Question 1

Market forces are the determinant of exchange rates in a freely floating exchange rate system.

Accepted Answer

In a freely floating exchange rate system, the exchange rate is determined by the market forces of supply and demand. The exchange rate will adjust to balance the demand for and supply of a currency, based on factors such as trade, investment, inflation, and geopolitical events. The government may have some influence on the exchange rate, but in general, the exchange rate is determined by the market.

Question 2

The European countries conforming to the euro are completely insulated from movements in the euro's value with respect to other currencies.

Accepted Answer

Although countries using the euro as their currency are part of a monetary union and share a common currency, their economies are still affected by changes in the value of the euro relative to other currencies. For example, a stronger euro can make exports more expensive and less competitive, while a weaker euro can boost exports but increase the prices of imported goods.

Question 3

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.

Accepted Answer

If a country weakens its currency, it becomes cheaper for foreign buyers to purchase goods and services, which can lead to increased demand and stimulate the economy.

Question 4

The Bretton Woods Agreement created a system under which exchange rates are determined by market forces without intervention by various governments.

Accepted Answer

The Bretton Woods Agreement was actually the opposite of this statement. It created a fixed exchange rate system where governments agreed to intervene to maintain their currency's value relative to the U.S. dollar.

Question 5

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.

Accepted Answer

The elimination of exchange rate risk on transactions between participating European countries is one of the main advantages of the euro, as it encourages more trade and investment within Europe.

Question 6

The euro is pegged to other currencies of European countries that have not adopted the euro.

Accepted Answer

The answer of The euro is pegged to other currencies...

Question 7

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.

Accepted Answer

China's government has a strong control over the national economy and banking system through policies, regulations, and state-owned enterprises. This strong influence allowed for better management of the crisis and investment in key industries, such as infrastructure and technology. Other Asian countries had a more hands-off approach to private enterprise, which left them more vulnerable to the economic shocks of the crisis.

Question 8

The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro.

Accepted Answer

The Bank of England is responsible for setting the monetary policy for the United Kingdom, not the European countries participating in the euro. The European Central Bank (ECB) is responsible for setting the monetary policy for the eurozone.

Question 9

The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers.

Accepted Answer

The Smithsonian Agreement was an accord reached in 1971 to adjust the fixed exchange rates established under the Bretton Woods system, allowing for greater flexibility but not completely free-floating currencies.

Question 10

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 vs. the dollar.

Accepted Answer

Indirect intervention refers to using monetary policy tools such as interest rates or quantitative easing to influence the exchange rate. By raising interest rates, the demand for the currency increases and this leads to an appreciation in the currency value. Therefore, using interest rates to increase the value of the yen against the dollar is an example of indirect intervention by the Bank of Japan.

Question 11

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.

Accepted Answer

Governments are actually required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries in a fixed exchange rate system. If the exchange rate deviates too much from the fixed rate, the government must buy or sell foreign currency to bring it back in line.

Question 12

In a sterilized exchange rate arrangement, a country's home currency value is pegged to a foreign currency or to some unit of account.

Accepted Answer

A sterilized exchange rate arrangement involves central bank interventions to offset the impact of foreign exchange operations on the domestic money supply, not necessarily pegging the currency.

Question 13

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.

Accepted Answer

The establishment of the euro means that all countries using the currency share the same monetary policy, eliminating the ability for individual countries to solve their economic problems with their own unique policies.

Question 14

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.

Accepted Answer

A "dirty" float, or managed float, does not have official boundaries for the exchange rate; instead, it allows the currency to float in the market with occasional government intervention to stabilize or influence the currency's value.

Question 15

Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the change in money supply.

Accepted Answer

Nonsterilized intervention involves the central bank purchasing or selling foreign currency without simultaneously offsetting the impact on the monetary base or money supply through open market operations. This means that the intervention can potentially affect the exchange rate as well as domestic interest rates and inflation, depending on the monetary policy stance. In contrast, sterilized intervention involves offsetting the impact on the monetary base through an equivalent purchase or sale of domestic securities, which can limit the spillover effects on other macroeconomic variables.

Question 16

Under a pegged exchange rate system, the home currency's value is pegged to a foreign currency.

Accepted Answer

Under a pegged exchange rate system, the value of the home country's currency is tied to the value of a foreign currency. This means that the exchange rate between the two currencies remains fixed and does not fluctuate freely based on market forces.

Question 17

China is commonly criticized for keeping the yuan's value at superficially high levels.

Accepted Answer

China is often criticized for keeping the yuan's value artificially low to boost exports by making them cheaper on the international market.

Question 18

The Fed's indirect method of intervention is to trade dollars for or against other currencies.

Accepted Answer

The Fed's indirect method of intervention involves influencing the economy through monetary policy tools like interest rates, rather than directly trading currencies.

Question 19

The Asian crisis is generally believed to have started in Japan.

Accepted Answer

The Asian financial crisis started in Thailand in 1997, before spreading to other countries in the region such as Indonesia, South Korea, and Malaysia. While Japan was also affected by the crisis, it did not start there.

Question 20

Currency devaluation can boost a country's exports, but currency revaluation can increase foreign competition.

Accepted Answer

Currency devaluation reduces the value of a country's currency, making their exports cheaper for foreign buyers and thus increasing demand for their products. On the other hand, currency revaluation increases the value of a country's currency, making their exports more expensive and potentially decreasing demand for their products. This also makes foreign products cheaper for domestic buyers, which can increase competition for local businesses.

Quiz 6: Government Influence on Exchange Rates