Chapter 6—Government Influence on Exchange Rates
1. To force the value of the pound to appreciate against the dollar, the Federal Reserve should:
a.
sell dollars for pounds in the foreign exchange market and the European Central Bank
(ECB) should sell dollars for pounds in the foreign exchange market.
b.
sell pounds for dollars in the foreign exchange market and the European Central Bank
(ECB) should sell dollars for pounds in the foreign exchange market.
c.
sell pounds for dollars in the foreign exchange market and the European Central Bank
(ECB) should not intervene.
d.
sell dollars for pounds in the foreign exchange market and the European Central Bank
(ECB) should sell pounds for dollars in the foreign exchange market.
2. A weak dollar is normally expected to cause:
a.
high unemployment and high inflation in the U.S.
b.
high unemployment and low inflation in the U.S.
c.
low unemployment and low inflation in the U.S.
d.
low unemployment and high inflation in the U.S.
3. A strong dollar is normally expected to cause:
a.
high unemployment and high inflation in the U.S.
b.
high unemployment and low inflation in the U.S.
c.
low unemployment and low inflation in the U.S.
d.
low unemployment and high inflation in the U.S.
4. 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.
5. 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
d.
fixed rate; floating rate
6. A primary result of the Bretton Woods Agreement was:
a.
the establishment of the European Monetary System (EMS).
b.
establishing specific rules for when tariffs and quotas could be imposed by governments.
c.
establishing that exchange rates of most major currencies were to be allowed to fluctuate
1% above or below their initially set values.
d.
establishing that exchange rates of most major currencies were to be allowed to fluctuate
freely without boundaries (although the central banks did have the right to intervene when
necessary).
7. A primary result of the Smithsonian Agreement was:
a.
the establishment of the European Monetary System (EMS).
b.
establishing that exchange rates of most major countries were to be allowed to fluctuate
2.25% above or below their initially set values.
c.
establishing specific rules for when tariffs and quotas could be imposed by governments.
d.
establishing that exchange rates of most major currencies were to be allowed to fluctuate
freely without boundaries (although the central banks did have the right to intervene when
necessary).
8. 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.
9. 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
10. 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.
11. The interest rate of a country with a currency board:
a.
is less stable than it would be without a currency board.
b.
is typically below the interest rate of the currency to which it is tied.
c.
will move in tandem with the interest rate of the currency to which it is tied.
d.
is completely independent of the interest rate of the currency to which it is tied.
12. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y‘s currency
depreciates 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.
less; less
c.
more; less
d.
less; more
13. 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
14. 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.
A and D
15. If the Fed desires to weaken 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.
16. 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.
17. A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.
a.
upward; upward
b.
downward; upward
c.
upward; downward
d.
downward; downward
18. 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 the above will have an impact on inflation.
19. 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
20. The euro is the currency:
a.
adopted in all western European countries as of 1999.
b.
adopted in all eastern European countries as of 1999.
c.
adopted in all European countries as of 1999.
d.
none of the above
21. The euro has not been adopted by:
a.
Slovenia.
b.
the U.K.
c.
Germany.
d.
France.
22. 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
23. Countries that have adopted the euro must agree on a single ____ policy.
a.
monetary
b.
fiscal
c.
worker compensation
d.
foreign relations
24. Countries that have adopted the euro tend to have very similar ____.
a.
interest rates
b.
inflation rates
c.
income tax rates
d.
budget deficits
25. The risk-free interest rates among countries that have adopted the euro should:
a.
not necessarily be similar to risk-free rates in other countries.
b.
equal the U.S. risk-free rate.
c.
equal the risk-free rates in other European countries.
d.
equal the risk-free rates in Asian countries.
26. 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.
d.
All of the above are true.
27. 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 unemployment. Which of the following is an appropriate action
given this scenario?
a.
Weaken the dollar
b.
Strengthen the dollar
c.
Buy dollars with foreign currency in the foreign exchange market
d.
Implement a tight monetary policy
28. 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 the above
29. To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously
____ Treasury securities.
a.
buy; sell
b.
sell; buy
c.
buy; buy
d.
sell; sell
30. 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 the above
31. 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.
32. 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.
33. Which of the following is not true regarding Thailand?
a.
Thailand was one of the slowest growing countries before the Asian crisis.
b.
High levels of spending and low levels of saving placed upward pressure on prices of real
estate, products, and on Thailand’s local interest rate.
c.
Thailand’s baht was linked to the dollar prior to July 1997, which made Thailand an
attractive site for foreign investors.
d.
Thai banks provided many loans that were very risky in their attempt to make use of all of
their funds.
e.
All of the above are true.
34. 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.
35. During the period 1944-1971, the U.S. used a ____ system.
a.
euro exchange rate
b.
fixed
c.
dirty float
d.
flexible
36. Which of the following are examples of currency controls?
a.
import restrictions.
b.
prohibition of remittance of funds.
c.
ceilings on granting credit to foreign firms.
d.
all of the above
37. 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 decline for MNCs that conduct transactions within Europe.
d.
The euro replaced the British pound.
38. Which of the following countries have not adopted the euro?
a.
Germany
b.
Italy
c.
Switzerland
d.
France
39. Which of the following are true about the Southeast Asian currency crisis?
a.
It was preceded by several years of large capital inflows to Asia.
b.
It was preceded by a five-year recession in Asia.
c.
Asian interest rates declined during the crisis.
d.
Asian exchange rates were pegged to the Japanese yen to resolve the crisis.
40. 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
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. Under the system known as the “dirty” float, official boundaries for the exchange rate exist, but they
are wider than they are under a fixed exchange rate system.
a. True
b. False
43. Under a pegged exchange rate system, the home currency’s value is pegged to a foreign currency.
a. True
b. False
44. 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
45. 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
46. 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
47. The Asian crisis is generally believed to have started in Japan.
a. True
b. False
48. A possible reason why China was less affected by the Asian crisis is that its government exerts more
influence on private enterprise than the governments of other Asian countries.
a. True
b. False
49. Currency devaluation can boost a country’s exports, but currency revaluation can increase foreign
competition.
a. True
b. False
50. Market forces are the determinant of exchange rates in a freely floating exchange rate system.
a. True
b. False
51. 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
52. 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
53. The Bank of England is responsible for setting the monetary policy for the European countries
participating in the euro.
a. True
b. False
54. The Fed’s indirect method of intervention is to trade dollars for or against other currencies.
a. True
b. False
55. China is commonly criticized for keeping the yuan’s value at superficially high levels.
a. True
b. False
56. The Bretton Woods Agreement created a system under which exchange rates are determined by market
forces without intervention by various governments.
a. True
b. False
57. 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
58. The euro is pegged to other currencies of European countries that have not adopted the euro.
a. True