Madura Chapter 6

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Chapter 6

Government Influence on Exchange Rates

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 entral !ank "E!)

should sell dollars for pounds in the foreign exchange market.!) sell pounds for dollars in the foreign exchange market and the European entral !ank "E!)

should sell dollars for pounds in the foreign exchange market.) sell pounds for dollars in the foreign exchange market and the European entral !ank "E!)

should not intervene.#) sell dollars for pounds in the foreign exchange market and the European entral !ank "E!)

should sell pounds for dollars in the foreign exchange market.

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'. A (eak dollar is normall expected to cause:A) high unemploment and high inflation in the *.%.!) high unemploment and lo( inflation in the *.%.) lo( unemploment and lo( inflation in the *.%.#) lo( unemploment and high inflation in the *.%.

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+. A strong dollar is normall expected to cause:A) high unemploment and high inflation in the *.%.

!) high unemploment and lo( inflation in the *.%.) lo( unemploment and lo( inflation in the *.%.#) lo( unemploment and high inflation in the *.%.

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. To force the value of the !ritish pound to depreciate against the dollar, the Federal Reserve should:A) sell dollars for pounds in the foreign exchange market and the !ank of England should sell

dollars for pounds in the foreign exchange market.!) sell pounds for dollars in the foreign exchange market and the !ank of England should sell

dollars for pounds in the foreign exchange market.) sell pounds for dollars in the foreign exchange market and the !ank of England should sell

pounds for dollars in the foreign exchange market.

#) sell dollars for pounds in the foreign exchange market and the !ank of England should sellpounds for dollars in the foreign exchange market.

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. onsider t(o countries that trade (ith each other, called / and 0. According to the text, inflation inountr / (ill have a greater impact on inflation in ountr 0 under the sstem. $o(,consider t(o other countries that trade (ith each other, called A and !. *nemploment in ountrA (ill have a greater impact on unemploment in ountr ! under the sstem.A) floating rate2 fixed rate!) floating rate2 floating rate

) fixed rate2 fixed rate#) fixed rate2 floating rate

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3. A primar result of the !retton &oods Agreement (as:A) the esta4lishment of the European 5onetar %stem "E5%).!) esta4lishing specific rules for (hen tariffs and 6uotas could 4e imposed 4 governments.) esta4lishing that exchange rates of most ma7or currencies (ere to 4e allo(ed to fluctuate 18

a4ove or 4elo( their initiall set values.#) esta4lishing that exchange rates of most ma7or currencies (ere to 4e allo(ed to fluctuate freel

(ithout 4oundaries "although the central 4anks did have the right to intervene (hen necessar).

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9. A primar result of the %mithsonian Agreement (as:A) the esta4lishment of the European 5onetar %stem "E5%).!) esta4lishing that exchange rates of most ma7or countries (ere to 4e allo(ed to fluctuate '.'8

a4ove or 4elo( their initiall set values.) esta4lishing specific rules for (hen tariffs and 6uotas could 4e imposed 4 governments.#) esta4lishing that exchange rates of most ma7or currencies (ere to 4e allo(ed to fluctuate freel

(ithout 4oundaries "although the central 4anks did have the right to intervene (hen necessar).

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. *nder a fixed exchange rate sstem:A) a foreign exchange market does not exist.!) central 4ank intervention in the foreign exchange market is not necessar.) central 4ank intervention in the foreign exchange market is often necessar.#) central 4ank intervention in the foreign exchange market is not allo(ed.

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-. *nder a managed float exchange rate sstem, the Fed ma attempt to stimulate the *.%. econom4 the dollar. %uch an ad7ustment in the dollar;s value should the *.%. demandfor products produced 4 ma7or foreign countries.A) (eakening2 increase!) (eakening2 decrease) strengthening2 increase#) strengthening2 decrease

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Chapter 6: Government Influence on Exchange Rates 1-'

) managed float sstem.#) cra(ling peg sstem.

