International Business, 14e (Daniels et al.)
Chapter 10 The Determination of Exchange Rates
1) The primary objective of the International Monetary Fund is to ________.
A) encourage euro adoption
B) promote exchange rate stability
C) establish a unilateral system of payments
D) foster the power of the foreign exchange market
2) The Bretton Woods Agreement established a system of fixed exchange rates under which each IMF
member country set a ________.
A) quota
B) par value
C) gold standard
D) nominal interest rate
3) In order to join the IMF, a country must contribute a certain sum of money, called a ________.
A) special drawing right
B) trade balance
C) monetary reserve
D) quota
4) Which of the following best describes the special drawing right?
A) an international reserve asset created to supplement members’ existing reserve assets
B) the official currency for international trade established by the World Bank
C) a substitute for the fixed value of gold as determined by currency rates
D) a contribution made by countries to join the IMF
5) The value of the SDR is currently based on the ________.
A) euro
B) U.S. dollar
C) weighted average of four currencies
D) weighted average of six currencies
6) What role has the IMF played in the Greek financial crisis of 2010-2011?
A) setting the value of the drachma
B) releasing funds for debt payments
C) demanding the sale of state-owned assets
D) lowering interest rates for international investors
7) Which of the following was NOT a result of the Smithsonian Agreement?
A) revaluation of currencies other than the dollar against gold
B) establishment of par values the quota system
C) devaluation of the dollar against gold
D) widening of exchange-rate flexibility
8) The primary result of the Jamaica Agreement was to ________.
A) allow greater exchange-rate flexibility
B) set austerity measures for debt control
C) establish a system based on par values
D) implement fixed exchange rates
9) ________ is a form of locking the value of a country’s currency onto another currency.
A) Managed floating
B) Monetarization
C) Dollarization
D) Floating
10) Which type of exchange rate arrangement is based on supply and demand?
A) soft peg
B) hard peg
C) crawling
D) floating
11) Which of the following countries has a soft peg currency?
A) China
B) Brazil
C) Japan
D) India
12) Which of the following was part of the stability and growth pact that was required for countries to be
part of the European Monetary Union?
A) The annual government budget must be no greater than 3% of GDP.
B) The annual inflation rate must remain within 1.5% of the three best-performing EU countries.
C) The annual government budget deficit could be no greater than 60% of GDP.
D) The annual inflation rate must remain within 5.5% of the four best-performing EU countries.
13) Which EU country has NOT adopted the euro?
A) Germany
B) France
C) Sweden
D) Greece
14) The major objective of the European Central Bank is to ________.
A) set monetary policy for EU countries that adopt the euro
B) ensure that EU interest rates are equal to U.S. rates
C) control taxes as a means of monitoring EU debt
D) reduce spending by EU countries
15) Which of the following problems with the euro most likely worsened the financial crisis in Greece?
A) excessive flexibility with interest rates
B) cultural disagreements on labor reform
C) lack of uniform fiscal regulation standards
D) unclear policies of the European Central Bank
16) Which of the following has the greatest amount of foreign-exchange reserves in the world?
A) China
B) Japan
C) Russia
D) Taiwan
17) The global financial crisis has pushed China closer to ________.
A) operating independently from the central banks of other countries
B) discontinuing its relationship with the Bank for International Settlements
C) liberalizing its currency
D) controlling its currency
18) Why is China most likely considering a greater reliance on the SDR?
A) gains in the foreign exchange market
B) concerns about the value of the U.S. dollars
C) demands to replace the dollar with the euro for reserves
D) requirements by the IMF to make China’s currency more flexible
19) Which of the following links together the central banks of the world and acts as a central banker’s
bank?
A) the IMF
B) the World Bank
C) the BIS
D) the EMU
20) If inflation in the United States is relatively higher than inflation in Japan, and the Japanese
government wants to keep the exchange rate fixed between the yen and the dollar, it should most likely
________.
A) allow its currency to rise against the dollar
B) allow its currency to fall against the dollar
C) increase the supply of yen in the market
D) decrease the supply of yen in the market
21) Given the daily volume of foreign-exchange transactions, it is most accurate to say which of the
following?
A) It is impossible for a government’s interventions in the foreign-exchange market to affect market
psychology.
B) A government’s intervention in the foreign-exchange market can reverse a currency’s slide for the
long term.
C) A government’s intervention cannot force the foreign-exchange market to move in a direction it
doesn’t want to go.
D) A government should focus more on intervening in foreign-exchange markets than on correcting
economic fundamentals.
22) A country’s central bank is responsible for ________.
A) distributing money to foreign countries that are in a debt crisis
B) encouraging disorderly conditions in foreign exchange markets
C) the policies affecting the value of its country’s currency
D) establishing foreign exchange markets
23) The central bank in the United States is the ________.
A) Federal Reserve System
B) U.S. Exchange Reserve
C) Board of Governors
D) U.S. Treasury
24) The ________ is the currency most widely used as a reserve asset.
A) euro
B) Japanese yen
C) U.S. dollar
D) British pound
25) The Fed wants to counter downward pressure on the dollar, so it will most likely ________.
A) sell dollars for foreign currency
B) sell dollars and buy foreign stocks
C) buy Treasury bills with dollars
D) buy dollars with foreign currency
26) A black market exists when ________.
A) a country closely monitors and adjusts the foreign-exchange rate
B) people pay more for hard currency than the official rate
C) a country is running a budget surplus
D) a country is experiencing a recession
27) Hard currencies are usually ________.
A) not fully convertible
B) undesirable assets
C) highly liquid
D) unstable
28) Fully convertible currencies are also called ________.
A) external currencies
B) hard currencies
C) unlimited currencies
D) soft currencies
29) Governments use a multiple exchange rate system to ________.
A) increase their budget surplus
B) reduce exports
C) control foreign exchange convertibility
D) limit deposit requirements
30) Country X has a floating rate for luxury goods and a lower rate for semi-manufactured goods. Which
of the following is most likely used by Country X?
A) import deposit requirements
B) multiple exchange-rates
C) import licensing
D) quantity controls
31) Thomas is planning a vacation to Country X. On a tourism Web site, he reads that the government of
Country X limits the amount of money a tourist may convert into the country’s currency. Country X
most likely uses which of the following?
A) import deposit requirements
B) multiple exchange rates
C) import licensing
D) quantity controls
32) The purchasing power parity theory claims that a change in relative ________ between two
countries must cause a change in ________ in order to keep the prices of goods in two countries fairly
similar.
A) exchange rates; inflation
B) inflation; exchange rates
C) interest rates; inflation
D) interest rates; exchange rates
33) The ________ theory seeks to define the relationship between currencies based on relative inflation.
A) inflation growth rate
B) revaluation
C) purchasing power parity
D) interest rate
34) According to purchasing power parity theory, if Brazilian inflation was 6 percent and inflation in
Argentina was 12 percent, the Brazilian real would be expected to ________.
A) rise by the difference in inflation rates
B) fall by the difference in inflation rates
C) rise by 4.5 percent
D) stay the same
35) Which of the following is used as an illustration of the PPP theory for estimating exchange rates?
A) the Composition of Official Foreign Exchange Reserves (COFER)
B) the black market rate
C) the import licensing ratio
D) the Big Mac Index
36) Which of the following statements best describes a limitation of the Big Mac Index?
A) Profit margins vary by the strength of competition, which affect relative prices.
B) The theory of PPP incorrectly assumes that there are barriers to trade.
C) The Big Mac represents all possible commodities and services.
D) Taxes have no effect on Big Mac prices.
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37) According to purchasing power parity, if the domestic inflation rate is ________ than that in the
foreign country, the domestic currency should be ________ than that of the foreign country.
A) lower; weaker
B) higher; higher
C) lower; stronger
D) higher; stronger
38) If a Big Mac costs $3.41 in the United States and $2.67 in Argentina (the price of a Big Mac in
Argentine pesos converted into dollars at the spot exchange rate), which of the following is most likely
true?
A) The peso is overvalued against the dollar.
B) The dollar is overvalued against the peso.
C) It should be harder for a U.S. tourist to buy a leather coat in Buenos Aires because the dollar won’t go
very far.
D) It will be cheap for Argentine companies to invest in the United States because the dollar is relatively
weak.
39) Which of the following states that the country with the higher interest rate should have the higher
inflation?
A) the Fisher Effect
B) the International Fisher Effect
C) the Interest Rate Inflation Theory
D) the Forward rate theory
40) The International Fisher Effect ________.
A) links interest rates and inflation
B) implies that the currency of the country with the lower interest rate will weaken in the future
C) implies that the country with the higher interest rate should have lower inflation
D) links interest rates and exchange rates
41) The International Fisher Effect implies that ________
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A) the country with the higher interest rate should have lower inflation
B) the currency of the country with the lower interest rate will strengthen in the future
C) the currency of the country with the higher interest rate will strengthen in the future
D) interest rates and inflation are not linked at all
42) If the real interest rate is 5%, the rate of inflation in the United States is 6%, and the rate of inflation
in the United Kingdom is 3%, which of the following statements would NOT be true?
A) The nominal rate of interest in the U.S. would be greater than the nominal interest rate in the U.K.
B) The difference between the U.K. and U.S. interest rates is a function of the difference between their
inflation rates.
C) The nominal rate of interest in the United States and the United Kingdom would be the same because
of purchasing power parity.
D) Investors would get a higher return on their money in the United States.
43) Ted, a manager at Global Manufacturing, is analyzing trends in economic variables to predict future
exchange rates that might affect the MNEs international operations. Which of the following is Ted most
likely doing?
A) fundamental forecasting
B) technical forecasting
C) resource forecasting
D) economic forecasting
44) Sarah, a manager at Farley Enterprises, an MNE with operations in Asia, Europe, and North
America, is using past trends in exchange rate movements to spot future trends. Which type of
forecasting approach is Sarah most likely using?
A) fundamental
B) technical
C) application
D) economic
45) A technical forecaster is also known as a ________.
A) CFO
B) de facto economist
C) chartist
D) monetary administrator
46) Research has shown that past exchange rates are an accurate predictor of future exchange rates
________.
A) only in the long run
B) only in the very short run
C) only during times of economic crisis
D) only during times of economic calm
47) Forecasters must predict the magnitude, direction, and ________ of an exchange rate change or
movement.
A) length
B) timing
C) altitude
D) depth
48) It is easier to predict the ________ of a change than the ________ of a change in exchange rates.
A) altitude; magnitude
B) depth; length
C) timing; depth
D) direction; magnitude
49) In a country with a currency that is not freely floating, the timing of an exchange rate change is often
a ________ decision.
A) cultural
B) consensus
C) political
D) market
50) Many economists have predicted that Hong Kong will change its currency system to the ________.
A) U.S. dollar
B) euro
C) yuan
D) won
51) Shelly, a manager at a global firm, is studying the foreign currency intervention practices of
Indonesia. Shelly is most likely examining ________ factors.
A) institutional setting
B) fundamental analysis
C) confidence
D) circumstantial
52) Craig, a manager at a global firm, is studying the cyclical nature of growth and employment as a part
of the process to forecast exchange rates. Which factor is Craig most likely monitoring?
A) the institutional setting
B) fundamental analyses
C) cultural analyses
D) circumstances