Ch15

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

a

15. 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

a

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 b. Managed floating exchange rates c. Adjustable pegged exchange rates d. Crawling pegged exchange rates

a

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. 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

a

22. 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

a

30. 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

a

36. 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

a

39. 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

a

4. 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

a

7. 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

a

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

b

13. 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

b

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 illustrates this basket? a. IMF tranche b. Special Drawing Rights c. Primary reserve asset d. Swap facility

b

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. 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

b

31. 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

b

38. 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

b

40. 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

b

5. 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

b

1. 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

c

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? a. Pegged or fixed exchange rates b. Adjustable pegged exchange rates c. Managed floating exchange rates d. Freely floating exchange rates

c

23. 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

c

32. 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

c

34. 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

c

35. 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

c

41. A main purpose of exchange stabilization funds is to: a. Permit a country to overvalue its currency in the exchange markets b. Permit a country to undervalue its currency in the exchange markets c. Increase the supply of foreign currency when imports exceed exports d. Decrease the supply of foreign currency when imports exceed exports

c

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 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

c

16. 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

d

3. 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

d

6. 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

d

8. 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

d