Test Questions & Answers International Finance Chapter 19 - Principles of Macroeconomics -Complete Test Bank by Taylor. DOCX document preview.
Chapter 19
International Finance
Multiple Choice
1. A foreign exchange rate refers to
a. | the balance of payments. |
b. | the law of comparative advantage. |
c. | the price of one country’s currency in terms of another currency. |
d. | the price of one good in terms of the price of another good within the country. |
e. | the balance of trade. |
OBJ: conceptual
SEC: 0. International Finance
TOP: Exchange Rate
MSC: Bloom's: Knowledge
2. If the exchange rate between the dollar and peso is that $1 equals 5 pesos, then the price of a peso is
a. | $5. |
b. | $0.25. |
c. | $0.2. |
d. | $2. |
e. | $1. |
OBJ: conceptual
SEC: 0. International Finance
TOP: Exchange Rate
MSC: Bloom's: Application | AACSB: Analytic
3. Suppose that the exchange rate between the dollar and peso is that $1 equals 10 pesos. If a firm in Mexico purchases $10,000 worth of U.S. cellphones, how many pesos must the firm exchange for?
a. | 100 pesos. |
b. | 1,000 pesos. |
c. | 10,000 pesos. |
d. | 100,000 pesos. |
e. | 1,000,000 pesos. |
OBJ: conceptual
SEC: 0. International Finance
TOP: Exchange Rate
MSC: Bloom's: Application | AACSB: Analytic
4. Assume that $1 equals 100 yen. A Japanese student wants to pay $4,000 in tuition for a university in the United States. How many yen should she exchange in order to have the dollars to pay the tuition?
a. | 25,000 yen. |
b. | 250,000 yen. |
c. | 40,000 yen. |
d. | 400,000 yen. |
e. | 4,000,000 yen. |
OBJ: conceptual
SEC: 0. International Finance
TOP: Exchange Rate
MSC: Bloom's: Application | AACSB: Analytic
5. Assume that one U.S. dollar equals 100 yen. An American student wants to pay 500,000 yen in tuition for a university in the Japan. How many dollars should she exchange in order to have the dollars to pay the tuition?
a. | $500. |
b. | $5,000. |
c. | $50,000. |
d. | $500,000. |
e. | $50,000,000. |
OBJ: conceptual
SEC: 0. International Finance
TOP: Exchange Rate
MSC: Bloom's: Application | AACSB: Analytic
6. An appreciation of a country’s currency means
a. | it takes more units of another country’s currency to buy one unit of this currency. |
b. | it takes fewer units of another country’s currency to buy one unit of this currency. |
c. | it takes more units of this currency to buy one unit of the good that country produces. |
d. | it takes fewer units of this currency to buy one unit of the good that country produces. |
e. | how much its domestic consumers enjoy the goods it produces. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Appreciation
MSC: Bloom's: Knowledge
7. A depreciation of a country’s currency means
a. | it takes more units of another country’s currency to buy one unit of this currency. |
b. | it takes fewer units of another country’s currency to buy one unit of this currency. |
c. | it takes more units of this currency to buy one unit of the good that country produces. |
d. | it takes fewer units of this currency to buy one unit of the good that country produces. |
e. | the decrease in its residents’ standard of living. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Depreciation
MSC: Bloom's: Knowledge
8. An appreciation of the dollar relative to the peso means that
a. | one dollar can buy fewer pesos. |
b. | U.S. exports will rise. |
c. | one peso is worth fewer dollars. |
d. | interest rates must have fallen. |
e. | there has been an increase in the demand for foreign assets. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Appreciation
MSC: Bloom's: Analysis | AACSB: Analytic
9. In 2015, one dollar was exchanged for 1.3 euros. In 2017, one dollar was exchanged for 1.09 euros. We know that over period 2015-2017, the euro
a. | appreciated against the dollar. |
b. | depreciated against the dollar. |
c. | was at par with the dollar. |
d. | and the dollar appreciated against all other currencies. |
e. | and the dollar depreciated against all other currencies. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Appreciation
MSC: Bloom's: Analysis | AACSB: Analytic
10. A decrease in the value of a domestic currency in term of another currency is known as
a. | a discount rate |
b. | an appreciation. |
c. | a depreciation. |
d. | a fixed exchange rate. |
e. | an inflation. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Depreciation
MSC: Bloom's: Knowledge
11. Suppose that yesterday one dollar was exchanged for 1.2 euros. Today one dollar is exchanged for 1.3 euros. We know that the euro
a. | has appreciated against the dollar. |
b. | has depreciated against the dollar. |
c. | is now at par with the dollar. |
d. | and the dollar has appreciated against the Japanese yen. |
e. | and the dollar has depreciated against the Japanese yen. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Depreciation
MSC: Bloom's: Analysis | AACSB: Analytic
12. A depreciation of the dollar relative to the euro means that
a. | a dollar can be exchanged for more euros. |
b. | the United States will export more goods to France. |
c. | the United States will import more goods from Germany. |
d. | the United States will export fewer goods to France. |
e. | interest rates in the United States are increasing relative to the interest rates in the euro zone. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Exchange Rates and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
13. All else equal, a depreciation of the dollar makes
