.
b.
refers to an increase in a floating exchange rate.
c.
refers to a decrease in a floating exchange rate.
d.
refers to an increase in a fixed exchange rate.
e.
refers to a decrease in a fixed exchange rate.
131. Prior to World War I, the international financial system had operated on:
a.
a floating exchange rate system.
b.
a managed exchange rate system.
c.
a laissez-faire exchange rate system.
d.
the gold standard.
e.
the dollar standard.
132. The gold standard:
a.
has been in operation since the establishment of the Federal Reserve Board.
b.
has been in operation since shortly after World War I.
c.
has been in operation since the Bretton Woods agreement was signed.
d.
was in operation for about 35 years before World War I.
e.
was in operation from the date of the Bretton Woods agreement until the devaluation of the U.S. dollar in
1971.
133. When the international financial system operated under the gold standard, _____.
a.
the currencies of most countries were convertible into gold
b.
all international transactions were financed with gold
c.
the price of gold was determined by the supply and demand for foreign exchange
d.
the quantity of money demanded was always the same
e.
there was very little inflation
134. One feature of the gold standard was that:
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Chapter 20: International Finance
a.
countries had almost complete control over their own monetary policies.
b.
a surplus of gold caused the money supply to decrease.
c.
slow gold production led to deflation.
d.
exchange rates were highly unstable.
e.
each currency was worth the same as other currencies.
135. Under the gold standard, _____.
a.
a nation's currency was traded for gold at a fixed rate
b.
a nation's central bank or monetary authority had absolute control over its money supply
c.
new discoveries of gold had no effect on money supply or prices
d.
prices were constant globally
e.
all international transactions were financed with gold
136. The main goal of the Bretton Woods meeting was to:
a.
curb inflation that affected almost every developed country after the Second World War.
b.
encourage gold production in the third world nations.
c.
set world prices for gold in order to achieve stable exchange rates.
d.
set up a new international system of payments and to stabilize exchange rates.
e.
help less developed countries of the world to experience growth and development.
137. The Bretton Woods agreement was reached:
a.
immediately after the Civil War.
b.
just before World War I.
c.
just after World War I.
d.
just after the Great Depression.
e.
toward the end of World War II.
138. The International Monetary Fund was founded in _____.
a.
1938
b.
1961
c.
1971
d.
1991
e.
1944
139. The International Monetary Fund was founded in _____.
a.
Paris
b.
New York
c.
Washington
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Chapter 20: International Finance
d.
New York
e.
Bretton Woods
140. The Bretton Woods system:
a.
established a worldwide gold standard.
b.
established a worldwide system of fixed exchange rates.
c.
established a worldwide system of flexible exchange rates.
d.
harmonized tariff systems.
e.
was restricted to industrialized nations.
141. The Bretton Woods system:
a.
pegged exchange rates in terms of U.S. dollars.
b.
pegged exchange rates in terms of all major currencies in the world.
c.
pegged exchange rates in terms of pounds.
d.
established a system of flexible exchange rates.
e.
established the European monetary system.
142. Under the Bretton Woods agreement, _____.
a.
nations could not adjust their exchange rates relative to the dollar for any reason
b.
exchange rates were based on a market basket of European currencies plus the dollar
c.
the United States stood ready to convert foreign holdings of dollars into gold at a fixed rate of $35 per ounce
d.
the international monetary system operated exactly like the gold standard of the pre-World War II years
e.
gold played no role in the international monetary system
143. The Bretton Woods system collapsed because:
a.
the world economy was unhealthy.
b.
the collapse of world gold production undermined the operation of the system.
c.
the dollar was undervalued.
d.
the dollar was overvalued.
e.
the ten richest countries in the world refused to cooperate.
144. The Bretton Woods system collapsed because:
a.
the countries started introducing trade barriers.
b.
the collapse of world gold production undermined the operation of the system.
c.
the gold value of the dollar exceeded the exchange value, causing an outflow of gold from the U.S.
d.
the dollar was undervalued.
e.
the exchange value of the dollar exceeded its gold value, causing an inflow of gold to the U.S.
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145. Which of the following contributed to the collapse of the Bretton Woods system?
a.
Chronic U.S. trade surpluses
b.
Fixed exchange rates
c.
An insufficient gold supply
d.
West Germany allowing the dollar to float against the mark
e.
West Germany not wanting the dollar to appreciate
146. Which of the following best describes circumstances surrounding the breakdown of the Bretton Woods system?
a.
The United States was enjoying a persistent trade surplus.
b.
There was too much dependence on the dollar because no other country had a stable currency.
c.
Germany, with its strong currency, refused to defend the dollar.
d.
Speculators were betting on the depreciation of the U.S. dollar and they started selling dollars in the foreign
exchange market.
e.
The member countries began restricting free trade by introducing tariffs.
147. The current international monetary system is a _____.
a.
flexible exchange rate system
b.
fixed exchange rate system
c.
system combining fixed and flexible exchange rates
d.
gold standard
e.
gold exchange rate system
148. The reason the current exchange rate system is called a "managed float" is that:
a.
it is managed by the IMF.
b.
it is basically a misnomer.
c.
it recognizes that there will be some intervention by central banks.
d.
only the forces of supply and demand determine the exchange rates.
e.
Congress passed a law declaring that the exchange rate system be legally termed "managed float."
149. Managed float means:
a.
a fixed exchange rate system with regularly scheduled periodic devaluations.
b.
a freely floating exchange rate system.
c.
a combination of freely floating exchange rates with occasional intervention by central banks.
d.
a fixed exchange rate system managed by the European Community.
e.
a flexible exchange rate system managed entirely by the IMF.
150. Critics of the system of flexible exchange rates allege that it:
a.
causes inflation.
b.
causes unemployment.
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c.
gives central banks too little discretion over their money supplies.
d.
restricts the growth of developing countries.
e.
gives too much financial power to industrial countries.
