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Indicate whether the statement is true or false.
1. A currency peg is insulated from economic or political conditions, such that the exchange rate in the market will only
change if the country’s government breaks the peg and sets a new exchange rate.
a.
True
b.
False
2. A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on
financial flows than the governments of other Asian countries.
a.
True
b.
False
3. In a sterilized exchange rate arrangement, a country’s home currency value is pegged to a foreign currency or to some
unit of account.
a.
True
b.
False
4. Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the
change in money supply.
a.
True
b.
False
5. The Bretton Woods Agreement called for the establishment of a single European currency.
a.
True
b.
False
6. A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating
European countries, which encourages more trade and capital flows within Europe.
a.
True
b.
False
7. A common way to reduce inflation is to weaken the value of the domestic currency.
a.
True
b.
False
8. An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to
increase the value of the yen versus the dollar.
a.
True
b.
False
9. A country with a currency board does not have control over its local interest rates.
a.
True
b.
False
10. While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are
better able to raise prices.
a.
True
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b.
False
11. The Bretton Woods Agreement created a system under which exchange rates were determined by market forces
without intervention by various governments.
a.
True
b.
False
12. Under the system known as a managed float, a currency is allowed to float on a daily basis, but the government can
periodically intervene to achieve specific objectives.
a.
True
b.
False
13. The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers.
a.
True
b.
False
14. Assuming no credit risk, the interest rates among countries in the eurozone should be similar.
a.
True
b.
False
15. Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is
an example of sterilized intervention.
a.
True
b.
False
16. Using indirect intervention, the Fed attempts to affect the dollar’s value indirectly by influencing the factors that
determine it, such as interest rates.
a.
True
b.
False
17. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it
would under a freely floating exchange rate system.
a.
True
b.
False
18. A central bank may attempt to stimulate a stagnant economy by weakening the value of the currency.
a.
True
b.
False
19. If the Bank of England announces that it will start to frequently intervene in order to reduce the fluctuations of the
British pound, the premiums on call and put options will increase.
a.
True
b.
False
20. China is commonly criticized for keeping the yuan’s value at superficially high levels.
a.
True
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b.
False
21. All European countries now use the euro as their currency.
a.
True
b.
False
22. In order to stimulate a stagnant economy, a government operating under a managed float may attempt to weaken its
currency.
a.
True
b.
False
23. Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major
political or economic problems.
a.
True
b.
False
24. The European countries conforming to the euro are completely insulated from movements in the euro’s value with
respect to other currencies.
a.
True
b.
False
25. Currency devaluation can boost a country’s exports, but currency revaluation can increase foreign competition.
a.
True
b.
False
26. An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from
unemployment problems in other countries.
a.
True
b.
False
27. Under a pegged exchange rate system, the home currency’s value is pegged to a foreign currency.
a.
True
b.
False
28. If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may
backfire because it will increase the money supply and thus increase inflation.
a.
True
b.
False
29. If a government wishes to stimulate its economy in the form of increased foreign demand for its country’s products, it
could attempt to weaken its currency.
a.
True
b.
False
30. If the French government wants to decrease inflation in France, it will exchange foreign currency for euros.
a.
True
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b.
False
31. Currency devaluations have the potential to reduce unemployment, while currency revaluations have the potential to
reduce inflation.
a.
True
b.
False
32. The Bank of England is responsible for setting the monetary policy for the European countries participating in the
euro.
a.
True
b.
False
33. A strong home currency can harm exports; exporters typically benefit from a weaker home country currency.
a.
True
b.
False
34. The establishment of the euro allows for more consistent economic conditions across countries but eliminates the
power of any individual European country to solve local economic problems with its own unique monetary policy.
a.
True
b.
False
35. The effects of the Asian crisis did not extend to countries in other parts of the world such as Latin America, Europe,
and the United States.
a.
True
b.
False
36. The Fed’s indirect method of intervention is to trade dollars for or against other currencies.
a.
True
b.
False
37. The euro is pegged to other currencies of European countries that have not adopted the euro.
a.
True
b.
False
38. A country with fixed exchange rates often faces constraints on growth.
a.
True
b.
False
39. Countries whose local currencies experienced greater depreciation during the Asian crisis generally also experienced
higher increases in their interest rates during the crisis.
a.
True
b.
False
40. While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive
foreign prices that result from a strong home currency.
a.
True
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b.
False
41. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the
foreign exchange market to maintain exchange rates within specified boundaries.
a.
True
b.