a. | both foreign goods and domestic goods cheaper at home |
b. | both foreign goods and domestic goods more expensive at home. |
c. | foreign goods cheaper at home and domestic goods more expensive abroad. |
d. | foreign goods more expensive at home and domestic goods cheaper abroad. |
e. | both domestic and foreign goods more expensive in all countries. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Knowledge | AACSB: Analytic
14. All else equal, an appreciation of the U.S. dollar against the euro makes
a. | both European goods and U.S. goods more expensive in the U.S. |
b. | both European goods and U.S. goods cheaper in the U.S. |
c. | European goods cheaper in the U.S. and U.S. goods more expensive in Europe. |
d. | European goods more expensive in the U.S. and U.S. goods cheaper in Europe. |
e. | U.S. goods cheaper in everywhere other than Europe. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
15. An appreciation of a country’s currency
a. | decreases its exports and increases its imports. |
b. | increases its imports and decreases its exports. |
c. | decreases both its exports and imports. |
d. | increases both its exports and imports. |
e. | has no effect on its exports or imports. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Knowledge | AACSB: Analytic
16. An appreciation of Mexico’s peso
a. | decreases Mexican exports and increases Mexican imports. |
b. | increases Mexican imports and decreases Mexican exports. |
c. | decreases both Mexican exports and imports. |
d. | increases both Mexican exports and imports. |
e. | has no effect on Mexican exports or imports. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
17. An appreciation of a country’s currency leads to
a. | both an increase in exports and imports, leaving net exports unchanged. |
b. | an increase in net exports. |
c. | a decrease in net exports. |
d. | both a decrease in exports and imports, leaving net exports unchanged. |
e. | either an increase or decrease in net exports, depending on the size of the country. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
18. One way to increase U.S. net exports is to
a. | lower the value of the U.S. exchange rate. |
b. | raise the value of the U.S. exchange rate. |
c. | keep the U.S. exchange rate fixed. |
d. | make U.S. exchange rate fluctuate a lot over time. |
e. | make sure the U.S. exchange rate appreciate over time. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
19. The effect of an increase in a country’s inflation on its net exports is equivalent to
a. | a depreciation of its currency. |
b. | an appreciation of its currency. |
c. | an increase in the prices of its imports. |
d. | a decrease in the prices of its exports. |
e. | a decrease in the price of its currency in term of a foreign currency. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Inflation and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
20. All else equal, a higher inflation rate in the U.S. leads to
a. | a decrease in U.S. exports but an increase in U.S. imports. |
b. | an increase in U.S. exports but a decrease in U.S. imports. |
c. | an increase in both U.S. exports and imports. |
d. | a decrease in both U.S. exports and imports. |
e. | no change in either U.S. exports or imports. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Inflation and Net Exports
MSC: Bloom's: Application | AACSB: Analytic
21. All else equal, if the inflation rate increases in the U.S. but remains unchanged in Europe, then
a. | the prices of U.S. goods will remain unchanged in Europe. |
b. | U.S. goods will become cheaper in Europe. |
c. | U.S. goods will become more expensive in Europe. |
d. | U.S. goods will become cheaper in the U.S. and their prices in Europe is undetermined. |
e. | None of these. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Inflation and Net Exports
MSC: Bloom's: Application | AACSB: Analytic
22. All else equal, net exports of a country will increase the most if
a. | its inflation rate decreases and its exchange rate depreciates. |
b. | its inflation rate increases and its exchange rate appreciates. |
c. | its inflation rate decreases and its exchange rate appreciates. |
d. | its inflation rate increases and its exchange rate depreciates. |
e. | both its inflation rate and exchange rate remain the same. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
23. All else equal, a depreciation of the U.S. dollar relative to the euro will
a. | decrease the prices of U.S.-made goods in the United States. |
b. | increase U.S. imports from France. |
c. | decrease U.S. exports to France. |
d. | increase U.S. exports to France. |
e. | increase the prices of French-made goods in France. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
24. All else equal, if the exchange rate of the dollar against the euro increases,
a. | German goods will be less expensive to U.S. residents. |
b. | U.S. residents will purchase fewer German imports |
c. | the quantity of euros supplied will increase. |
d. | German residents will increase their purchases of U.S. goods. |
e. | inflation in the U.S. will increase. |
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
/
25. An appreciation of a currency occurs when the value of that currency increases.
Basic
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Appreciation
MSC: Bloom's: Knowledge
26. A depreciation of the domestic currency occurs when it takes more units of foreign currency to buy a unit of domestic currency.
