Chapter 14

22. Other things equal, 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.

102. Which of the following is an example of the reasons that other countries have accused the U.S. of currency manipulation?

a. The Federal Reserve increases the money supply to grow the U.S. economy.

68. 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.

43. Under managed floating exchange rates, other things equal, a central bank would initiate

a. a contractionary monetary policy to offset a depreciation of its currency.

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

a. adjustable pegged rates to managed floating rates.

4. Other things equal, 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.

17. Other things equal, under a floating exchange rate system, if American exports increase and American imports decrease, the value of the dollar will likely

a. appreciate.

63. Suppose Sweden's inflation rate is less than that of its trading partner. Other things equal, under a floating exchange rate system Sweden would experience a an

a. appreciation in its currency.

98. For developing countries, efforts to prevent speculation and currency crises have included

a. controls on capital flows.

77. Under a system of fixed exchange rates, the purpose of currency devaluation is to cause the exchange value of a currency to ______, thus counteracting a balance-of-payments ______.

a. depreciate, deficit

104. With a system of fixed exchange rates, a country that exhausts its international reserves in an attempt to keep its currency from _____ will have to ______ its currency

a. depreciating, devalue

90. A central bank that desires a (an) ______ of its currency would likely implement a ______ monetary policy.

a. depreciation, expansionary

2. 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

7. Which exchange rate system does NOT require monetary reserves for official exchange rate intervention?

a. floating exchange rates

30. As a policy instrument, currency devaluation may be controversial since it

a. imposes hardships on the exporters of foreign countries.

74. Other things equal, 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

21. Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve decreases the money supply of the United States. Other things equal, under a floating exchange rate system, demand for the dollar will likely

a. increase, inducing an appreciation in value relative to other currencies.

42. Under managed floating exchange rates, other things equal, the Federal Reserve could offset an appreciation of the dollar against the yen by

a. increasing the money supply, which promotes falling interest rates

95. Countries such as Bolivia and Costa Rica have adopted crawling pegged exchange rates. Under this system, a country

a. makes small, frequent changes in the par value of its currency to moderate balance of payments disequilibrium.

76. When the United States abandoned the Bretton Woods system in 1973, it adopted a system of

a. managed floating exchange rates.

15. Developing nations whose trade and financial relationships are mainly with a single partner tend to utilize

a. pegged exchange rates.

86. With fixed exchange rates, assume that the home currency becomes undervalued relative to its par value. Other things equal, to maintain the fixed exchange rate, the home country's central bank must

a. purchase the home currency, and as a result it loses international reserves.

44. To offset an appreciation of the dollar against the yen, other things equal, the Federal Reserve would

a. sell dollars on the foreign exchange market and lower domestic interest rates.

27. Other things equal, the central bank of the United Kingdom could prevent the pound from appreciating by

a. selling pounds on the foreign exchange market.

48. An objective of the dollarization of the Mexican economy would be to

a. shield its economy from hyperinflation, currency depreciation, and capital flight.

24. In recent years, the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade. The United States has argued that the central bank of China has

a. sold yuan and bought dollars, thus depreciating the yuan against the dollar.

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

an/c. jointly floating exchange rate system.

71. Under a floating exchange rate system, other things equal, if there occurs a fall in the dollar price of the Swiss franc

b. American exports to Switzerland will be more expensive in francs.

56. In 1944, financial ministers throughout the world met in New Hampshire to set up an adjustable pegged exchange rate system. This system became known as the

b. Bretton Woods system.

5. Other things equal, under adjustable pegged exchange rates, if the rate of inflation in the United States exceeds the rate of inflation of its trading partners

b. U.S. imports tend to rise and exports tend to fall.

65. Under a floating exchange rate system, other things equal, which of the following best leads to a depreciation in the value of the Canadian dollar?

b. a decrease in the Canadian interest rate

46. If Mexico dollarizes its economy, it essentially

b. accepts the monetary policy of the Federal Reserve.

105. If a central bank was to prevent its currency from depreciating, it would likely adopt a (an) ______ monetary policy to ______ the domestic interest rate, thus strengthening its currency.

b. contractionary, increase

45. To help insulate their economies from inflation, currency depreciation, and capital flight, developing countries have implemented

b. currency boards.

59. The result of devaluations of the dollar in the early 1970s was to

b. decrease the price of U.S. exports.

20. Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve increases the money supply of the United States. Other things equal, under a floating exchange rate system, the dollar will likely

b. depreciate in value relative to other currencies.

18. Other things equal, under a floating exchange rate system, if American exports decrease and American imports increase, the value of the dollar will likely

b. depreciate.

88. Under a system of fixed exchange rates, other things equal, if the par value of the fixed exchange rate is overvalued, then its central bank's effort to prevent the currency from ______ will lead to a (an) ______.

b. depreciating, decrease in international reserves

28. Other things equal, a surplus nation can reduce its payments imbalance by

b. devaluing its national currency.

26. 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.

b. expansionary, contractionary

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

b. gold and adjustable pegged exchange rates.

99. In recent years, the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade. The United States has argued that China has

b. maintained an undervalued yuan that makes U.S. exports to China more expensive.

94. For the United States, its current exchange rate system is generally considered to be a

b. managed floating exchange rate system.

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

b. officially devaluing their currencies.

103. In 2016, the U.S. Treasury department found that China met ____________of the criteria of currency manipulation. a. none

b. one

14. 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 is an example of this type of basket?

b. special drawing rights

69. Proponents of freely floating exchange rates maintain that

b. the system allows policy makers freedom in pursuing domestic economic goals.

23. Under the Bretton Woods system of 1944-1973, member countries could re-peg their currencies up to _____, without permission of the International Monetary Fund.

c. 10 percent

84. Hong Kong essentially has fixed the exchange value of its currency to the

c. U.S. dollar.

72. Under a system of floating exchange rates, other things equal, a U.S. trade deficit with Japan will cause

c. an increase in the dollar price of yen.

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

c. appreciation of the dollar.

89. A central bank that desires a (an) ______ of its currency would likely implement a ______ monetary policy.

c. appreciation, contractionary

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

c. be excessive amounts of destabilizing speculation.

107. For a developing country, a _____ can promote economic instability because it forces the country to ______.

c. capital outflow, devalue its currency

50. The crawling peg is a

c. compromise between fixed and floating exchange rates.

92. Proponents of a fixed exchange rate system maintain that it is superior to a floating exchange rate system because

c. disorderly exchange rate movements can disrupt trade and investment patterns.

73. A potential limitation of freely floating exchange rates is that

c. exchange rates may experience wide and frequent fluctuations.

106. If a central bank was to prevent its currency from appreciating, it would likely adopt a (an) ______ monetary policy to ______ the domestic interest rate, thus strengthening its currency.

c. expansionary, decrease

29. A main purpose of exchange stabilization funds is to

c. increase the supply of foreign currency when imports increase and exceed exports.

19. Other things equal, under a floating exchange rate system, an increase in U.S. imports of Japanese goods will cause a demand for Japanese yen to

c. increase, inducing an appreciation in the yen.

11. 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?

c. managed floating exchange rates

91. Under a system of managed floating exchange rates, central banks intervene in the foreign exchange market to

c. moderate short run fluctuations in exchange rates.

93. Proponents of a freely floating exchange rate system maintain that it is superior to a fixed exchange rate system because it

c. provides continuous adjustment in the balance of payments.

33. To defend a pegged exchange rate that overvalues its currency, a country could

c. purchase its own currency in international markets.

87. With fixed exchange rates, assume that the home currency becomes undervalued—that is, above its par value when expressed as the home currency price of the foreign currency. Other things equal, to maintain the fixed exchange rate the home country's central bank must

c. purchase the home currency and sell foreign currencies.

60. According to the Bretton Woods system of 1944-1973, the United States was designated as the

c. reserve currency country.

62. Suppose Japan runs a trade deficit. Other things equal, if the Japanese yen appreciates against other currencies in the exchange markets, this will

c. tend to worsen the Japanese balance of trade because Japanese exports will become cheaper.

81. Countries tend to be less served by a fixed exchange rate system when

c. they are highly exposed to international capital movements.

32. Suppose that Japan maintains a pegged exchange rate that overvalues the yen. Other things equal this would likely result in

c. unemployment for Japanese workers.

51. Exchange rate controls a. achieved prominence during the economic crises of the late 1930s. b. were popular immediately after World War II. c. are widely used by the developing nations. d. All of these are correct.

d. All of these are correct

108. For Ecuador, the result of adopting the dollar as its official currency is that a. its government cannot capture revenue (seigniorage) by issuing currency. b. there tends to be greater promise of lower interest rates and greater financial stability. c. the rate of inflation in Ecuador is tied to that of the United States.

d. All of these are correct.

61. Under the Bretton Woods system of 1944-1973 a. member countries set the par value of their currencies in terms of gold. b. market exchange rates were almost fixed. c. currency devaluations or revaluations could be used to adjust the par value of a currency when it became overvalued or undervalued.

d. All of these are correct.

80. In recent years, members of the International Monetary Fund have adopted exchange rate systems including a. independently floating exchange rates. b. managed floating exchange rates. c. crawling pegged exchange rates.

d. All of these are correct.

83. The "impossible trinity" explains the relationship between a. free movements of international capital. b. independent monetary policies of countries. c. fixed exchange rate systems of countries.

d. All of these are correct.

96. Sources of currency crisis for emerging countries have included all of the following except a. weak banks and financial systems. b. governmental budget deficits financed by inflation. c. governments prone to being overthrown by force.

d. All of these are correct.

97. For developing countries, currency boards and dollarization are intended to a. convince speculators that the exchange rate is unchangeable. b. promote confidence in the soundness of the nation's money supply. c. arrest any tendencies in an economy toward inflation.

d. All of these are correct.

advantages over other members. b. their exchange rate systems should not be manipulated to prevent effective balance-of-payments adjustments. c. members countries can act to counter short-term disorderly conditions in foreign exchange markets.

d. All of these are correct.

b. fixed exchange rates. c. crawling pegged exchange rates.

d. All of these are correct.

101. In the 2000s, the U.S. accused which of the following countries of currency manipulation?

d. South Korea

16. Developing nations with more than one major trading partner tend to peg the value of their currencies to

d. a basket of currencies.

34. Given a two-country world, suppose Japan devalues the yen by 20 percent and South Korea devalues the won by 15 percent. Other things equal, this results in

d. a depreciation in the value of the yen against the won.

57. The Bretton Woods system of 1944-1973 was essentially a system of

d. adjustable pegged exchange rates.

31. Given a two-country world, assume Canada and Sweden devalue their currencies by 20 percent. Other things equal, this would result in

d. an appreciation in neither currency.

64. Assume that interest rates in London increase relative to those in Switzerland. Other things equal, under a floating exchange rate system one would expect the pound (relative to the Swiss franc) to

d. appreciate due to the increased demand for pounds.

78. Under a system of fixed exchange rates, the purpose of currency revaluation is to cause the exchange value of a currency to ______, thus counteracting a balance-of-payments ______.

d. appreciate, surplus

25. In recent years, the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade. Thus, proposals have been made that the United States should offset China's currency manipulation by

d. buying yuan and selling dollars, thus appreciating the yuan against the dollar.

3. Which exchange rate mechanism calls for frequent redefining of the par value by small amounts to remove a payment's disequilibrium?

d. crawling pegged exchange rates

75. Other things equal, 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.

d. decrease, increase, increase

66. Other things equal, a market-determined increase in the dollar price of the pound is associated with

d. depreciation of the dollar.

8. Suppose that Bolivia uses a fixed exchange rate system. If it chooses to also allow free capital flows, which of the following policies will it NOT be able to adopt?

d. free capital flows

1. Of the 188 members of the International Monetary Fund, the most frequently used exchange rate arrangement is

d. pegged or fixed exchange rates.

58. The Bretton Woods system of 1944-1973 was based upon

d. relatively stable exchange rates.

47. If Mexico fully dollarizes its economy, it agrees to

d. replace pesos with U.S. dollars in its economy.

85. With fixed exchange rates, assume that the home currency becomes overvalued relative to its par value. Other things equal, to maintain the fixed exchange rate the home country's central bank must

d. sell the home currency, and as a result it gains international reserves.

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

d. the domestic currency is undervalued relative to other currencies

100. Which of the following is an example of currency manipulation that would likely move Japan's trade balance to a trade surplus?

d. when Japan buys U.S. treasuries and sells yen

49. In order to stabilize a currency, a currency board needs to a. use an expansionary monetary policy to offset currency depreciation. b. use an expansionary monetary policy to offset currency appreciation. c. use a contractionary policy to offset currency appreciation.d. None of these are correct.

d.) none of these are correct