76) The international monetary system created by the Bretton Woods Agreement collapsed
because ________.
A) of its heavy dependence on the stability of the dollar
B) it was not accepted by a majority of the world’s nations
C) it did not have the funds necessary for its functioning
D) it favored only the developed countries and was of no help to struggling nations
77) IMF members formalized the existing system of floating exchange rates as the new
international monetary system by drafting the so-called ________.
A) Bretton Woods Agreement
B) Smithsonian Agreement
C) Plaza Accord
D) Jamaica Agreement
78) A system in which currencies float against one another, with governments intervening to
stabilize their currencies at particular target exchange rates is called a ________.
A) managed float system
B) linked exchange rate system
C) free float system
D) fixed exchange-rate system
79) Today’s international monetary system is considered to be a ________ system.
A) fixed exchange
B) free float
C) managed float
D) linked exchange rate
80) The ________ was a 1985 agreement among the G5 nations to act together in forcing down
the value of the U.S. dollar.
A) Bretton Woods Agreement
B) Smithsonian Agreement
C) Plaza Accord
D) Louvre Accord
81) The ________ was an agreement among the G7 nations that the dollar was appropriately
valued and that they would intervene in currency markets to maintain its current market value.
A) Bretton Woods Agreement
B) Smithsonian Agreement
C) Plaza Accord
D) Louvre Accord
82) A ________ is a monetary regime that is based on an explicit commitment to exchange
domestic currency for a specified foreign currency at a fixed exchange rate.
A) currency option
B) currency board
C) currency speculation
D) currency arbitrage
83) The ________ limited the fluctuations of European Union members’ currencies within a
specified trading range.
A) exchange rate mechanism
B) special drawing right
C) currency board
D) free float system
84) The ________ called for large-scale reduction of the debt owed by poorer nations, the
exchange of old loans for new low-interest loans, and the making of debt instruments that would
be tradable on world financial markets.
A) Brady Plan
B) Louvre Accord
C) Bretton Woods Agreement
D) Smithsonian Agreement
Scenario: Color-Me-Green Inc.
Color-Me-Green Inc., a U.S.-based clothing merchant, has started doing business internationally.
Having subsidiaries in several countries, the company must integrate financial information from
all its subsidiaries with the U.S. home office at the end of the year.
85) Suppose Country A has a currency called the Pulse (P). At the beginning of the year, the
exchange rate between the Pulse and the U.S. dollar was P150/$. The inflation rate in Country A
is running at an annual rate of 250 percent ,whereas inflation in the U.S. is running at 2 percent.
Which of the following would most likely be the new exchange rate that Color-Me-Green can
expect at the end of the year?
A) P525/$
B) P514.70/$
C) P43.71/$
D) $43.71/P
86) In Country B, Color-Me-Green is faced with a tight labor market and a low unemployment
rate. This low unemployment rate will most likely result in ________.
A) lower interest rates
B) lower wages for workers
C) higher purchasing power
D) higher rate of inflation
87) In an attempt to raise money in Country B, Color-Me-Green was quoted an interest rate of 14
percent by a local bank. This quoted rate is called the ________ rate.
A) cross
B) artificial
C) nominal
D) exchange
Scenario: Sam Dearing, Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm.
Sam is hoping to be offered a full-time position at the firm after he graduates from college, and
therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates
work.
88) Sam already knows that the ________ tells us how much of one currency we must pay to
receive a certain amount of another.
A) exchange rate
B) par value
C) law of one price
D) purchasing power parity theory
89) Sam’s mentor at the firm told him that the ________ stipulates that an identical product must
have an identical price in all countries when the price is expressed in a common currency.
A) exchange price
B) law of one price
C) fixed exchange-rate system
D) floating exchange-rate system
90) Sam has been studying the price of wheat across markets. If a kilogram of wheat costs €1.5
in France and $1 in the United States, the law of one price would tell us ________.
A) the expected exchange rate between the euro and the dollar is €1.5/$
B) wheat is over priced in France
C) wheat is under priced in France
D) an arbitrage opportunity exists in the international wheat market
91) Suppose Sam then noticed that the actual euro/dollar exchange rate on currency markets is
€1.2/$, and that a kilogram of wheat still costs $1 in the U.S. and €1.5 in France. Sam then
knows that ________.
A) the expected exchange rate between the euro and the dollar is €1.5/$
B) wheat is priced higher in France
C) wheat is priced lower in France
D) an arbitrage opportunity does not exist in the international wheat market
92) It the actual euro/dollar exchange rate on currency markets is €1.2/$, and a kilogram of
wheat still costs $1 in the U.S. and €1.5 in France, Sam also knows that the price of a kilogram
of wheat in France is ________.
A) $1.25
B) $.80
C) €.80
D) €1.2
93) Sam’s mentor is excited about the wheat prices in France and the U.S. because he sees an
opportunity to buy wheat in the U.S. and sell it in France, which is known as a(n) ________.
A) exchange rate profit
B) arbitrage opportunity
C) violation of purchasing power parity
D) violation of the law of one price
94) Briefly describe how exchange rates influence business activities.
95) Explain how exchange rates adjust to inflation.
96) Discuss the role of business confidence and psychology in currency values.
97) Why do managers prefer that movements in exchange rates be predictable? How does the
Big Mac index help determine whether a currency is overvalued or undervalued, and what are its
drawbacks?
98) Differentiate between efficient and inefficient market views and discuss the implications of
the two schools of thought for companies.
99) Discuss the challenges involved in forecasting exchange rates.
100) Explain the impact of added costs, trade barriers, and investor psychology on the ability of
purchasing power parity (PPP) to predict exchange rates accurately.
101) Explain how movement in a currency’s exchange rate affects the activities of both domestic
and international companies. Discuss how companies can export successfully despite having a
strong currency.
102) Explain the concept of devaluation, and explain the effect devaluation has on the price of a
country’s imports. Discuss how international companies can adjust to a weak currency.
103) Briefly describe the gold standard, its advantages, and why it collapsed.
104) Describe the most important features of the international monetary system created by the
Bretton Woods Agreement.
105) Explain the differences between a monetary policy and a fiscal policy, and discuss why the
IMF was established.
106) Compare and contrast the two main techniques for forecasting exchange rates.
107) Explain how a pegged exchange-rate system works. Why would a country choose to follow
this system?