Question 1

The central bank of the United Kingdom could prevent the pound from appreciating by:
A) Selling pounds on the foreign exchange market
B) Buying pounds on the foreign exchange market
C) Reducing its inflation rate relative to its trading partners
D) Promoting domestic investment and technological development

Accepted Answer

Selling pounds on the foreign exchange market would increase the supply of pounds and reduce their value, therefore preventing the pound from appreciating. Buying pounds would have the opposite effect and could cause the pound to appreciate. Reducing inflation relative to its trading partners or promoting domestic investment and technological development may indirectly affect the exchange rate, but not necessarily prevent the pound from appreciating.

Question 2

Under a floating exchange rate system,if there occurs a fall in the dollar price of the franc:
A) American exports to France will be cheaper in francs
B) American exports to France will be more expensive in francs
C) American imports from France will be more expensive in dollars
D) None of the above

Accepted Answer

The answer of Under a floating exchange rate system,if there...

Question 3

Assume that interest rates in London rise relative to those in Switzerland.Under a floating exchange-rate system,one would expect the pound (relative to the franc)to:
A) Depreciate due to the increased demand for pounds
B) Depreciate due to the increased demand for francs
C) Appreciate due to the increased demand for francs
D) Appreciate due to the increased demand for pounds

Accepted Answer

The answer of Assume that interest rates in London rise...

Question 4

Under a system of floating exchange rates,a U.S.trade deficit with Japan will cause:
A) A flow of gold from the United States to Japan
B) The U.S. government to ration yen to U.S. importers
C) An increase in the dollar price of yen
D) A decrease in the dollar price of yen

Accepted Answer

A trade deficit means that the U.S. is importing more goods and services from Japan than it is exporting to Japan. This creates an excess demand for Japanese yen in the U.S. market, which will lead to an increase in the dollar price of yen. This makes Japanese imports more expensive for U.S. consumers, which could eventually help reduce the trade deficit. Option A (a flow of gold from the United States to Japan) is unlikely under a floating exchange rate system as the exchange rate adjusts to balance the supply and demand of different currencies. Option B (the U.S. government rationing yen to U.S. importers) is not a typical policy response to a trade deficit under a floating exchange rate system. Option D (a decrease in the dollar price of yen) is unlikely because it would worsen the trade deficit by making Japanese exports cheaper for U.S. consumers.

Question 5

A market-determined decrease in the dollar price of the pound is associated with:
A) Revaluation of the dollar
B) Devaluation of the dollar
C) Appreciation of the dollar
D) Depreciation of the dollar

Accepted Answer

The answer of A market-determined decrease in the dollar price...

Question 6

To temporarily offset a depreciation in the dollar's exchange value,the Federal Reserve could ____ the U.S.money supply which would promote a (an)____ in U.S.interest rates and a (an)____ in investment flows to the United States.
A) Increase, decrease, decrease
B) Increase, increase, increase
C) Decrease, decrease, increase
D) Decrease, increase, increase

Accepted Answer

The answer of To temporarily offset a depreciation in the...

Question 7

In a managed floating exchange-rate system,temporary stabilization of the dollar's exchange value requires the Federal Reserve to adopt a (an)____ monetary policy when the dollar is appreciating and a (an)____ policy when the dollar is depreciating.
A) Expansionary, expansionary
B) Expansionary, contractionary
C) Contractionary, expansionary
D) Contractionary, contractionary

Accepted Answer

The answer of In a managed floating exchange-rate system,temporary stabilization...

Question 8

Which of the following is not a potential disadvantage of freely floating exchange rates?
A) They require larger amounts of international reserves than other exchange systems
B) Demand schedules for imports and exports may be price speculation
C) There may occur large amounts of destabilizing speculation
D) Capital movements among nations may be hindered via exchange rate fluctuations

Accepted Answer

The answer of Which of the following is not a...

Question 9

A market-determined increase in the dollar price of the pound is associated with:
A) Revaluation of the dollar
B) Devaluation of the dollar
C) Appreciation of the dollar
D) Depreciation of the dollar

Accepted Answer

The answer of A market-determined increase in the dollar price...

Question 10

Under a floating exchange-rate system,if the U.S.dollar depreciates against the Swiss franc:
A) American exports to Switzerland will be cheaper in francs
B) American exports to Switzerland will be more expensive in francs
C) American imports from Switzerland will be cheaper in dollars
D) None of the above

Accepted Answer

A depreciation of the U.S. dollar means that it is worth less compared to the Swiss franc. This makes it cheaper for Swiss buyers to purchase American goods, resulting in cheaper exports for the United States.

Question 11

Given an initial equilibrium in the money market and foreign exchange market,suppose the Federal Reserve decreases 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

The answer of Given an initial equilibrium in the money...

Question 12

Suppose Sweden's inflation rate is less than that of its trading partner.Under a floating exchange rate system,Sweden would experience a:
A) Appreciation in its currency
B) Depreciation in its currency
C) Fall in the level of its exports
D) Rise in the level of its imports

Accepted Answer

A lower inflation rate in Sweden compared to its trading partner would mean that Swedish goods would be cheaper relative to its trading partner. This would increase the demand for Swedish exports and, in turn, increase demand for Swedish Krona, leading to its appreciation.

Question 13

If the Japanese yen appreciates against other currencies in the exchange markets,this will:
A) Have no effect on the Japanese balance of trade
B) Tend to improve the Japanese balance of trade
C) Tend to worsen the Japanese balance of trade
D) None of the above

Accepted Answer

An appreciation of the Japanese yen means that Japan's goods and services become relatively more expensive for foreign buyers. As a result, exports are likely to become less competitive, which tends to worsen the Japanese balance of trade. Conversely, imports become relatively cheaper, which tends to increase the demand for imported goods and services, further worsening the balance of trade.

Question 14

Proponents of freely floating exchange rates maintain that:
A) Central banks can easily modify fluctuations in exchange rates
B) The system allows policy makers freedom in pursuing domestic economic goals
C) Inelastic demand schedules prevent large fluctuations in exchange rates
D) Inelastic supply schedules prevent large fluctuations in exchange rates

Accepted Answer

Proponents of freely floating exchange rates argue that such a system allows policy makers to pursue domestic economic goals without being constrained by the need to maintain a fixed exchange rate. Therefore, B is the best choice as it highlights the key advantage of freely floating exchange rates. A, C, and D are incorrect as they do not accurately describe the advantages of the freely floating exchange rate system.

Question 15

Under a floating exchange-rate system,which of the following best leads to a depreciation in the value of the Canadian dollar?
A) A decrease in the Canadian money supply
B) A fall in the Canadian interest rate
C) An increase in national income overseas
D) Rising inflation overseas

Accepted Answer

The answer of Under a floating exchange-rate system,which of the...

Question 16

To temporarily offset an appreciation in the dollar's exchange value,the Federal Reserve could ____ the U.S.money supply which would promote a (an)____ in U.S.interest rates and a ____ in investment flows to the United States.
A) Increase, decrease, decrease
B) Increase, increase, decrease
C) Decrease, decrease, decrease
D) Decrease, increase, decrease

Accepted Answer

The answer of To temporarily offset an appreciation in the...

Question 17

A surplus nation can reduce its payments imbalance by:
A) Applying tariffs and trade restrictions on imports
B) Revaluing its national currency
C) Increasing its labor productivity
D) Setting higher interest rates than its trading partners

Accepted Answer

The answer of A surplus nation can reduce its payments...

Question 18

If the Japanese yen depreciates against other currencies in the exchange markets,this will:
A) Have no effect on the Japanese balance of trade
B) Tend to worsen the Japanese balance of trade
C) Tend to improve the Japanese balance of trade
D) None of the above

Accepted Answer

When the Japanese yen depreciates against other currencies, Japanese goods become cheaper in foreign markets, which tends to increase exports and improve the Japanese balance of trade.

Question 19

A potential disadvantage of freely floating exchange rates is that there would:
A) Exist excessive amounts of hedging in the foreign exchange markets
B) Be a lack of incentive to initiate exchange arbitrage
C) Be excessive amounts of destabilizing speculation
D) Exist a devaluation bias in the exchange markets

Accepted Answer

Freely floating exchange rates can lead to excessive speculation in the foreign exchange markets which can create volatility in the currency markets, making it difficult for traders and businesses to plan and invest. This can lead to destabilizing effects on the economy. Therefore, choice C is the best answer. The other choices (A, B, and D) are less likely to be considered potential disadvantages of freely floating exchange rates.

Question 20

A potential limitation of freely floating exchange rates is that:
A) Countries require a larger amount of international reserves than otherwise
B) Countries are unable to initiate economic policies to combat unemployment
C) Exchange rates may experience wide and frequent fluctuations
D) Demand tends to be highly sensitive to price movements

Accepted Answer

Freely floating exchange rates may experience wide and frequent fluctuations, which can create uncertainty for businesses and investors. This can make it difficult for businesses to plan and make investment decisions, which can have negative effects on economic growth. Additionally, rapid fluctuations in exchange rates can lead to destabilization of financial markets and increased risk of currency crises.

Quiz 15: Exchange-rate Systems and Currency Crises

The central bank of the United Kingdom could prevent the pound from appreciating by:

Under a floating exchange rate system,if there occurs a fall in the dollar price of the franc:

Assume that interest rates in London rise relative to those in Switzerland.Under a floating exchange-rate system,one would expect the pound (relative to the franc) to:

Under a system of floating exchange rates,a U.S.trade deficit with Japan will cause:

A market-determined decrease in the dollar price of the pound is associated with:

To temporarily offset a depreciation in the dollar's exchange value,the Federal Reserve could the U.S.money supply which would promote a (an) in U.S.interest rates and a (an) in investment flows to the United States.

In a managed floating exchange-rate system,temporary stabilization of the dollar's exchange value requires the Federal Reserve to adopt a (an) monetary policy when the dollar is appreciating and a (an) policy when the dollar is depreciating.

Which of the following is not a potential disadvantage of freely floating exchange rates?

A market-determined increase in the dollar price of the pound is associated with:

Under a floating exchange-rate system,if the U.S.dollar depreciates against the Swiss franc:

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

Suppose Sweden's inflation rate is less than that of its trading partner.Under a floating exchange rate system,Sweden would experience a:

If the Japanese yen appreciates against other currencies in the exchange markets,this will:

Proponents of freely floating exchange rates maintain that:

Under a floating exchange-rate system,which of the following best leads to a depreciation in the value of the Canadian dollar?

To temporarily offset an appreciation in the dollar's exchange value,the Federal Reserve could the U.S.money supply which would promote a (an) in U.S.interest rates and a in investment flows to the United States.

A surplus nation can reduce its payments imbalance by:

If the Japanese yen depreciates against other currencies in the exchange markets,this will:

A potential disadvantage of freely floating exchange rates is that there would:

A potential limitation of freely floating exchange rates is that: