1) figure 2.3:
refer to figure 2.3. suppose that the u.k agreed to peg its currency against the u.s. dollar
at $2.00 per pound during the bretton woods system. assume that the u.s. increases its
imports from the u.k. as a result, the bank of england would have to:
a.let the british pound appreciates
b.let the british pound depreciates
c.sell pounds and buy dollars in foreign exchange market
d.sell dollars and buy pounds in foreign exchange market
2) which of the following reasons explain why interest rate parity may not hold
perfectly?
i.transaction costs
ii.business loan risks
iii.offshore risk accounting rules
iv.political risk
a.i only
b.ii and iii
c.i and iv
d.i, iii, and iv
3) which of the following could be considered a cause of the collapse of the bretton
woods system?
a.the existence of japanese budget deficits offset currency reserves as the yen become
increasingly overvalued
b.the united states gold stock became increasingly too small to meet foreign dollar
liabilities
c.countries in europe devalued currencies to increase export competitiveness
d.in order to meet reserve requirements imposed by the imf, france and germany
mandated private holders of gold to purchase u.s. dollars destabilizing the u.s. dollar to
gold peg
4) the maer emphasizes money demand and money supply as determinants of:
a.the balance of payments under the fixed exchange rate
b.the balance of payments under the floating exchange rate
c.exchange rate movements
d.capital flows
5) a contract that provides the right, but not the obligation, to buy or sell a given amount
of currency at a fixed exchange rate on or before the maturity date is called a(n)
______.
a.excise option
b.foreign currency option
c.foreign currency swap
d.hedge contract
6) an appreciation of a countrys currency
a.decreases the relative price of its exports and lowers the relative price of its imports
b.raises the relative price of its exports and raises the relative price of its imports
c.lowers the relative price of its exports and raises the relative price of its imports
d.raises the relative price of its exports and lowers the relative price of its imports
7) suppose that the one-year u.s. interest rate is 4% and the one-year u.k. interest rate is
6%. if the current spot rate is $1.80 per pound, what must the one-year forward rate
($/pound) be according to the approximate covered interest parity?
a.1.360
b.1.764
c.1.836
d.1.980
8) when maintaining a pegged exchange rate (fixed exchange rate), if the central bank
runs out of foreign currency reserves, then:
a.it can always print more of domestic currency
b.it can back the money supply by buying domestic assets
c.it can sell its own currency and buy foreign currency reserves
d.it must allow the domestic currency to float
9) an unsterilized intervention in which a central bank sells domestic currency to buy
foreign assets will lead to:
a.an increase in foreign reserves
b.a decrease in domestic money supply
c.an appreciation of domestic currency
d.all of the above are correct
10) with fixed exchange rates, a country cannot conduct ________ to alter domestic
income.
a.fiscal policy
b.monetary policy
c.currency devaluations
d.currency appreciation
11) the relationship between product price levels and exchange rates is explained by:
a.currency boards
b.purchasing power parity
c.per capita income levels
d.interest rate parity
12) consider the case of a u.s. bank operating in the cayman islands and a u.s. bank
operating in new york. if a business were to apply for a loan in u.s. dollars at the
cayman island location, then it is probably the case that:
a.the interest rate on the loan is higher than the one in new york
b.the interest rate on the loan is lower than the one in new york
c.the interest rates are the same
d.the interest rate on the loan is lower, but repaid in cayman island dollars
13) a domestic currency devaluation could lead to an immediate negative effect on the
trade balance, if the domestic:
a.import and export contracts are written in dollar
b.import and export contracts are written in foreign currency
c.import contracts are written in domestic currency and the domestic export contracts
are written in foreign currency
d.import contracts are written in foreign currency and the domestic export contracts are
written in domestic currency
14) suppose that the fed increases the u.s. money supply and the bretton woods system
of fixed exchange rates is still in place. then to maintain the fixed exchange rate, foreign
central banks intervene by:
a.raising the interest rate on dollars
b.buying dollars and selling its currency
c.raising the interest rate on its currency
d.selling dollars and buying its currency
15) if the fed decreases money supply,
a.the is curve will shift to the right
b.the is curve will shift to the left
c.the lm curve will shift to the right
d.the lm curve will shift to the left
16)