Question 1

Which exchange-rate mechanism is intended to insulate the balance of payments from short-term capital movements while providing exchange rate stability for commercial transactions?
A) Dual exchange rates
B) Managed floating exchange rates
C) Adjustable pegged exchange rates
D) Crawling pegged exchange rates

Accepted Answer

A

Question 2

Under a pegged exchange-rate system,which does not explain why a country would have a balance-of-payments deficit?
A) Very high rates of inflation occur domestically
B) Foreigners discriminate against domestic products
C) Technological advance is superior abroad
D) The domestic currency is undervalued relative to other currencies

Accepted Answer

D

Question 3

Under adjustable pegged exchange rates,if the rate of inflation in the United States exceeds the rate of inflation of its trading partners:
A) U.S. exports tend to rise and imports tend to fall
B) U.S. imports tend to rise and exports tend to fall
C) U.S. foreign exchange reserves tend to rise
D) U.S. foreign exchange reserves remain constant

Accepted Answer

If the rate of inflation in the United States exceeds the rate of inflation of its trading partners, it would cause the prices of US goods to increase relative to foreign goods, which would lead to a decrease in US exports and an increase in imports. This would result in a higher demand for foreign currency to pay for the increased imports, leading to a decrease in the value of the US dollar and a decrease in US foreign exchange reserves.

Question 4

Under a floating exchange rate system,an increase in U.S.imports of Japanese goods will cause the demand schedule for Japanese yen to:
A) Increase, inducing a depreciation in the yen
B) Decrease, inducing a depreciation in the yen
C) Increase, inducing an appreciation in the yen
D) Decrease, inducing an appreciation in the yen

Accepted Answer

The answer of Under a floating exchange rate system,an increase...

Question 5

Under a floating exchange-rate system,if American exports decrease and American imports rise,the value of the dollar will:
A) Appreciate
B) Depreciate
C) Be officially revalued
D) Be officially devalued

Accepted Answer

When exports decrease and imports rise, it means there is a higher demand for foreign currency to purchase more imports from other countries. This creates an oversupply of the dollar in the market, leading to a decrease in its value, or depreciation.

Question 6

Which exchange-rate mechanism calls for frequent redefining of the par value by small amounts to remove a payments disequilibrium?
A) Dual exchange rates
B) Adjustable pegged exchange rates
C) Managed floating exchange rates
D) Crawling pegged exchange rates

Accepted Answer

Crawling pegged exchange rates call for frequent redefining of the par value by small amounts to remove a payments disequilibrium.

Question 7

Rather than constructing their own currency baskets,many nations peg the value of their currencies to a currency basket defined by the International Monetary Fund.Which of the following illustrates this basket?
A) IMF tranche
B) Special Drawing Rights
C) Primary reserve asset
D) Swap facility

Accepted Answer

Special Drawing Rights (SDRs) is a currency basket defined by the IMF that consists of a weighted average of four major currencies: the US dollar, the euro, the Japanese yen, and the British pound. Many nations peg their currencies to this basket to reduce fluctuations in their exchange rates with multiple currencies. IMF tranches, primary reserve asset, and swap facilities are not related to currency baskets.

Question 8

Which exchange-rate system does not require monetary reserves for official exchange-rate intervention?
A) Floating exchange rates
B) Pegged exchange rates
C) Managed floating exchange rates
D) Dual exchange rates

Accepted Answer

Floating exchange rates allow the value of a currency to be determined by market forces without any government intervention or need for monetary reserves.

Question 9

Small nations (e.g.,Tanzania)with more than one major trading partner tend to peg the value of their currencies to:
A) Gold
B) Silver
C) A single currency
D) A basket of currencies

Accepted Answer

Small nations with multiple major trading partners may find it difficult to peg their currency to a single currency, as it could result in an overvaluation or undervaluation depending on the economic situation of the trading partner. Pegging to a basket of currencies, therefore, provides a more stable exchange rate and reduces the risk of currency fluctuations impacting trade relationships.

Question 10

Under the historic adjustable pegged exchange-rate system,member countries were permitted to correct persistent and sizable payment deficits (i.e.,fundamental disequilibrium)by:
A) Officially revaluing their currencies
B) Officially devaluing their currencies
C) Allowing their currencies to depreciate in the free market
D) Allowing their currencies to appreciate in the free market

Accepted Answer

Under the historic adjustable pegged exchange-rate system, member countries were permitted to correct persistent and sizable payment deficits by officially devaluing their currencies. This involved the country's central bank reducing the official exchange rate of the currency to make it relatively cheaper in terms of other currencies. This made the country's exports relatively cheaper and more competitive on the global market, while making imports relatively more expensive, which was intended to reduce the trade deficit and restore equilibrium in the balance of payments.

Question 11

Small nations (e.g.,the Ivory Coast)whose trade and financial relationships are mainly with a single partner tend to utilize:
A) Pegged exchange rates
B) Freely floating exchange rates
C) Managed floating exchange rates
D) Crawling pegged exchange rates

Accepted Answer

Small nations with a single trade partner may benefit from pegging their exchange rate to that of their main trading partner in order to facilitate trade and mitigate currency risk. This can also help to stabilize the economy and encourage investment.

Question 12

In 1973,the reform of the international monetary system resulted in the change from:
A) Adjustable pegged rates to managed floating rates
B) Managed floating rates to adjustable pegged rates
C) Crawling pegged rates to freely floating rates
D) Freely floating rates to crawling pegged rates

Accepted Answer

The reform of the international monetary system in 1973 resulted in the change from adjustable pegged rates, where countries maintained a fixed exchange rate with the US dollar that could be adjusted on occasion, to managed floating rates, where exchange rates are allowed to float but central banks may intervene to influence their value.

Question 13

Under a floating exchange-rate system,if American exports increase and American imports fall,the value of the dollar will:
A) Appreciate
B) Depreciate
C) Be officially revalued
D) Be officially devalued

Accepted Answer

When American exports increase and imports fall, demand for the dollar increases because foreigners need to buy dollars to pay for American goods. This increased demand for the dollar causes its value to appreciate.

Question 14

A primary objective of dual exchange rates is to allow a country the ability to insulate its balance of payments from net:
A) Current account transactions
B) Unilateral transfers
C) Merchandise trade transactions
D) Capital account transactions

Accepted Answer

Dual exchange rates are often used to manage capital account transactions, which can have a significant impact on a country's balance of payments. By allowing for two different exchange rates, one for capital transactions and one for other transactions, a country can better control the flow of capital in and out of the country and minimize the impact on the rest of its economy. Insulating the balance of payments from capital account transactions is a primary objective of dual exchange rates.

Question 15

The exchange-rate system that best characterizes the present international monetary arrangement used by industrialized countries is:
A) Freely fluctuating exchange rates
B) Adjustable pegged exchange rates
C) Managed floating exchange rates
D) Pegged or fixed exchange rates

Accepted Answer

The present international monetary arrangement used by industrialized countries is managed floating exchange rates. This means that exchange rates fluctuate based on market forces but central banks and governments occasionally intervene to influence the direction of the exchange rate.

Question 16

The Bretton Woods Agreement of 1944 established a monetary system based on:
A) Gold and managed floating exchange rates
B) Gold and adjustable pegged exchange rates
C) Special Drawing Rights and managed floating exchange rates
D) Special Drawing Rights and adjustable pegged exchange rates

Accepted Answer

The Bretton Woods Agreement established a system in which currencies were pegged to the US dollar, and the US dollar was pegged to gold. This meant that all other currencies were indirectly pegged to gold. The exchange rate between the US dollar and gold was fixed at $35 per ounce, and other countries were allowed to adjust their exchange rates within narrow margins (+/- 1%) relative to the US dollar. This system is known as the gold exchange standard or the adjustable pegged exchange rate system.

Question 17

Given an initial equilibrium in the money market and foreign exchange market,suppose the Federal Reserve increases the money supply of the United States.Under a floating exchange-rate system,the dollar would:
A) Appreciate in value relative to other currencies
B) Depreciate in value relative to other currencies
C) Be officially devalued by the government
D) Be officially revalued by the government

Accepted Answer

When the Federal Reserve increases the money supply, the supply of dollars in the foreign exchange market increases, which leads to a decrease in its value. This means that the dollar would depreciate in value relative to other currencies. Under a floating exchange-rate system, the value of a currency is not officially managed by the government and is determined by market forces of supply and demand. Therefore, there would be no official devaluation or revaluation of the dollar.

