IFM Chapter 6

81. Which of the following is not true regarding the eurozone? a. Members cannot set unique monetary policy individually. b. Members cannot apply their own fiscal policies. c. Members have to agree on the ideal monetary policy. d. Its creation allowed for greater political union among its members. e. It's broken no answer

e No Answer

54. The Fed's indirect method of intervention is to trade dollars for or against other currencies. a. True b. False

F

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.

A not necessarily be similar to risk-free rates in other countries

93. If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, 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

A purchase euro put options

75. Assume that Japan and the United States frequently trade with each other. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan. a. upward; reduce; unchanged b. upward; increase; higher c. downward; reduce; unchanged d. downward; increase; higher

A upward; reduce; unchanged

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.

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.

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

B Buy dollars with foreign currency

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

B European

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.

B allowed to fluctuate but with central bank intervention

95. A strong dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which in turn place ____ pressure on U.S. bond prices. a. downward; upward; upward b. downward; downward; upward c. upward; upward; downward d. upward; downward; upward

B downward; downward; upward

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

B downward; upward

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).

B establishing that exchange rates of most major countries were to be allowed to fluctuate 2.25% above or below their initially set values.

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.

B high unemployment and low inflation in the U.S

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.

B interest rates.

85. To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities. a. buy; sell b. sell; sell c. sell; buy d. buy; sell

B sell; sell

98. One of the best-known pegged exchange rate arrangements that was established by several European countries in April 1972 and was difficult to maintain is called the: a. European Monetary System (EMS). b. snake agreement. c. Maastricht Treaty. d. European Union.

B snake agreement

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.

B strengthen.

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

B weakening; decrease

38. Which of the following countries have not adopted the euro? a. Germany b. Italy c. Switzerland d. France

C Switzerland

76. Which one is not a disadvantage of a freely floating exchange rate system? a. It can adversely affect a country that has high unemployment. b. It can adversely affect a country that has high inflation. c. The government may intervene to change the value of a given currency. d. The exchange rate risk is high and may be costly to manage.

C The government may intervene to change the value of a given currency.

72. Which one 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.

C The government might change the value of the currency

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.

C Transactions costs decline for MNCs that conduct transactions within Europe.

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

C buy; buy

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.

C central bank intervention in the foreign exchange market is often necessary.

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).

C establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values

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.

C exchanging dollars for foreign currency

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

C fixed rate; fixed rate

77. A "dirty" float represents 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.

C floating exchange rates, but the central bank can manipulate the currency.

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

C increase; decrease

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

C less effective.

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.

C managed float system.

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

C more; less

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

C nonsterilized intervention

88. Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will cause an ____ U.S. dollars and an ____ euros. a. inward shift in demand for; outward shift in supply of b. inward shift in demand for; inward shift in supply of c. outward shift in supply of; outward shift in demand for d. outward shift in supply of; inward shift in demand for

C outward shift in supply of; outward shift in demand for

92. If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would most likely ____ to capitalize on this intervention. a. purchase yen put options b. sell yen futures contracts c. purchase yen call options d. buy U.S. Treasury bonds

C purchase yen call options

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.

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

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

C upward; upward; downward

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.

C will move in tandem with the interest rate of the currency to which it is tied.

73. The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent. a. 2.25 b. 6 c. 10 d. 8

D 8

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.

D All of the above are true.

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.

D China

80. The European Central Bank is located in: a. London. b. Denmark. c. Luxembourg. d. Frankfurt.

D Frankfurt

74. Which of the following did not occur as a result of 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% above or below the initially set rates. d. The United States experienced no balance-of-trade deficits.

D The United States experienced no balance-of-trade deficits

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

D all of the above

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

T

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

T

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

T

50. Market forces are the determinant of exchange rates in a freely floating exchange rate system. a. True b. False

T

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

T

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

T

58. The euro is pegged to other currencies of European countries that have not adopted the euro. a. True b. False

T

60. 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. a. True b. False

T

61. A strong home currency can harm exports; exporters typically benefit from a weaker home country currency. a. True b. False

T

62. 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

T

65. Dollarization refers to the replacement of local currency with U.S. dollars. a. True b. False

T

66. A country with fixed exchange rates often faces constraints on growth. a. True b. False

T

68. The European Central Bank is responsible for monetary policy in all countries that adopted the euro as its currency. a. True b. False

T

71. 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 b. False

T

82. Assuming no credit risk, the interest rates among countries in the eurozone should be similar. a. True b. False

T

90. A central bank may attempt to stimulate a stagnant economy by weakening the value of the currency. a. True b. False

T

94. If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may backfire because it will increase money supply and thus increase inflation. a. True b. False

T

84. 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 balance-of-trade surplus.

A To reduce inflation.

35. During the period 1944-1971, the U.S. used a ____ system. a. euro exchange rate b. fixed c. dirty float d. flexible

B fixed

21. The euro has not been adopted by: a. Slovenia. b. the U.K. c. Germany. d. France.

B the U.K

100. Currency devaluations have the potential to reduce unemployment, while currency revaluations have the potential to reduce inflation. a. True b. False

T

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

T

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

T

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

T

64. A country with a currency board does not have control over its local interest rates. a. True b. False

T

89. If the Fed ____ the interest rates when inflationary expectations remain unchanged, the most likely result is that the value of dollar will ____ and the economy may ____. a. increases; appreciate; weaken b. decreases; appreciate; weaken c. increases; depreciate; strengthen d. decreases; appreciate; strengthen

A increases; appreciate; weaken

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

A interest rates

23. Countries that have adopted the euro must agree on a single ____ policy. a. monetary b. fiscal c. worker compensation d. foreign relations

A monetary

83. Which of the following is not a reason for devaluation of a currency? a. high inflation. b. to reduce balance-of-trade deficit. c. to decrease the amount of imports. d. high unemployment.

A high inflation

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.

A It was preceded by several years of large capital inflows to Asia

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.

A Thailand was one of the slowest growing countries before the Asian crisis

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

A Weaken the dollar

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.

A exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.

87. 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.

D exchange foreign currencies for dollars, and buy existing Treasury securities with dollars

96. 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

D less; more

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

D none of the above

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.

D: low unemployment and high inflation in the U.S

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

F

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

F

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

F

47. The Asian crisis is generally believed to have started in Japan. a. True b. False

F

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

F

53. The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro. a. True b. False

F

55. China is commonly criticized for keeping the yuan's value at superficially high levels. a. True b. False

F

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

F

59. The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers. a. True b. False

F

63. All European countries now use the euro as their currency. a. True b. False

F

67. The Bretton Woods Agreement called for the establishment of a single European currency. a. True b. False

F

69. 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

F

70. 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

F

78. If a U.S. firm plans to frequently purchases goods from Hong Kong over the next several years, it does not have to worry about exchange rate risk. a. True b. False

F

79. If the French government wants to decrease inflation in France, it will exchange foreign currency for euros. a. True b. False

F

86. The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in the eurozone. a. True b. False

F

91. A common way to reduce inflation is to weaken the value of the domestic currency. a. True b. False

F

97. If the Bank of England announces that it will start to frequently intervene in order to reduce the fluctuations of British pound, the premiums on call and put options will increase. a. True b. False

F

99. Direct intervention is usually more effective than indirect intervention. a. True b. False

F