False
42. Dollarization refers to the replacement of the local currency with U.S. dollars.
a.
True
b.
False
43. The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in
the eurozone.
a.
True
b.
False
44. If a U.S. firm plans to frequently purchase goods from Hong Kong over the next several years, it does not have to
worry about exchange rate risk.
a.
True
b.
False
45. The Asian crisis is generally believed to have started in Japan.
a.
True
b.
False
46. In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation
of the dollar would result in more expensive foreign imports, thus reducing foreign competition.
a.
True
b.
False
47. Direct intervention is usually more effective than indirect intervention.
a.
True
b.
False
48. The European Central Bank is responsible for monetary policy in all countries that have adopted the euro as their
currency.
a.
True
b.
False
49. Market forces are the determinant of exchange rates in a freely floating exchange rate system.
a.
True
b.
False
50. Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on
the local currency of that country.
a.
True
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b.
False
51. If foreign investors fear that a peg may be broken because of fund outflows from that country, they may attempt to
purchase more of that currency before the peg is broken.
a.
True
b.
False
52. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it
would under a freely floating exchange rate system.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
53. A weak dollar is normally expected to cause:
a.
high unemployment and high inflation in the United States.
b.
high unemployment and low inflation in the United States.
c.
low unemployment and low inflation in the United States.
d.
low unemployment and high inflation in the United States.
54. The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.
a.
2.25
b.
6
c.
10
d.
8
55. The European Central Bank is located in:
a.
London.
b.
Denmark.
c.
Luxembourg.
d.
Frankfurt.
56. Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market, but does
not adjust for the resulting change in the money supply. This is an example of:
a.
pegged intervention.
b.
indirect intervention.
c.
nonsterilized intervention.
d.
sterilized intervention.
e.
pegged intervention AND sterilized intervention.
57. To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury
securities.
a.
buy; sell
b.
sell; buy
c.
buy; buy
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d.
sell; sell
58. Which of the following did not occur under the Bretton Woods Agreement?
a.
Each currency was valued in terms of gold.
b.
Values of all currencies were fixed with respect to each other.
c.
Currencies were allowed to fluctuate no more than 1 percent above or below the initially set rates.
d.
The United States experienced no balance-of-trade deficits.
59. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y’s currency appreciates
against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from
Country Z.
a.
more; more
b.
more; less
c.
less; less
d.
less; more
60. Which of the following is not a reason for devaluation of a currency?
a.
high inflation
b.
to reduce a balance-of-trade deficit
c.
to decrease the amount of imports
d.
high unemployment
61. When using indirect intervention, a central bank is likely to focus on:
a.
inflation.
b.
interest rates.
c.
income levels.
d.
expectations of future exchange rates.
62. Which of the following is the most likely reason for revaluation of a currency?
a.
to reduce inflation
b.
to stimulate the local economy
c.
to increase the amount of exports
d.
to increase a balance-of-trade surplus
63. Under a fixed exchange rate system:
a.
a foreign exchange market does not exist.
b.
central bank intervention in the foreign exchange market is not necessary.
c.
central bank intervention in the foreign exchange market is often necessary.
d.
central bank intervention in the foreign exchange market is not allowed.
64. Which of the following is true regarding the euro?
a.
Exchange rate risk between participating European currencies is completely eliminated, encouraging more
trade and capital flows across European borders.
b.
It allows for more consistent economic conditions across countries.
c.
It prevents each country from conducting its own monetary policy.
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d.
All of these are true.
65. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:
a.
sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds
in the foreign exchange market.
b.
sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds
in the foreign exchange market.
c.
sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars
in the foreign exchange market.
d.
sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars
in the foreign exchange market.
66. Countries that have adopted the euro must agree on a single ____ policy.
a.
monetary
b.
fiscal
c.
worker compensation
d.
foreign relations
67. Countries that have adopted the euro tend to have very similar:
a.
interest rates.
b.
inflation rates.
c.
income tax rates.
d.
budget deficits.
68. Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?
a.
Thailand
b.
Indonesia
c.
Russia
d.
China
e.
Malaysia
69. If a country in the eurozone is experiencing weak economic conditions, which of the following monetary policies
would its government be likely to pursue to correct the problem?
a.
Strengthen its currency to stimulate exports.
b.
Reduce interest rates to stimulate the economy.
c.
Raise interest rates to reduce inflation.
d.
None of these are correct.