Question 18

During the 1970s,the European Union,in its quest for monetary union,adopted what came to be referred to as the "Community Snake." This device was a:
A) Adjustable pegged exchange rate system
B) Dual exchange rate system
C) Jointly floating exchange rate system
D) Freely floating exchange rate system

Accepted Answer

The answer of During the 1970s,the European Union,in its quest...

Question 19

Which exchange-rate system involves a "leaning against the wind" strategy in which short-term fluctuations in exchange rates are reduced without adhering to any particular exchange rate over the long run?
A) Pegged or fixed exchange rates
B) Adjustable pegged exchange rates
C) Managed floating exchange rates
D) Freely floating exchange rates

Accepted Answer

The exchange-rate system that involves a "leaning against the wind" strategy is called managed floating exchange rates. This system allows for some flexibility in exchange rates and allows for short-term fluctuations to be reduced through intervention by central banks. However, there is no specific exchange rate target in the long run. Choice A (pegged or fixed exchange rates) involves a specific exchange rate target, choice B (adjustable pegged exchange rates) allows for some flexibility but still maintains a specific exchange rate target, and choice D (freely floating exchange rates) allows for complete flexibility with no intervention by central banks.

Question 20

Under managed floating exchange rates,if the rate of inflation in the United States is less than the rate of inflation of its trading partners,the dollar will likely:
A) Appreciate against foreign currencies
B) Depreciate against foreign currencies
C) Be officially revalued by the government
D) Be officially devalued by the government

Accepted Answer

Under managed floating exchange rates, if the rate of inflation in the United States is less than the rate of inflation of its trading partners, the value of the dollar will likely increase or appreciate against foreign currencies. This is because the lower inflation means fewer price increases for goods and services in the US, making them relatively cheaper and more attractive to foreign buyers. As a result, the demand for dollars increases, pushing up its value.

Quiz 15: Exchange-rate Systems and Currency Crises

Which exchange-rate mechanism is intended to insulate the balance of payments from short-term capital movements while providing exchange rate stability for commercial transactions?

Under a pegged exchange-rate system,which does not explain why a country would have a balance-of-payments deficit?

Under adjustable pegged exchange rates,if the rate of inflation in the United States exceeds the rate of inflation of its trading partners:

Under a floating exchange rate system,an increase in U.S.imports of Japanese goods will cause the demand schedule for Japanese yen to:

Under a floating exchange-rate system,if American exports decrease and American imports rise,the value of the dollar will:

Which exchange-rate mechanism calls for frequent redefining of the par value by small amounts to remove a payments disequilibrium?

Rather than constructing their own currency baskets,many nations peg the value of their currencies to a currency basket defined by the International Monetary Fund.Which of the following illustrates this basket?

Which exchange-rate system does not require monetary reserves for official exchange-rate intervention?

Small nations (e.g.,Tanzania) with more than one major trading partner tend to peg the value of their currencies to:

Under the historic adjustable pegged exchange-rate system,member countries were permitted to correct persistent and sizable payment deficits (i.e.,fundamental disequilibrium) by:

Small nations (e.g.,the Ivory Coast) whose trade and financial relationships are mainly with a single partner tend to utilize:

In 1973,the reform of the international monetary system resulted in the change from:

Under a floating exchange-rate system,if American exports increase and American imports fall,the value of the dollar will:

A primary objective of dual exchange rates is to allow a country the ability to insulate its balance of payments from net:

The exchange-rate system that best characterizes the present international monetary arrangement used by industrialized countries is:

The Bretton Woods Agreement of 1944 established a monetary system based on:

Given an initial equilibrium in the money market and foreign exchange market,suppose the Federal Reserve increases the money supply of the United States.Under a floating exchange-rate system,the dollar would:

During the 1970s,the European Union,in its quest for monetary union,adopted what came to be referred to as the "Community Snake." This device was a:

Which exchange-rate system involves a "leaning against the wind" strategy in which short-term fluctuations in exchange rates are reduced without adhering to any particular exchange rate over the long run?

Under managed floating exchange rates,if the rate of inflation in the United States is less than the rate of inflation of its trading partners,the dollar will likely: