Ch. 6, MCQ's

Under a fixed exchange rate system:

Under a fixed exchange rate system:

To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities.

buy; buy

A primary result of the Smithsonian Agreement was:

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

A primary result of the Bretton Woods Agreement was:

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

If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:

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

Which of the following is an example of direct intervention in foreign exchange markets?

exchanging dollars for foreign currency.

During the period 1944-1971, the U.S. used a ____ system

fixed

A "dirty" float represents a system of:

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

Which of the following is not a reason for devaluation of a currency?

high inflation.

Countries that have adopted the euro tend to have very similar ____.

interest rates

When using indirect intervention, a central bank is likely to focus on:

interest rates.

The euro is the currency:

none of the above

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:

nonsterilized intervention.

The risk-free interest rates among countries that have adopted the euro should:

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

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.

outward shift in supply of; outward shift in demand for

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.

purchase euro put options

If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would most likely ____ to capitalize on this intervention.

purchase yen call options

To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:

sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities.

sell; sell

From a financial management perspective, which of the following is true regarding the introduction of the Euro?

transactions costs decline for MNCs that conduct transactions within Europe.

The interest rate of a country with a currency board:

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

China's yuan is presently:

allowed to fluctuate but with central bank intervention.

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.

downward; downward; upward

A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.

downward; upward

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?

Buy dollars with foreign currency

The European Central Bank is located in:

Frankfurt.

Which of the following is not true regarding the eurozone?

Members cannot apply their own fiscal policies.

Which of the following is true regarding the euro?

1. Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders. 2. It allows for more consistent economic conditions across countries. 3. It prevents each country from conducting its own monetary policy.

Which of the following is not true regarding the Mexican peso crisis?

1. Mexico encouraged firms and consumers to buy an excessive amount of imports because the peso was stronger than it should have been. 2. Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in Mexico. 3. In December of 1994, the central bank of Mexico allowed the peso to float freely. 4. The central bank of Mexico increased interest rates after the peso declined in value in order to prevent investors from withdrawing their investments in Mexico's debt securities.

Which of the following are examples of currency controls?

1. import restrictions. 2. prohibition of remittance of funds. 3. ceilings on granting credit to foreign firms.

The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.

8

Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?

China.

The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries.

European

Which of the following are true about the Southeast Asian currency crisis?

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

To force the value of the pound to appreciate against the dollar, the Federal Reserve should:

Sell dollars for pound in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.

Which of the following countries have not adopted the euro?

Switzerland

Which of the following is not true regarding Thailand?

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

The euro has not been adopted by:

The UK

Which of the following did not occur as a result of Bretton Woods Agreement?

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

Which one is not a disadvantage of a freely floating exchange rate system?

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

Which one of the following is a disadvantage of a fixed exchange rate system:

The government might change the value of the currency.

Which of the following is the most likely reason for revaluation of a currency?

To reduce inflation.

Which of the following is an appropriate form of indirect intervention?

To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation.

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?

Weaken the dollar

Which of the following is not true regarding government intervention?

a. Under the direct method of intervention, an appreciation of the dollar would be accomplished by exchanging dollars for foreign currencies. b. Under nonsterilized intervention, the Fed would intervene in the foreign exchange market without adjusting the money supply. c. Under sterilized intervention, the Fed would intervene simultaneously in the foreign exchange and Treasury markets. d. Under indirect intervention, the Fed would attempt to affect the dollar's value by indirectly influencing the factors that determine it, such as interest rates.

Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would

a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars. b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars. c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars. d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.

Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would

a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars. b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars. c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars. d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars. *e. none of the above*

Among the reasons for government intervention are:

a. to smooth exchange rate movement. b. to establish implicit exchange rate boundaries. c. to respond to temporary disturbances.

If the Fed desires to weaken the dollar without affecting the dollar money supply, it should:

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

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.

floating rate; floating rate

A strong dollar is normally expected to cause:

high unemployment and low inflation in the U.S.

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 ____.

increase; decrease

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 ____.

increases; appreciate; weaken

As foreign exchange activity has grown, a given degree of central bank intervention has become:

less effective.

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.

less; more

A weak dollar is normally expected to cause:

low unemployment and high inflation in the U.S.

The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a:

managed float system.

Countries that have adopted the euro must agree on a single ____ policy.

monetary

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.

more; less

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:

snake agreement.

The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar's value is expected to:

strengthen

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.

upward; reduce; unchanged

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.

upward; upward; downward

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.

weakening; decrease