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11. The interest rate of a countr (ith a currenc 4oard:

A) is less sta4le than it (ould 4e (ithout a currenc 4oard.!) is tpicall 4elo( the interest rate of the currenc to (hich it is tied.) (ill move in tandem (ith the interest rate of the currenc to (hich it is tied.#) is completel independent of the interest rate of the currenc to (hich it is tied.

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1'. The currenc of countr / is pegged to the currenc of countr 0. Assume that countr 0;scurrenc depreciates against the currenc of countr >. ?t is likel that countr / (ill export to countr > and import from countr >.A) more2 more!) less2 less) more2 less#) less2 more

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1+. Assume countries A, !, and produce goods that are su4stitutes of each other and that thesecountries engage in trade (ith each other. Assume that countr A;s currenc floats against countr!;s currenc, and that countr ;s currenc is pegged to !;s. ?f A;s currenc depreciates against !,then A;s exports to should , and A;s imports from should .A) decrease2 increase!) decrease2 decrease) increase2 decrease#) increase2 increase

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1. Assume a central 4ank exchanges its currenc for other foreign currencies in the foreign exchangemarket, 4ut does notad7ust for the resulting change in the mone suppl. This is an example of:A) pegged intervention.!) indirect intervention.) nonsterili@ed intervention.#) sterili@ed intervention.

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1. ?f the Fed desires to (eaken the dollar (ithout affecting the dollar mone suppl, it should:A) exchange dollars for foreign currencies, and sell some of its existing Treasur securit holdings

for dollars.!) exchange foreign currencies for dollars, and sell some of its existing Treasur securit holdings

for dollars.) exchange dollars for foreign currencies, and 4u existing Treasur securities (ith dollars.

#) exchange foreign currencies for dollars, and 4u existing Treasur securities (ith dollars.

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13. &hich of the follo(ing is an example of direct intervention in foreign exchange marketsA) lo(ering interest rates.!) increasing the discount rate.) exchanging dollars for foreign currenc.#) imposing 4arriers on international trade.

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19. A strong dollar places pressure on inflation, (hich in turn places pressure on thedollar.A) up(ard2 up(ard!) do(n(ard2 up(ard) up(ard2 do(n(ard#) do(n(ard2 do(n(ard

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1. The Fed ma use a stimulative monetar polic (ith leastconcern a4out causing inflation if thedollar;s value is expected to:A) remain sta4le.!) strengthen.

) (eaken.#) none of these (ill have an impact on inflation.

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1-. A (eaker dollar places pressure on *.%. inflation, (hich in turn places pressureon *.%. interest rates, (hich places pressure on *.%. 4ond prices.A) up(ard2 do(n(ard2 up(ard!) up(ard2 do(n(ard2 do(n(ard) up(ard2 up(ard2 do(n(ard#) do(n(ard2 up(ard2 up(ardE) do(n(ard2 do(n(ard2 up(ard

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Chapter 6: Government Influence on Exchange Rates 1-

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'3. &hich of the follo(ing is true regarding the euroA) Exchange rate risk 4et(een participating European currencies is completel eliminated,

encouraging more trade and capital flo(s across European 4orders.!) ?t allo(s for more consistent economic conditions across countries.) ?t prevents each countr from conducting its o(n monetar polic.

D) All of these are true.

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'9. ?t has 4een argued that the exchange rate can 4e used as a polic tool. Assume that the *.%.government (ould like to reduce unemploment. &hich of the follo(ing is an appropriate actiongiven this scenarioA) (eaken the dollar.!) strengthen the dollar.) 4u dollars (ith foreign currenc in the foreign exchange market.#) implement a tight monetar polic.

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'. ?t has 4een argued that the exchange rate can 4e used as a polic tool. Assume that the *.%.government (ould like to reduce inflation. &hich of the follo(ing is an appropriate action giventhis scenarioA) sell dollars for foreign currenc.!) 4u dollars (ith foreign currenc.) lo(er interest rates.

D) none of these.

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29. To strengthen the dollar using sterili@ed intervention, the Fed (ould dollars

and simultaneousl Treasur securities.

A) 4u2 sell!) sell2 4u) 4u2 4u#) sell2 sell

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+1. &hen using indirect intervention, a central 4ank is likel to focus on:A) inflation.!) interest rates.) income levels.#) expectations of future exchange rates.

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32. &hich of the follo(ing countries (as pro4a4l the leastaffected "directl or indirectl)

4 the Asian crisisA) Thailand.!) ?ndonesia.) Russia.#) hina.E) 5alasia.

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33.&hich of the follo(ing is nottrue regarding ThailandA) Thailand (as one of the slo(est gro(ing countries over the 1-1-- period.

!) Gigh levels of spending and lo( levels of saving placed up(ard pressure on prices of realestate, products, and on Thailand;s local interest rate.

) Thailand;s 4aht (as linked to the dollar prior to =ul 1--9, (hich made Thailand an attractivesite for foreign investors.

#) Thai 4anks provided man loans that (ere ver risk in their attempt to make use of all of theirfunds.

E) All of these are true.

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+. The term Htarget @one arrangementI refers to a:A) situation (here countries ad7ust their national economic policies to maintain exchange rates

(ithin some predetermined limits.!) sstem (here several central 4anks act in a coordinated intervention to keep the price of one

countr;s currenc (ithin reasona4le trading ranges.) sstem (here currencies are pegged to gold, or to hard currenc.#) sstem (here local currencies are replaced 4 dollars.

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+. #uring the period 1-1-91, the *.%. used a sstem.A) euro exchange rate!) fixed

) dirt float#) flexi4le

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+3. &hich of the follo(ing are examples of currenc controlsA) import restrictions.!) prohi4ition of remittance of funds.) ceilings on granting credit to foreign firms.#) all of these.

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+9. From a financial management perspective, (hich of the follo(ing is true regarding the introductionof the euroA) *.%.4ased 5$s are not su47ect to exchange rate risk (hen the have transactions in euros.!) The euro is pegged to all other European currencies.) Transactions costs decline for 5$s that conduct transactions (ithin Europe.#) The euro replaced the !ritish pound.

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+. &hich of the follo(ing countries have notadopted the euroA) Cerman!) ?tal) ?celand#) #enmark

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+-. &hich of the follo(ing is true a4out the %outheast Asian currenc crisisA) ?t (as preceded 4 several ears of large capital inflo(s to Asia.!) ?t (as preceded 4 a fiveear recession in Asia.) Asian interest rates declined during the crisis.#) Asian exchange rates (ere converted from floating to fixed to resolve the crisis.

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Chapter 6: Government Influence on Exchange Rates 1-

'. *nder the sstem kno(n as the HdirtI float, official 4oundaries for the exchange rateexist, 4ut the are (ider than the are under a fixed exchange rate sstem.A) true.!) false.

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+. *nder a pegged exchange rate sstem, the home currenc;s value is pegged to a foreign currenc orto some unit of account.A) true.!) false.

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. A ma7or advantage of the euro is the complete elimination of exchange rate risk ontransactions 4et(een participating European countries, (hich encourages more trade and capitalflo(s (ithin Europe.A) true.!) false.

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. The European countries conforming to the euro are completel insulated frommovements in the euro;s value (ith respect to other currencies.A) true.!) false.

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3. The esta4lishment of the euro allo(s for more consistent economic conditions acrosscountries 4ut eliminates the po(er of an individual European countr to solve local economic

pro4lems (ith its o(n uni6ue monetar polic.A) true.!) false.

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9. The Asian crisis is generall 4elieved to have started in =apan.A) true.!) false.

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. A possi4le reason (h hina (as less affected 4 the Asian crisis is that itsgovernment exerts more influence on private enterprise than the governments of other Asiancountries.A) true.!) false.

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-. urrenc devaluation can 4oost a countr;s exports, 4ut currenc revaluation canincrease foreign competition.A) true.!) false.

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Chapter 6: Government Influence on Exchange Rates '


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Chapter 6: Government Influence on Exchange Rates '

Madura Chapter 6

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