Basic
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Depreciation
MSC: Bloom's: Knowledge
27. The U.S. dollar has appreciated against the euro if it has taken more euros to purchase one dollar.
Moderate
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Appreciation
MSC: Bloom's: Application | AACSB: Analytic
28. The yen has depreciated if $1 equaled 100 yen yesterday but 105 yen today.
Moderate
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rate Depreciation
MSC: Bloom's: Application | AACSB: Analytic
29. When the U.S. dollar appreciates, foreign goods are cheaper in the U.S. and U.S. goods are more expensive abroad.
Moderate
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Knowledge | AACSB: Analytic
30. All else equal, a depreciation of the Japanese yen leads to an increase in Japan’s net exports.
Moderate
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Exchange Rates and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
31. All else equal, a higher rate of inflation in the foreign country makes foreign goods cheaper in the domestic country.
Moderate
OBJ: conceptual
SEC: 1. Exchange Rates
TOP: Inflation and Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
Short Answer
32. What does it mean when the dollar appreciates? What does it mean when the dollar depreciate?
a. | U.S. residents demand more European goods. |
b. | U.S. residents demand fewer European goods. |
c. | European residents demand more U.S. goods. |
d. | European residents demand more European goods. |
e. | U.S. residents demand fewer U.S. goods. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Analysis | AACSB: Analytic
35. If there is an increase in the U.S. demand for European goods, then
a. | both the dollar and the euro will appreciate. |
b. | both the dollar and the euro will depreciate. |
c. | the dollar will depreciate against the euro. |
d. | the dollar will appreciate against the euro. |
e. | the exchange rate between the dollar and the euro will remain unchanged, but their exchange rates will appreciate against other currencies. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Analysis | AACSB: Analytic
36. If U.S. residents boycott German goods, then
a. | the demand for euros will decrease in the foreign exchange market. |
b. | the supply of euros will decrease in the foreign exchange market. |
c. | German goods will be more expensive in Germany. |
d. | the euro will appreciate. |
e. | there is no effect on the euro. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Analysis | AACSB: Analytic
37. Demand for the Mexican peso is determined by
a. | how stable the peso keeps its value. |
b. | the demand for Mexican goods by other countries. |
c. | the supply of Mexican goods to other countries. |
d. | the demand for other countries’ goods in those countries. |
e. | the supply of other countries’ goods in those countries. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Application | AACSB: Analytic
38. All else equal, a rightward shift of the demand curve of the market for the U.S. dollar would result in
a. | an appreciation of the dollar. |
b. | an increase in the demand for foreign financial assets. |
c. | an appreciation of a foreign currency. |
d. | a decrease in the equilibrium quantity of the dollar. |
e. | an increase in the equilibrium quantity of a foreign currency. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Analysis | AACSB: Analytic
39. All else equal, an increase in the U.S. interest rate will
a. | increase the demand for the dollar. |
b. | decrease the demand for the dollar. |
c. | increase the supply of the dollar. |
d. | increase the demand for foreign currencies. |
e. | have no effect on either the demand for or supply of currencies. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Interest Rate Differentials
MSC: Bloom's: Knowledge | AACSB: Analytic
40. All else equal, an increase in the U.S. interest rate will likely lead to
a. | an appreciation of the dollar. |
b. | a depreciation of the dollar. |
c. | a decrease in the value of the dollar. |
d. | an increase in U.S. net exports. |
e. | less foreign investment in the United States. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Interest Rate Differentials
MSC: Bloom's: Application | AACSB: Analytic
41. Suppose the interest rates in both Japan and the United States rise, but the Japanese interest rate rises more than the U.S. interest rate does. As a result, international investors will
a. | do nothing because investors do not react to changes in interest rates. |
b. | find Japanese financial assets equally attractive as U.S. financial assets. |
c. | find Japanese financial assets less attractive than U.S. financial assets. |
d. | find Japanese financial assets more attractive than U.S. financial assets. |
e. | find both Japanese and U.S. financial assets worthless. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Interest Rate Differentials
MSC: Bloom's: Application | AACSB: Analytic
42. During the period between 1980 and 2010, a comparison of interest rate differential between the U.S. and the United Kingdom against their exchange rate suggest that
a. | when the U.S. interest rate was relatively higher, the dollar depreciated. |
b. | when the U.S. interest rate was relatively lower, the dollar depreciated. |
c. | the interest rate differential and exchange rate are positively related half the time and negatively related the other half of the time. |
d. | both the interest rate differential and exchange rate were very steady over the entire period. |
e. | there is no relationship between changes in the interest rate differential and the exchange rate. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Interest Rate Differentials
MSC: Bloom's: Knowledge | AACSB: Analytic
43. When the central bank of the United States increases the interest rate,
a. | the dollar will appreciate, and net exports will rise. |
b. | the dollar will depreciate, and net exports will fall. |
c. | the dollar will depreciate, and net exports will rise. |
d. | the dollar will appreciate, and net exports will fall. |
e. | the dollar will depreciate, and net exports will remain constant. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Interest Rate and Exchange Rate
MSC: Bloom's: Analysis | AACSB: Analytic
44. Which is the theory that suggests that the exchange rate will adjust so that the prices of goods in different countries are the same?
a. | Price differentials |
b. | The law of zero price |
c. | The law of multiple prices |
d. | Purchasing power parity |
e. | Comparative advantage |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Purchasing Power Parity
MSC: Bloom's: Knowledge
45. Purchasing power parity is basically the same as
a. | the law of no price. |
b. | the law of one price. |
c. | the law of price differentials. |
d. | the law of no exchange rate movements. |
e. | the law of short-run exchange rate determination. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Purchasing Power Parity
MSC: Bloom's: Knowledge
46. Purchasing power parity exists when domestic currency
a. | buys more goods abroad as at home. |
b. | buys the same amount of goods abroad as at home. |
c. | buys less goods abroad as at home. |
d. | is not convertible to a foreign currency. |
e. | has a fixed exchange rate with a foreign currency. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Purchasing Power Parity
MSC: Bloom's: Knowledge
47. Purchasing power parity more likely occurs under all the following conditions except
a. | low transportation costs. |
b. | a non-convertible currency. |
c. | more non-tradable goods. |
d. | more open to imports. |
e. | flexible prices. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Purchasing Power Parity
MSC: Bloom's: Knowledge | AACSB: Analytic
48. According to the theory of purchasing power parity, if the domestic country’s inflation rate decreases while the inflation rates in other countries remain unchanged, then
a. | the domestic currency will appreciate over time. |
b. | the domestic currency will depreciate over time. |
c. | the exchange rate of the domestic currency will remain unchanged but the exchange rates of other currencies will appreciate. |
d. | the exchange rate of the domestic currency will fluctuate over time. |
e. | nothing will occur because of the law of one price. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Inflation Differentials
MSC: Bloom's: Analysis | AACSB: Analytic
49. According to the theory of purchasing power parity, if inflation is 5 percent in the U.S. and 2 percent in Canada, then
a. | the U.S. dollar will appreciate against the Canadian dollar over time. |
b. | the U.S. dollar will depreciate against the Canadian dollar over time. |
c. | both the U.S. dollar and the Canadian dollar will appreciate against other currencies. |
d. | both the U.S. dollar and the Canadian dollar will depreciate against other currencies. |
e. | nothing will occur. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Inflation Differentials
MSC: Bloom's: Analysis | AACSB: Analytic
50. The data for the inflation rates and currency exchange rates of the United States, Japan and Brazil over the period 1980-2010 confirm that
a. | the U.S. dollar appreciated against the currency of a country with a relatively lower inflation rate. |
b. | the U.S. dollar appreciated against the currency of a country with a relatively higher inflation rate. |
c. | the U.S. dollar appreciated regardless of the inflation rates in other countries. |
d. | the U.S. dollar depreciated regardless of the inflation rates in other countries. |
e. | the U.S. dollar was fixed. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Inflation Differentials
MSC: Bloom's: Knowledge | AACSB: Analytic
51. According to the textbook, foreign exchange rates during the period 1980-2010
a. | support the purchasing power parity theory with evidence that a country with relatively high inflation experienced an depreciation of its currency exchange rate. |
b. | reject the purchasing power parity theory with evidence that a country with relatively high inflation experienced a depreciation of its currency exchange rate. |
c. | support the purchasing power parity theory with evidence that a country with relatively high inflation experienced a depreciation of its currency exchange rate. |
d. | reject the purchasing power parity theory with evidence that a country with relatively high inflation experienced an appreciation of its currency exchange rate. |
e. | does not support or reject the purchasing power parity theory because there is no evidence of any relationship between a country’s inflation and its currency exchange rate. |
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Inflation Differentials
MSC: Bloom's: Knowledge | AACSB: Analytic
/
52. When the price of a currency is higher, the quantity of this currency demanded is lower.
Basic
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Knowledge
53. All else equal, an increase in the demand for the U.S. dollar results in an appreciation of the dollar.
Basic
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Knowledge
54. All else equal, an increase in the U.S. demand for foreign goods causes an appreciation of the dollar.
Moderate
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Analysis | AACSB: Analytic
55. If interest rates in other countries remain unchanged, then an increase in the U.S. interest rate will lead to an appreciation of the dollar.
Moderate
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Interest Rate Differentials
MSC: Bloom's: Analysis | AACSB: Analytic
56. Interest rate differentials explain exchange rate movements in the long run.
Basic
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Interest Rate Differentials
MSC: Bloom's: Knowledge
57. Differences in prices between two countries explain exchange rate movements in the long run.
Basic
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Price Differentials
MSC: Bloom's: Knowledge
58. The theory of purchasing power parity works well if there are more non-tradable goods.
Basic
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Purchasing Power Parity
MSC: Bloom's: Knowledge
59. The theory of purchasing power parity predicts that a country’s currency will depreciate if its inflation is higher, all else equal.
Basic
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Purchasing Power Parity
MSC: Bloom's: Knowledge
60. The theory of purchasing power parity implies that price differentials between two countries do not exist in the long run.
Moderate
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Purchasing Power Parity
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer
61. In the foreign exchange market, who demands U.S. dollars and who supplies U.S. dollars? Explain.
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Knowledge | AACSB: Analytic
62. Suppose the foreign exchange market is in equilibrium. Now the interest rate in the United States rises while the interest rate in Germany remains the same. What will happen to the euro in the foreign exchange market? Explain.
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Analysis | AACSB: Analytic
63. Why does the demand curve for the dollar slope down? Why does the supply curve of the dollar slope up?
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Analysis | AACSB: Analytic
64. What is the theory of purchasing power parity? What does it predict about exchange rate movements?
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Purchasing Power Parity
MSC: Bloom's: Analysis | AACSB: Analytic
65. What determines an exchange rate in the short run? What determines an exchange rate in the long run? Explain.
OBJ: conceptual
SEC: 2. Exchange Rate Determination
TOP: Exchange Rate Determination
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
66. Which of the following is about exchange rate systems in the world?
a. | Many European countries have fixed exchange rates with each other. |
b. | Most countries in the world have flexible exchange rate systems. |
c. | Only developing countries have fixed exchange rates. |
d. | The United States has always had a flexible exchange rate system. |
e. | The United States has always had a fixed exchange rate system. |
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Exchange Rate System
MSC: Bloom's: Knowledge | AACSB: Analytic
67. A flexible exchange rate policy
a. | is one in which the central bank has flexibility in determining exchange rates. |
b. | has not been used in the United States since the Great Depression. |
c. | is one in which the exchange rate is determined in the foreign exchange market. |
d. | gives the president the power to determine exchange rates when negotiating free trade agreements with other countries. |
e. | has been adopted universally throughout the world economy. |
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Flexible Exchange Rate Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
68. A fixed exchange rate system
a. | has been adopted universally throughout the world economy. |
b. | is one in which the foreign exchange markets determine at what value to fix a country's exchange rate. |
c. | has not been in place since the Great Depression. |
d. | is the system that determines the exchange rate between the U.S. dollar and the euro. |
e. | is one in which a country maintains a fixed value of its currency in terms of other currencies. |
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Fixed Exchange Rate Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
69. If a country has a fixed exchange rate,
a. | it will have a more stable economy. |
b. | it will have lower inflation. |
c. | it will have higher inflation. |
d. | it will have fixed interest rates. |
e. | it cannot use monetary policy to control inflation. |
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Fixed Exchange Rate System
MSC: Bloom's: Analysis | AACSB: Analytic
70. If two countries have a fixed exchange rate, they will both have
a. | lower inflation. |
b. | interest rates that move in the same direction. |
c. | more stable economies. |
d. | fixed interest rates at differential levels. |
e. | interest rates that move in the opposite direction. |
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Fixed Exchange Rate System
MSC: Bloom's: Analysis | AACSB: Analytic
71. The fixing of exchange rates in Europe means that
a. | each country no longer has control over its monetary policy. |
b. | when one country is in a recession they will all be in a recession. |
c. | each country no longer needs a central bank. |
d. | each country no longer has control over its monetary or fiscal policy. |
e. | inflation will be higher in Europe. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Fixed Exchange Rate System
MSC: Bloom's: Analysis | AACSB: Analytic
72. The fixing of exchange rates in Europe means that, if Italy experiences an expansion and the others do not,
a. | Italy will have to drop out of the fixed exchange rate system to regain control over its inflation. |
b. | Italy can use fiscal policy but not monetary policy to cool down the economy. |
c. | Italy cannot use fiscal or monetary policy to cool down the economy. |
d. | Italy can use monetary policy but not fiscal policy to cool down the economy. |
e. | inflation will spiral out of control in Italy. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Fixed Exchange Rate System
MSC: Bloom's: Analysis | AACSB: Analytic
73. Between 2000 and 2005, China pegged its currency to the dollar by
a. | selling dollars in the foreign exchange market. |
b. | buying the Chinese currency in the foreign exchange market. |
c. | decreasing its holdings of dollar reserves and increasing its holdings of domestic currency. |
d. | increasing its holdings of dollar reserves and decreasing its holdings of domestic currency. |
e. | doing nothing. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: The Role of Reserves
MSC: Bloom's: Knowledge | AACSB: Analytic
74. Suppose a central bank attempts to peg its country’s currency to the dollar. Now interest rates in the United States increase. To maintain the fixed exchange rate, that central bank can
a. | sell dollars in the foreign exchange market. |
b. | reduce the holding of its country’s currency. |
c. | decrease interest rates in its country. |
d. | sell its country’s currency in the foreign exchange market. |
e. | buy dollars in the foreign exchange market. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: The Role of Reserves
MSC: Bloom's: Analysis | AACSB: Analytic
75. If the value of a currency is believed to have been kept artificially too high, the currency is considered to be
a. | overvalued. |
b. | undervalued. |
c. | at par. |
d. | appreciated. |
e. | depreciated. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Overvaluation
MSC: Bloom's: Knowledge
76. If the value of a currency is believed to have been kept artificially too low, the currency is considered to be
a. | overvalued. |
b. | undervalued. |
c. | at par. |
d. | appreciated. |
e. | depreciated. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Undervaluation
MSC: Bloom's: Knowledge
77. Some governments have undervalued their currencies in an attempt to
a. | raise exports. |
b. | raise imports. |
c. | keep inflation low. |
d. | keep interest rates low. |
e. | increase domestic consumption. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Undervaluation
MSC: Bloom's: Knowledge | AACSB: Analytic
78. Suppose the policymakers believe their country’s currency is overvalued, they should apply a policy of
a. | undervaluation. |
b. | devaluation. |
c. | revaluation. |
d. | appreciation. |
e. | the law of one price. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Devaluation
MSC: Bloom's: Knowledge
79. Suppose the policymakers believe their country’s currency is undervalued, they should apply a policy of
a. | overvaluation. |
b. | devaluation. |
c. | revaluation. |
d. | depreciation. |
e. | the law of one price. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Revaluation
MSC: Bloom's: Knowledge
80. A government may apply a policy of revaluation when it believes its currency is
a. | overvalued. |
b. | undervalued. |
c. | at par. |
d. | at equilibrium. |
e. | in purchasing power parity. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Revaluation
MSC: Bloom's: Knowledge
81. The U.S. government may devalue the dollar if it believes the dollar is
a. | overvalued. |
b. | undervalued. |
c. | at par. |
d. | at equilibrium. |
e. | in purchasing power parity. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Devaluation
MSC: Bloom's: Knowledge
82. Suppose you peg your currency to the U.S. dollar. Now interest rates in the United States have increased. To maintain the fixed exchange rate, you can
a. | sell dollars in the foreign exchange market. |
b. | buy dollars in the foreign exchange market. |
c. | decrease interest rates in your country. |
d. | raise your country’s inflation rate. |
e. | sell your currency in the foreign exchange market. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Exchange Rate Intervention
MSC: Bloom's: Analysis | AACSB: Analytic
83. Foreign exchange market intervention like devaluation or revaluation occurs
a. | when a central bank changes interest rates. |
b. | whenever there is countercyclical fiscal policy. |
c. | only if a country has adopted a flexible exchange rate policy. |
d. | when a country's government buys or sells foreign currency to affect its exchange rate. |
e. | only when countries want to permanently alter exchange rates. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Exchange Rate Intervention
MSC: Bloom's: Analysis | AACSB: Analytic
84. Devaluation or revaluation by governments
a. | is viable only for short periods of time. |
b. | does not occur. |
c. | is used solely to alter exchange rates for long periods of time. |
d. | enables flexible exchange rates. |
e. | is more likely to work if the central bank does not change interest rates. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Exchange Rate Intervention
MSC: Bloom's: Analysis | AACSB: Analytic
85. The East Asian currency crisis of 1997 was a result of
a. | central banks running out of foreign currency reserves. |
b. | central banks keeping large amounts of foreign currency reserves. |
c. | central banks cutting interest rates. |
d. | East Asian countries growing too rapidly. |
e. | a flexible exchange rate policy. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: The Role of Reserves
MSC: Bloom's: Knowledge | AACSB: Analytic
86. Sustained undervaluation of a country’s currency results in
a. | a fall in the domestic money supply. |
b. | a rise in the prices of domestic goods and services. |
c. | deflation. |
d. | falling interest rates. |
e. | the depletion of foreign currency reserves. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Undervaluation
MSC: Bloom's: Knowledge | AACSB: Analytic
87. As a result of undervaluation,
a. | domestic consumers can buy more foreign goods. |
b. | exporters can sell more goods to foreign buyers. |
c. | domestic currency is artificially more valuable. |
d. | the government faces a flexible exchange rate. |
e. | consumers pay more for domestic goods. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Undervaluation
MSC: Bloom's: Analysis | AACSB: Analytic
88. If a central bank devaluates its currency, then
a. | the domestic money supply will fall. |
b. | inflation will increase. |
c. | deflation will occur. |
d. | its domestic interest rate will fall. |
e. | its domestic money supply will fall. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Devaluation
MSC: Bloom's: Analysis | AACSB: Analytic
/
89. The United States has maintained a fixed exchange rate policy throughout its history.
Basic
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Fixed Exchange Rates
MSC: Bloom's: Knowledge
90. The Bretton-Woods system is an example of a fixed exchange rate system.
Basic
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Fixed Exchange Rates
MSC: Bloom's: Knowledge
91. Flexible exchange rate policies have been adopted throughout history.
Moderate
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Exchange Rate System
MSC: Bloom's: Analysis | AACSB: Analytic
92. Currency overvaluation benefits domestic producers that exports goods to other countries.
Moderate
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Overvaluation
MSC: Bloom's: Knowledge | AACSB: Analytic
93. A government can apply a policy of devaluation to adjust its exchange rate if it believes its currency is overvalued.
Basic
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Devaluation
MSC: Bloom's: Knowledge
94. Undervaluation of a currency helps exporters sell more goods to foreign buyers.
Basic
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Undervaluation
MSC: Bloom's: Knowledge
95. One way for a government to keep its currency undervalued over time is to increase its holdings of foreign currency reserves.
Moderate
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: The Role of Reserves
MSC: Bloom's: Knowledge | AACSB: Analytic
96. A government’s policy to keep its currency undervalued by increasing its foreign currency reserves will eventually lead to deflation.
Moderate
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: The Role of Reserves
MSC: Bloom's: Knowledge | AACSB: Analytic
97. Exchange market devaluation or revaluation has been shown to have large and long-lasting effect on the exchange rate.
Moderate
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Exchange Rate Intervention
MSC: Bloom's: Knowledge | AACSB: Analytic
98. To avoid changing your interest rate to put it in line with the country to whose currency your own currency is pegged, you can attempt to buy and sell foreign currency in the exchange market as an alternative.
Moderate
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Exchange Rate Intervention
MSC: Bloom's: Analysis | AACSB: Analytic
99. If a country fixes its currency to the dollar, its economy becomes closely linked to the actions of the Federal Reserve.
Moderate
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Currency Unions
MSC: Bloom's: Analysis | AACSB: Analytic
100. It is possible to have both a fixed exchange rate and control over your own monetary policy if you impose strict controls on financial capital flows into and out of your country.
Moderate
OBJ: factual
SEC: 3. Fixed Exchange Rates
TOP: Exchange Rate Intervention
MSC: Bloom's: Analysis | AACSB: Analytic
Short Answer
101. Explain why and how China has kept its Chinese renminbi undervalued? What would be the potential problem for this policy?
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Exchange Rate Intervention
MSC: Bloom's: Analysis | AACSB: Analytic
102. Suppose Country A pegs its currency to the dollar. If Country A wants to keep the exchange rate fixed, what are its options under each of the following scenarios? Is there an advantage to one of the options?
(A) | U.S. interest rates rise. |
(B) | There is a recession in the United States so that household income falls. |
(C) | Country A experiences a positive wealth effect that raises consumer spending. |
(A) | Raise interest rates in Country A or sell dollars on the foreign exchange market. Raising interest rates may cause a recession. Selling dollars is not likely to be effective if done alone. |
(B) | Since U.S. interest rates are falling, Country A must lower its interest rates or buy dollars on the foreign exchange market. Lowering interest rates may be inflationary. |
(C) | Country A must either increase the money supply to put downward pressure on interest rates or employ a countercyclical fiscal policy. It could also buy dollars on the foreign exchange market. Increasing the money supply will fuel the expansion. Buying dollars to prevent the currency from appreciating is unlikely to be effective. |
OBJ: conceptual
SEC: 3. Fixed Exchange Rates
TOP: Exchange Rate Intervention
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
103. The Economic and Monetary Union is an example of
a. | a tariff. |
b. | the gold standard. |
c. | a labor union. |
d. | a system of common currency. |
e. | a system of flexible exchange rates. |
OBJ: factual
SEC: 4. Currency Unions
TOP: EMU
MSC: Bloom's: Knowledge
104. The currency for members of the EMU is
a. | the euro. |
b. | the dollar. |
c. | the pound. |
d. | the real. |
e. | renminbi. |
OBJ: factual
SEC: 4. Currency Unions
TOP: EMU
MSC: Bloom's: Knowledge
105. Which of the following countries has adopted the euro as its currency since 1999?
a. | Germany |
b. | The United Kingdom |
c. | Denmark |
d. | Sweden |
e. | China |
OBJ: factual
SEC: 4. Currency Unions
TOP: EMU
MSC: Bloom's: Knowledge
106. All of the following countries are members of the Eurozone except
a. | Ireland. |
b. | Germany. |
c. | France. |
d. | Italy. |
e. | the United Kingdom. |
OBJ: factual
SEC: 4. Currency Unions
TOP: EMU
MSC: Bloom's: Knowledge
107. The central bank for the EMU is
a. | Bank of England. |
b. | the Riksbank. |
c. | the Federal Reserve. |
d. | European Central Bank. |
e. | None of these: The EMU does not have a central bank. |
OBJ: factual
SEC: 4. Currency Unions
TOP: EMU
MSC: Bloom's: Knowledge
108. The criteria for joining the EMU was laid out by
a. | the Treaty of Maastricht in 1992. |
b. | the Tokyo Round in 1979. |
c. | the Uruguay Round in 1986. |
d. | the Treaty of Versailles in 1919. |
e. | the Recovery and Reinvestment Act of 2009. |
OBJ: factual
SEC: 4. Currency Unions
TOP: EMU
MSC: Bloom's: Knowledge
109. The convergence criteria for joining the EMU include all the following except
a. | inflation at a given low rate. |
b. | the long-term interest rate at a given low rate. |
c. | a budget deficit not exceeding 3 percent of GDP. |
d. | government debt not exceeding 60 percent of GDP. |
e. | an annual growth rate of real GDP per capita higher than 5 percent. |
OBJ: factual
SEC: 4. Currency Unions
TOP: EMU
MSC: Bloom's: Knowledge | AACSB: Analytic
110. One major reason for the countries that have joined the EU but not the EMU is that those countries
a. | do not want to lose monetary policy independence. |
b. | do not want to lose tariff revenues. |
c. | want more free trade with other countries. |
d. | want to have more government spending. |
e. | have people speaking different languages. |
OBJ: factual
SEC: 4. Currency Unions
TOP: EMU
MSC: Bloom's: Knowledge | AACSB: Analytic
111. Countries are motivated to pursue fixed exchange rate policies in order
a. | to allow their central banks to pursue an independent monetary policy. |
b. | to have an independent fiscal policy. |
c. | to limit the use of countercyclical fiscal policy. |
d. | to reduce exchange rate volatility. |
e. | raise tariff revenue from importing foreign goods. |
OBJ: conceptual
SEC: 4. Currency Unions
TOP: Why Countries Form Fixed Exchange Rate Systems
MSC: Bloom's: Analysis | AACSB: Analytic
112. Which of the following is a rationale for countries joining the Eurozone?
a. | Increased central bank independence |
b. | Free trade with countries outside the Eurozone |
c. | More trade and investment flows with a common currency |
d. | Improvement of countercyclical policy capabilities |
e. | The need for independent fiscal policy |
OBJ: conceptual
SEC: 4. Currency Unions
TOP: Why Countries Form Fixed Exchange Rate Systems
MSC: Bloom's: Analysis | AACSB: Analytic
113. Which of the following is a drawback for very small member states like Ireland to join the Economic and Monetary Union (EMU)?
a. | Economic policy for the EMU reflects less of the particular economic conditions of smaller member states than for larger member states. |
b. | Economic policy for the EMU reflects the economic conditions of smaller member states equally as larger member states. |
c. | Economic policy for the EMU reflects more of the particular economic conditions of smaller member states than for larger member states. |
d. | Economic policy for the EMU does not reflect the economic conditions of any of its member states. |
e. | Economic policy for the EMU reflects only the economic conditions of Germany. |
OBJ: conceptual
SEC: 4. Currency Unions
TOP: Why Countries Form Fixed Exchange Rate Systems
MSC: Bloom's: Analysis | AACSB: Analytic
/
114. The Economic and Monetary Union in Europe is a currency union.
Basic
OBJ: factual
SEC: 4. Currency Unions
TOP: Currency Unions
MSC: Bloom's: Knowledge
115. An advantage of being part of a currency union is forced monetary discipline.
Moderate
OBJ: factual
SEC: 4. Currency Unions
TOP: Currency Unions
MSC: Bloom's: Knowledge | AACSB: Analytic
116. Countries who maintain fixed exchange rates with each other are likely to more frequently employ countercyclical fiscal policy.
Moderate
OBJ: factual
SEC: 4. Currency Unions
TOP: Currency Unions
MSC: Bloom's: Analysis | AACSB: Analytic
117. In the case of the European Union, the benefit of a fixed exchange rate system outweighed the loss of a separate monetary policy.
Moderate
OBJ: factual
SEC: 4. Currency Unions
TOP: Why Countries Form Fixed Exchange Rate Systems
MSC: Bloom's: Analysis | AACSB: Analytic
118. In the case of Italy, the benefit of a fixed exchange rate with the European Union outweighed the loss of a separate monetary policy.
Moderate
OBJ: factual
SEC: 4. Currency Unions
TOP: Why Countries Form Fixed Exchange Rate Systems
MSC: Bloom's: Analysis | AACSB: Analytic
119. The European Central Bank’s decision to lower interest rates in 2000 and 2001 had no adverse effect the EMU members.
Moderate
OBJ: conceptual
SEC: 4. Currency Unions
TOP: Problems with a Fixed Exchange Rate System
MSC: Bloom's: Knowledge | AACSB: Analytic
120. The Eurozone is an example of a combination of both fixed and flexible exchange rate system.
Moderate
OBJ: factual
SEC: 4. Currency Unions
TOP: Currency Unions
MSC: Bloom's: Knowledge | AACSB: Analytic
121. Most countries that are members of the EMU also have a common monetary policy.
Basic
OBJ: conceptual
SEC: 4. Currency Unions
TOP: EMU
MSC: Bloom's: Knowledge
Short Answer
122. Name two reasons why a country would want to fix its exchange rate.
OBJ: conceptual
SEC: 4. Currency Unions
TOP: Fixed Exchange Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
123. Explain why a country will lose control over its monetary policy if it fixes its exchange rate to the euro.
OBJ: conceptual
SEC: 4. Currency Unions
TOP: Loss of Control over Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
124. “Countries that prefer to follow a specific monetary policy will not find it beneficial to join a currency union.” Answer or about this statement. Explain.
OBJ: conceptual
SEC: 4. Currency Unions
TOP: Currency Unions
MSC: Bloom's: Analysis | AACSB: Analytic
125. “European countries that want the benefits of fixed exchange rates with their neighboring countries without the costs could simply impose strict controls on investment flows into and out of their country.” Answer or about this statement. Explain.
OBJ: conceptual
SEC: 4. Currency Unions
TOP: Fixed Exchange Rate
MSC: Bloom's: Analysis | AACSB: Analytic