70. Consider two countries that trade with each other, called X and Y. According to the text, inflation in Country X will
have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with
each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under
the ____ system.
a.
floating rate; fixed rate
b.
floating rate; floating rate
c.
fixed rate; fixed rate
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d.
fixed rate; floating rate
71. Under the ____________ from 1979–1992 (before the euro existed), the currencies of most European countries that
were members were allowed to fluctuate by no more than 2.25 percent (6 percent for some currencies) from the initially
established values.
a.
European Monetary System (EMS)
b.
snake agreement
c.
Maastricht Treaty
d.
Bretton Woods Agreement
72. A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates,
which places ____ pressure on U.S. bond prices.
a.
upward; downward; upward
b.
upward; downward; downward
c.
upward; upward; downward
d.
downward; upward; upward
e.
downward; downward; upward
73. The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar’s value is
expected to:
a.
remain stable
b.
strengthen
c.
weaken
d.
None of these will have an impact on inflation.
74. A managed float exchange rate system is a system of:
a.
freely floating exchange rates.
b.
fixed exchange rates.
c.
floating exchange rates, but the central bank can manipulate the currency.
d.
fixed exchange rates, but the central bank can manipulate the currency.
75. The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a:
a.
pegged system.
b.
fixed system.
c.
managed float system.
d.
crawling peg system.
76. If a speculator expects that the Fed will intervene heavily by exchanging euros for U.S. dollars in order to affect the
exchange rate, she would most likely ____ to capitalize on this intervention.
a.
purchase euro put options
b.
purchase euro futures contracts
c.
purchase yen call options
d.
sell U.S. Treasury bonds
77. Among the reasons for government intervention are:
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a.
to smooth exchange rate movement.
b.
to establish implicit exchange rate boundaries.
c.
to respond to temporary disturbances.
d.
All of these are correct.
78. As foreign exchange activity has grown, a given degree of central bank intervention has become:
a.
more effective.
b.
more frequent.
c.
less effective.
d.
None of these are correct.
79. A strong dollar is normally expected to cause:
a.
high unemployment and high inflation in the United States.
b.
high unemployment and low inflation in the United States.
c.
low unemployment and low inflation in the United States.
d.
low unemployment and high inflation in the United States.
80. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to
reduce inflation. Which of the following is an appropriate action given this scenario?
a.
Sell dollars for foreign currency.
b.
Buy dollars with foreign currency.
c.
Lower interest rates.
d.
None of these are correct.
81. China’s yuan is presently:
a.
allowed to fluctuate freely without any central bank intervention.
b.
allowed to fluctuate but with central bank intervention.
c.
pegged to the dollar.
d.
pegged to the euro.
82. Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in
trade with each other. Assume that Country A’s currency floats against Country B’s currency, and that Country C’s
currency is pegged to B‘s. If A’s currency depreciates against B, then A’s exports to C should ____, and A’s imports from
C should ____.
a.
decrease; increase
b.
decrease; decrease
c.
increase; decrease
d.
increase; increase
83. Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will cause an
____ shift in the demand for euros, and will place _____ pressure on the value of the euro.
a.
inward; upward
b.
inward; downward
c.
outward; upward
d.
outward; downward
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84. If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:
a.
exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.
b.
exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.
c.
exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
d.
exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.
85. Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar.
Such an adjustment in the dollar’s value should ____ the U.S. demand for products produced by major foreign countries.
a.
weakening; increase
b.
weakening; decrease
c.
strengthening; increase
d.
strengthening; decrease
86. During the period 1944–1971, the United States used a ____ system.
a.
euro exchange rate
b.
fixed exchange rate
c.
dirty float
d.
flexible exchange rate
87. Which of the following is an example of direct intervention in foreign exchange markets?
a.
lowering interest rates
b.
increasing the inflation rate
c.
exchanging dollars for foreign currency
d.
imposing barriers on international trade
88. From a financial management perspective, which of the following is true regarding the introduction of the euro?
a.
U.S.-based MNCs are not subject to exchange rate risk when they have transactions in euros.
b.
The euro is pegged to all other European currencies.
c.
Transactions costs declined for MNCs that conduct transactions within Europe.
d.
The euro replaced the British pound.
89. The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries.
a.
Latin American
b.
European
c.
Asian
d.
North American
90. Which of the following is a disadvantage of a fixed exchange rate system?
a.
Importers are insulated from the risk that the currency will appreciate over time.
b.
Management of an MNC is less difficult.
c.
The government might change the value of the currency.
d.
Exporters are insulated from the risk that the currency will depreciate over time.
91. The euro has not been adopted by: