ECO 305 Week 10 Quiz

50
ECO 305 Week 10 Quiz – Strayer Click on the Link Below to Purchase A+ Graded Course Material http://budapp.net/ECO-305-Week-10-Quiz-Strayer-367.htm Quiz 9 Chapter 14 and 15 EXCHANGE-RATE ADJUSTMENTS AND THE BALANCE OF PAYMENTS MULTIPLE CHOICE 1. According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where the domestic economy faces: a. Unemployment coupled with a payments deficit b. Unemployment coupled with a payments surplus c. Full employment coupled with a payments deficit d. Full employment coupled with a payments surplus 2. According to the J-curve effect, when the exchange value of a country's currency appreciates, the country's trade balance: a. First moves toward deficit, then later toward surplus b. First moves toward surplus, then later toward deficit c. Moves into deficit and stays there d. Moves into surplus and stays there 3. Assume that Brazil has a constant money supply and that it devalues its currency. The monetary approach to devaluation reasons that one of the following tends to occur for Brazil:

description

ECO 305 Week 10 QuizECO/305 Week 10 Quiz

Transcript of ECO 305 Week 10 Quiz

Page 1: ECO 305 Week 10 Quiz

ECO 305 Week 10 Quiz – Strayer

Click on the Link Below to Purchase A+ Graded Course Material

http://budapp.net/ECO-305-Week-10-Quiz-Strayer-367.htm

Quiz 9 Chapter 14 and 15

EXCHANGE-RATE ADJUSTMENTS AND THE BALANCE OF PAYMENTS

MULTIPLE CHOICE

1. According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where the domestic economy faces:a. Unemployment coupled with a payments deficitb. Unemployment coupled with a payments surplusc. Full employment coupled with a payments deficitd. Full employment coupled with a payments surplus

2. According to the J-curve effect, when the exchange value of a country's currency appreciates, the country's trade balance:a. First moves toward deficit, then later toward surplusb. First moves toward surplus, then later toward deficitc. Moves into deficit and stays thered. Moves into surplus and stays there

3. Assume that Brazil has a constant money supply and that it devalues its currency. The monetary approach to devaluation reasons that one of the following tends to occur for Brazil:a. Domestic prices rise--purchasing power of money falls--consumption fallsb. Domestic prices rise--purchasing power of money rises--consumption risesc. Domestic prices fall--purchasing power of money rises--consumption fallsd. Domestic prices fall--purchasing power of money rises--consumption rises

4. According to the Marshall-Lerner approach, a currency depreciation will best lead to an improvement on the home country's trade balance when the:a. Home demand for imports is inelastic--foreign export demand is inelasticb. Home demand for imports is inelastic--foreign export demand is elasticc. Home demand for imports is elastic--foreign export demand is inelasticd. Home demand for imports is elastic--foreign export demand is elastic

Page 2: ECO 305 Week 10 Quiz

5. Assume an economy operates at full employment and faces a trade deficit. According to the absorption approach, currency devaluation will improve the trade balance if domestic:a. Interest rates rise, thus encouraging investment spendingb. Income rises, thus stimulating consumptionc. Output falls to a lower leveld. Spending is cut, thus freeing resources to produce exports

6. An appreciation of the U.S. dollar tends to:a. Discourage foreigners from making investments in the United Statesb. Discourage Americans from purchasing foreign goods and servicesc. Increase the number of dollars that could be bought with foreign currenciesd. Discourage Americans from traveling overseas

7. The Marshall-Lerner condition deals with the impact of currency depreciation on:a. Domestic incomeb. Domestic absorptionc. Purchasing power of money balancesd. Relative prices

8. According to the J-curve concept, which of the following is false--that the effects of a currency depreciation on the balance of payments are:a. Transmitted primarily via the income adjusted mechanismb. Likely to be adverse or negative in the short runc. In the long run positive, given favorable elasticity conditionsd. Influenced by offsetting devaluations made by other countries

9. Which of the following is true for the J-curve effect? It:a. Applies to the interest rate effects of currency depreciationb. Applies to the income effects of currency depreciationc. Suggests that demand tends to be most elastic over the long rund. Suggests that demand tends to be least elastic over the long run

Page 3: ECO 305 Week 10 Quiz

10. American citizens planning a vacation abroad would welcome:a. Appreciation of the dollarb. Depreciation of the dollarc. Higher wages extended to foreign workersd. Lower wages extended to foreign workers

11. Assume the Canadian demand elasticity for imports equals 0.2, while the foreign demand elasticity for Canadian exports equals 0.3. Responding to a trade deficit, suppose the Canadian dollar depreciates by 20 percent. For Canada, the depreciation would lead to a:a. Worsening trade balance--a larger deficitb. Improving trade balance--a smaller deficitc. Unchanged trade balanced. None of the above

12. Assume the Canadian demand elasticity for imports equals 1.2, while the foreign demand elasticity for Canadian exports equals 1.8. Responding to a trade deficit, suppose the Canadian dollar depreciates by 10 percent. For Canada, the depreciation would lead to a(n):a. Worsening trade balance--a larger deficitb. Improving trade balance--a smaller deficitc. Unchanged trade balanced. None of the above

13. From 1985 to 1988 the U.S. dollar depreciated over 50 percent against the yen, yet Japanese export prices to Americans did not come down the full extent of the dollar depreciation. This is best explained by:a. Partial currency pass-throughb. Complete currency pass-throughc. Partial J-curve effectd. Complete J-curve effect

14. Because of the J-curve effect and partial currency pass-through, a depreciation of the domestic currency tends to increase the size of a:a. Trade surplus in the short runb. Trade surplus in the long run

Page 4: ECO 305 Week 10 Quiz

c. Trade deficit in the short rund. Trade deficit in the long run

15. According to the Marshall-Lerner condition, a currency depreciation is least likely to lead to an improvement in the home country's trade balance when:a. Home demand for imports is inelastic and foreign export demand is inelasticb. Home demand for imports is elastic and foreign export demand is inelasticc. Home demand for imports is inelastic and foreign export demand is elasticd. Home demand for imports is elastic and foreign export demand is elastic

16. If foreign manufacturers cut manufacturing costs and profit margins in response to a depreciation in the U.S. dollar, the effect of these actions is to:a. Shorten the amount of time in which the depreciation leads to a smaller trade deficitb. Shorten the amount of time in which the depreciation leads to a smaller trade surplusc. Lengthen the amount of time in which the depreciation leads to a smaller trade deficitd. Lengthen the amount of time in which the depreciation leads to a smaller trade surplus

17. The shift in focus toward imperfectly competitive markets in domestic and international trade questions the concept of:a. Official exchange ratesb. Complete currency pass-throughc. Exchange arbitraged. Trade-adjustment assistance

18. The extent to which a change in the exchange rate leads to changes in import and export prices is known as:a. The J-curve effectb. The Marshall-Lerner effectc. The absorption effectd. Pass-through effect

Page 5: ECO 305 Week 10 Quiz

19. Complete currency pass-through arises when a 10 percent depreciation in the value of the dollar causes U.S.:a. Import prices to fall by 10 percentb. Import prices to rise by 10 percentc. Export prices to rise by 10 percentd. Export prices to rise by 20 percent

20. Which approach predicts that if an economy operates at full employment and faces a trade deficit, currency devaluation (depreciation) will improve the trade balance only if domestic spending is cut, thus freeing resources to produce exports?a. The absorption approachb. The Marshall-Lerner approachc. The monetary approachd. The elasticities approach

21. Which approach analyzes a nation's balance of payments in terms of money demand and money supply?a. Expenditures approachb. Absorption approachc. Elasticities approachd. Monetary approach

22. The ____ effect suggests that following a currency depreciation a country's trade balance worsens for a period before it improves.a. Marshall-Lernerb. J-curvec. Absorptiond. Pass-through

23. The J-curve effect implies that following a currency appreciation, a country's trade balance:a. Worsens before it improvesb. Continually worsensc. Improves before it worsensd. Continually improves

Page 6: ECO 305 Week 10 Quiz

24. Which analysis considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run:a. Monetary analysisb. Absorption analysisc. Expenditures analysisd. Pass-through analysis

25. The longer the currency pass-through period, the ____ required for currency depreciation to have the intended effect on the trade balance.a. Shorter the time periodb. Longer the time periodc. Larger the spending cutd. Smaller the spending cut

26. The shorter the currency pass-through period, the ____ required for currency depreciation to have the intended effect on the trade balance.a. Shorter the time periodb. Longer the time periodc. Larger the spending cutd. Smaller the spending cut

27. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars. A depreciation of the dollar's exchange value:a. Enhances its international competitivenessb. Worsens its international competitivenessc. Does not affect its international competitivenessd. None of the above

28. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars. An appreciation of the dollar's exchange value:a. Enhances its international competitivenessb. Worsens its international competitivenessc. Does not affect its international competitivenessd. None of the above

Page 7: ECO 305 Week 10 Quiz

29. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a larger portion of Ford's total costs, a dollar appreciation leads to a ____ in the peso cost of a Ford vehicle and a ____ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.a. Smaller increase, larger decreaseb. Smaller increase, smaller decreasec. Larger increase, smaller decreased. Larger increase, larger decrease

30. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a larger portion of Ford's total costs, a dollar depreciation leads to a (an) ____ in the peso cost of a Ford vehicle and a (an) ____ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.a. Decrease, increaseb. Increase, decreasec. Decrease, decreased. Increase, increase

31. Given favorable elasticity conditions, an appreciation of the yen results ina. A smaller Japanese trade deficitb. A larger Japanese trade surplusc. Decreased prices for imported products for Japand. Increased prices for imported products for Japan

32. Given favorable elasticity conditions, a depreciation of the lira tends to result in:a. Lower prices of imported products for Italyb. Higher prices of imported products for Italyc. A larger trade deficit for Italyd. A smaller trade surplus for Italy

Page 8: ECO 305 Week 10 Quiz

33. According to the J-curve effect, a depreciation of the pound's exchange value has:a. No impact on a U.K. balance-of-trade deficit in the short runb. No impact on a U.K. balance-of-trade deficit in the long runc. An immediate negative effect on the U.K. balance of traded. An immediate positive effect on the U.K. balance of trade

34. According to the J-curve effect, an appreciation of the yens exchange value has:a. No impact on the Japanese trade balance in the short runb. No impact on the Japanese trade balance in the long runc. An immediate negative effect on the Japanese trade balanced. An immediate positive effect on the Japanese trade balance

35. According to the Marshall-Lerner condition, currency depreciation has no effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:a. 0.1b. 0.5c. 1.0d. 2.0

36. According to the Marshall-Lerner condition, currency depreciation would have a positive effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:a. 0.2b. 0.5c. 1.0d. 2.0

37. According to the Marshall-Lerner condition, currency depreciation would have a negative effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:a. 0.5b. 1.0c. 1.5d. 2.0

Page 9: ECO 305 Week 10 Quiz

38. The absorption approach suggests that one of the following causes a trade deficit to decrease following currency depreciation:a. A decline in domestic interest ratesb. A rise in domestic importsc. A rise in government spendingd. A decline in domestic absorption

39. The absorption approach to currency depreciation is represented by one of the following equations:a. B = Y - Ab. Y = C + I + G + (X-M)c. I + X = S + Md. S - I = X - M

40. The time period that it takes for companies to form new business connections and place new orders in response to currency depreciation is known as the:a. Recognition lagb. Replacement lagc. Decision lagd. Production lag

41. The time period that it takes for companies to increase output of commodities for which demand has increased due to currency depreciation is known as the:a. Recognition lagb. Decision lagc. Replacement lagd. Production lag

42. According to the J-curve effect, currency appreciation:a. Decreases a trade surplusb. Increases a trade surplusc. Decreases a trade surplus before increasing a trade surplusd. Increases a trade surplus before decreasing a trade surplus

Page 10: ECO 305 Week 10 Quiz

43. According to the J-curve effect, currency depreciation:a. Decreases a trade deficitb. Increases a trade deficitc. Decreases a trade deficit before increasing a trade deficitd. Increases a trade deficit before decreasing a trade deficit

44. The analysis of the effects of currency depreciation include all of the following except the:a. Absorption approachb. Elasticity approachc. Fiscal approachd. Monetary approach

45. According to the absorption approach (B = Y - A), currency devaluation improves a nation's trade balance if:a. Y increases and A increasesb. Y decreases and A decreasesc. Y increases and/or A decreasesd. Y decreases and/or A increases

46. The effect of currency depreciation on the purchasing power of money balances and the resulting impact on domestic expenditures is emphasized by the:a. Absorption approachb. Monetary approachc. Fiscal approachd. Elasticity approach

47. The Marshall-Lerner condition suggests that depreciation of the franc leads to a worsening of France's trade account if the:a. Elasticity of demand for French exports is 0.4 while the French elasticity of demand for imports is 0.2b. Elasticity of demand for French exports is 0.6 while the French elasticity of demand for imports is 0.4

Page 11: ECO 305 Week 10 Quiz

c. Elasticity of demand for French exports is 0.5 while the French elasticity of demand for imports is 0.7d. Elasticity of demand for French exports is 0.6 while the French elasticity of demand for imports is 0.7

Table 14.1. Hypothetical Costs of Producing an Automobile for Toyota Inc. of Japan

Cost Component Yen Cost Dollar-Equivalent Cost

Labor 1,200,000Materials Steel 800,000 Other materials 1,600,000Total material costs 2,400,000Other costs 400,000Total costs 4,000,000

48. Refer to Table 14.1. Assuming that Toyota obtains all inputs from Japanese suppliers and that the yen/dollar exchange rate is 200 yen per dollar. The dollar-equivalent cost of a Toyota automobile equals:a. $5000b. $10,000c. $15,000d. $20,000

49. Refer to Table 14.1. Assume that Toyota Inc. obtains all of its automobile inputs from Japanese suppliers. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the yen cost of a Toyota automobile equals:a. 4,000,000 yenb. 6,000,000 yenc. 8,000,000 yend. 10,000,000 yen

50. Refer to Table 14.1. Assume that Toyota Inc. obtains all of its automobile inputs from Japanese suppliers. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the dollar-equivalent cost of a Toyota automobile equals:a. $10,000b. $20,000c. $30,000

Page 12: ECO 305 Week 10 Quiz

d. $40,000

51. Refer to Table 14.1. Assume that Toyota Inc. imports steel from U.S. suppliers, whose costs are denominated in dollars, while all other inputs are obtained from Japanese suppliers whose costs are denominated in yen. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the yen cost of a Toyota automobile equals:a. 2,400,000 yenb. 3,000,000 yenc. 3,600,000 yend. 4,200,000 yen

52. Refer to Table 14.1. Assume that Toyota Inc. imports steel from U.S. suppliers, whose costs are denominated in dollars, while all other inputs are obtained from Japanese suppliers whose costs are denominated in yen. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the dollar-equivalent cost of a Toyota automobile equals:a. $24,000b. $30,000c. $36,000d. $42,000

53. The lag that occurs between changes in relative prices and the quantities of goods traded is thea. Recognition lagb. Recovery lagc. Implementation lagd. Legislative lag

54. The Marshall-Lerner condition illustratesa. The price effects of a nation's currency depreciation on its trade deficitb. The price effects of a nation's currency appreciation on its trade deficitc. The effect of fixed exchange rate systems on the trade balanced. None of the above

Page 13: ECO 305 Week 10 Quiz

55. The absorption approach to currency depreciation focuses on thea. Purchasing power of moneyb. Relative price effectsc. Income effectsd. Price elasticity of demand

56. Reversing balance of payments disequilibria may came at the expense ofa. Economic relations with our trading partnersb. Domestic recessionc. Price inflationd. All of the above

TRUE/FALSE

1. Currency devaluation is initiated by governmental policy rather than the free-market forces of supply and demand.

2. If a currency's exchange rate is overvalued, a government would likely initiate actions to revalue the currency.

3. If a currency's exchange rate is undervalued, a government would likely initiate actions to devalue the currency.

4. The purpose of currency devaluation is to cause a depreciation in a currency's exchange value.

5. The purpose of currency revaluation is to cause an appreciation in a currency's exchange value.

6. Assume that General Motors employs labor and materials, whose costs are denominated in dollars, in the production of automobiles. If the dollar's exchange value depreciates by 10 percent against the yen, the yen-denominated cost of a GM vehicle rises by 10 percent.

Page 14: ECO 305 Week 10 Quiz

7. Assume that General Motors employs labor and materials, whose costs are denominated in dollars, in the production of automobiles. If the dollar's exchange value appreciates by 10 percent against the yen, the yen-denominated cost of a GM vehicle falls by 10 percent.

8. Appreciation of the dollar's exchange value worsens the international competitiveness of Boeing Inc., whereas a dollar depreciation improves its international competitiveness.

9. When manufacturing automobiles, suppose that General Motors uses labor and materials whose costs are denominated in dollars and pounds respectively. If the dollar's exchange value appreciates by 15 percent against the pound, the pound-denominated cost of a GM vehicle rises by 15 percent.

10. According to the absorption approach, currency devaluation best improves a country's trade balance when its economy is at maximum capacity.

11. When manufacturing computer software, suppose that Microsoft Inc. uses labor and materials whose costs are denominated in dollars and francs respectively. If the dollar's exchange value depreciates 10 percent against the franc, the franc-denominated cost of the firm's software falls by 10 percent.

12. When producing jetliners, suppose that Boeing employs labor and materials whose costs are denominated in dollars and marks respectively. If the dollar's exchange value depreciates 20 percent against the mark, the mark-denominated cost of a Boeing jetliner falls by an amount less than 20 percent.

13. As yen-denominated costs become a larger portion of Ford's total costs, a dollar appreciation results in a smaller increase in the yen-denominated cost of a Ford auto than occurs when all input costs are dollar denominated.

14. A depreciation of the dollar results in Whirlpool dishwashers becoming less competitive in Europe.

Page 15: ECO 305 Week 10 Quiz

15. By decreasing the relative production costs of U.S. companies, a dollar appreciation tends to lower U.S. export prices in foreign-currency terms, which induces an increase in the amount of U.S. goods exported abroad.

16. By increasing relative U.S. production costs, a dollar depreciation tends to increase U.S. export prices in foreign-currency terms, which results in an increase in the quantity of U.S. goods exported abroad.

17. Suppose the exchange value of the franc rises against the currencies of Switzerland's major trading partners. To protect themselves from decreases in foreign sales caused by the mark's appreciation, Swiss companies could shift production to countries whose currencies had depreciated against the mark.

18. In the early 1990s, the yen sharply appreciated against the dollar. To protect themselves from export reductions caused by the yen's appreciation, Japanese auto companies transferred increasing amounts of auto production from the United States to Japan.

19. The elasticity approach to currency depreciation emphasizes the income effects of depreciation.

20. The elasticity approach to currency depreciation emphasizes the relative price effects of depreciation and suggests that depreciation best improves a country's trade balance when the elasticities of demand for the country's imports and exports are high.

21. The absorption approach to currency devaluation deals with the income effects of devaluation while the elasticity approach to devaluation deals with the price effects of devaluation.

22. According to the absorption approach, an increase in domestic expenditures must occur for currency devaluation to promote balance of trade equilibrium.

Page 16: ECO 305 Week 10 Quiz

23. The monetary approach emphasizes the effects of currency depreciation on the purchasing power of money, and the resulting impact on domestic expenditure levels.

24. According to the Marshall-Lerner condition, currency depreciation will worsen a country's balance of trade if the country's elasticity of demand for imports plus the foreign demand elasticity for the country's exports exceeds 1.0.

25. The Marshall-Lerner condition asserts that if the sum of a country's elasticity of demand for imports and the foreign elasticity of demand for the country's exports equals 1.0, a depreciation of the country's currency will not affect its balance of trade.

26. Suppose the U.S. price elasticity of demand for imports equals 0.4 and the foreign demand elasticity for the U.S. exports equals 0.2. According to the Marshall-Lerner condition, a depreciation of the dollar's exchange value will improve the U.S. balance of trade.

27. The Marshall-Lerner condition suggests that if the sum of a country's elasticity of demand for imports and the foreign elasticity of demand for the country's exports exceeds 1.0, an appreciation of the country's exchange rate will worsen its balance of trade.

28. Suppose the U.S. price elasticity of demand for imports equals 1.2 and the foreign elasticity of demand for U.S. exports equals 1.5. According to the Marshall-Lerner condition, an appreciation of the dollar's exchange value would worsen the U.S. balance of trade.

29. Empirical research suggests that most countries' price elasticities of demand for imports and exports are very inelastic, suggesting that currency depreciation would result in a worsening of a country's balance of trade.

Page 17: ECO 305 Week 10 Quiz

30. The J-curve effect implies that in the short run a currency depreciation will result in a balance of trade surplus for the home country. As time passes, however, the home country's balance of trade will move toward deficit.

31. Suppose the dollar appreciates 10 percent against the Swiss franc. According to the J-curve effect, the U.S. balance of trade will initially worsen, but then improve as time passes.

32. The J-curve effect implies that the price elasticity of demand for imports and exports is more elastic in the short run than in the long run.

33. The extent to which changing currency values result in changing prices of imports and exports is known as the J-curve effect.

34. Complete currency pass through suggests that if the dollar's exchange value depreciates by 10 percent, imports will become 10 percent more expensive to Americans while U.S. exports will become 10 percent cheaper to foreigners.

35. Partial currency pass-through implies that if the dollar's exchange value appreciates by 10 percent, imports would become, say, 6 percent more expensive to Americans while U.S. exports would become, say, 8 percent cheaper to foreigners.

36. Suppose the U.S. economy is operating at full capacity and the dollar's exchange value depreciates. According to the absorption approach, the United States would have to accept reductions in domestic spending if the U.S. trade balance is to improve as a result of the depreciation.

SHORT ANSWER

1. How do demand elasticities influence a country's trade position when exchange rates change?

Page 18: ECO 305 Week 10 Quiz

2. How is the absorption approach used for analyzing the effects of currency devaluation?

ESSAY

1. What is a pass-through relationship?

2. How do movements in exchange rates affect domestic costs, in the presence of foreign sourcing?

CHAPTER 15—EXCHANGE-RATE SYSTEMS AND CURRENCY CRISES

MULTIPLE CHOICE

1. The exchange-rate system that best characterizes the present international monetary arrangement used by industrialized countries is:a. Freely fluctuating exchange ratesb. Adjustable pegged exchange ratesc. Managed floating exchange ratesd. Pegged or fixed exchange rates

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 ratesb. Managed floating exchange ratesc. Adjustable pegged exchange ratesd. Crawling pegged exchange rates

3. Which exchange-rate mechanism calls for frequent redefining of the par value by small amounts to remove a payments disequilibrium?a. Dual exchange ratesb. Adjustable pegged exchange ratesc. Managed floating exchange ratesd. Crawling pegged exchange rates

Page 19: ECO 305 Week 10 Quiz

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 currenciesb. Depreciate against foreign currenciesc. Be officially revalued by the governmentd. Be officially devalued by the government

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 fallb. U.S. imports tend to rise and exports tend to fallc. U.S. foreign exchange reserves tend to rised. U.S. foreign exchange reserves remain constant

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 domesticallyb. Foreigners discriminate against domestic productsc. Technological advance is superior abroadd. The domestic currency is undervalued relative to other currencies

7. Which exchange-rate system does not require monetary reserves for official exchange-rate intervention?a. Floating exchange ratesb. Pegged exchange ratesc. Managed floating exchange ratesd. Dual exchange rates

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 transactionsb. Unilateral transfersc. Merchandise trade transactionsd. Capital account transactions

Page 20: ECO 305 Week 10 Quiz

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 systemb. Dual exchange rate systemc. Jointly floating exchange rate systemd. Freely 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:a. Officially revaluing their currenciesb. Officially devaluing their currenciesc. Allowing their currencies to depreciate in the free marketd. Allowing their currencies to appreciate in the free market

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 ratesb. Adjustable pegged exchange ratesc. Managed floating exchange ratesd. Freely floating exchange rates

12. In 1973, the reform of the international monetary system resulted in the change from:a. Adjustable pegged rates to managed floating ratesb. Managed floating rates to adjustable pegged ratesc. Crawling pegged rates to freely floating ratesd. Freely floating rates to crawling pegged rates

13. The Bretton Woods Agreement of 1944 established a monetary system based on:a. Gold and managed floating exchange ratesb. Gold and adjustable pegged exchange ratesc. Special Drawing Rights and managed floating exchange rates

Page 21: ECO 305 Week 10 Quiz

d. Special Drawing Rights and adjustable pegged exchange rates

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 trancheb. Special Drawing Rightsc. Primary reserve assetd. Swap facility

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 ratesb. Freely floating exchange ratesc. Managed floating exchange ratesd. Crawling pegged exchange rates

16. Small nations (e.g., Tanzania) with more than one major trading partner tend to peg the value of their currencies to:a. Goldb. Silverc. A single currencyd. A basket of currencies

17. Under a floating exchange-rate system, if American exports increase and American imports fall, the value of the dollar will:a. Appreciateb. Depreciatec. Be officially revaluedd. Be officially devalued

18. Under a floating exchange-rate system, if American exports decrease and American imports rise, the value of the dollar will:a. Appreciateb. Depreciate

Page 22: ECO 305 Week 10 Quiz

c. Be officially revaluedd. Be officially devalued

19. Under a floating exchange rate system, an increase in U.S. imports of Japanese goods will cause the demand schedule for Japanese yen to:a. Increase, inducing a depreciation in the yenb. Decrease, inducing a depreciation in the yenc. Increase, inducing an appreciation in the yend. Decrease, inducing an appreciation in the yen

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 currenciesb. Depreciate in value relative to other currenciesc. Be officially devalued by the governmentd. Be officially revalued by the government

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 currenciesb. Depreciate in value relative to other currenciesc. Be officially devalued by the governmentd. Be officially revalued by the government

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 francsb. American exports to Switzerland will be more expensive in francsc. American imports from Switzerland will be cheaper in dollarsd. None of the above

23. If the Japanese yen depreciates against other currencies in the exchange markets, this will:

Page 23: ECO 305 Week 10 Quiz

a. Have no effect on the Japanese balance of tradeb. Tend to worsen the Japanese balance of tradec. Tend to improve the Japanese balance of traded. None of the above

24. If the Japanese yen appreciates against other currencies in the exchange markets, this will:a. Have no effect on the Japanese balance of tradeb. Tend to improve the Japanese balance of tradec. Tend to worsen the Japanese balance of traded. None of the above

25. Suppose Sweden's inflation rate is less than that of its trading partner. Under a floating exchange rate system, Sweden would experience a:a. Appreciation in its currencyb. Depreciation in its currencyc. Fall in the level of its exportsd. Rise in the level of its imports

26. Assume that interest rates in London rise relative to those in Switzerland. Under a floating exchange-rate system, one would expect the pound (relative to the franc) to:a. Depreciate due to the increased demand for poundsb. Depreciate due to the increased demand for francsc. Appreciate due to the increased demand for francsd. Appreciate due to the increased demand for pounds

27. Under a floating exchange-rate system, which of the following best leads to a depreciation in the value of the Canadian dollar?a. A decrease in the Canadian money supplyb. A fall in the Canadian interest ratec. An increase in national income overseasd. Rising inflation overseas

Page 24: ECO 305 Week 10 Quiz

28. A market-determined increase in the dollar price of the pound is associated with:a. Revaluation of the dollarb. Devaluation of the dollarc. Appreciation of the dollard. Depreciation of the dollar

29. A market-determined decrease in the dollar price of the pound is associated with:a. Revaluation of the dollarb. Devaluation of the dollarc. Appreciation of the dollard. Depreciation of the dollar

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 systemsb. Demand schedules for imports and exports may be price speculationc. There may occur large amounts of destabilizing speculationd. Capital movements among nations may be hindered via exchange rate fluctuations

31. Proponents of freely floating exchange rates maintain that:a. Central banks can easily modify fluctuations in exchange ratesb. The system allows policy makers freedom in pursuing domestic economic goalsc. Inelastic demand schedules prevent large fluctuations in exchange ratesd. Inelastic supply schedules prevent large fluctuations in exchange rates

32. A potential disadvantage of freely floating exchange rates is that there would:a. Exist excessive amounts of hedging in the foreign exchange marketsb. Be a lack of incentive to initiate exchange arbitragec. Be excessive amounts of destabilizing speculationd. Exist a devaluation bias in the exchange markets

Page 25: ECO 305 Week 10 Quiz

33. Under a floating exchange rate system, if there occurs a fall in the dollar price of the franc:a. American exports to France will be cheaper in francsb. American exports to France will be more expensive in francsc. American imports from France will be more expensive in dollarsd. None of the above

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 Japanb. The U.S. government to ration yen to U.S. importersc. An increase in the dollar price of yend. A decrease in the dollar price of yen

35. A potential limitation of freely floating exchange rates is that:a. Countries require a larger amount of international reserves than otherwiseb. Countries are unable to initiate economic policies to combat unemploymentc. Exchange rates may experience wide and frequent fluctuationsd. Demand tends to be highly sensitive to price movements

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, decreaseb. Increase, increase, decreasec. Decrease, decrease, decreased. Decrease, increase, decrease

37. 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.a. Increase, decrease, decreaseb. Increase, increase, increasec. Decrease, decrease, increased. Decrease, increase, increase

Page 26: ECO 305 Week 10 Quiz

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, expansionaryb. Expansionary, contractionaryc. Contractionary, expansionaryd. Contractionary, contractionary

39. The central bank of the United Kingdom could prevent the pound from appreciating by:a. Selling pounds on the foreign exchange marketb. Buying pounds on the foreign exchange marketc. Reducing its inflation rate relative to its trading partnersd. Promoting domestic investment and technological development

40. A surplus nation can reduce its payments imbalance by:a. Applying tariffs and trade restrictions on importsb. Revaluing its national currencyc. Increasing its labor productivityd. Setting higher interest rates than its trading partners

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

42. As a policy instrument, currency devaluation may be controversial since it:a. Imposes hardships on the exporters of foreign countriesb. Imposes hardships on exporters of the devaluing countryc. Is generally followed by unemployment in the devaluing countryd. Is generally followed by price deflation in the devaluing country

Page 27: ECO 305 Week 10 Quiz

43. Given a two-country world, assume Canada and Sweden devalue their currencies by 20 percent. This would result in:a. An appreciation in the Canadian currencyb. An appreciation in the Swedish currencyc. An appreciation in both currenciesd. An appreciation in neither currency

44. Suppose that Japan maintains a pegged exchange rate that overvalues the yen. This would likely result in:a. Japanese exports becoming cheaper in world marketsb. Imports becoming expensive in the Japanese marketc. Unemployment for Japanese workersd. Full employment for Japanese workers

45. To defend a pegged exchange rate that overvalues its currency, a country could:a. Discourage commodity exportsb. Encourage commodity importsc. Purchase its own currency in international marketsd. Sell its own currency in international markets

46. Given a two-country world, suppose Japan devalues the yen by 20 percent and South Korea devalues the won by 15 percent. This results in:a. An appreciation in the value of both currenciesb. A depreciation in the value of both currenciesc. An appreciation in the value of the yen against the wond. A depreciation in the value of the yen against the won

47. Given a two-country world, suppose Japan revalues the yen by 15 percent and South Korea revalues the won by 12 percent. This results in:a. An appreciation in the value of both currenciesb. A depreciation in the value of both currenciesc. An appreciation in the value of the yen against the wond. A depreciation in the value of the yen against the won

Page 28: ECO 305 Week 10 Quiz

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D0 and S0 respectively.

Figure 15.1. The Market for the Swiss Franc

48. Refer to Figure 15.1. With a system of floating exchange rates, the equilibrium exchange rate is:a. $0.40 per francb. $0.50 per francc. $0.60 per francd. $0.70 per franc

49. Refer to Figure 15.1. Suppose that the United States increases its imports from Switzerland, resulting in a rise in the demand for francs from D0 to D1. Under a floating exchange rate system, the new equilibrium exchange rate would be:a. $0.40 per francb. $0.50 per francc. $0.60 per francd. $0.70 per franc

50. Refer to Figure 15.1. Suppose the United States decreases investment spending in Switzerland, thus reducing the demand for francs from D0 to D2. Under a floating exchange rate system, the new equilibrium exchange rate would be:a. $0.40 per francb. $0.50 per francc. $0.60 per francd. $0.70 per franc

51. Refer to Figure 15.1. Suppose the demand for francs increases from D0 to D1. Under a fixed exchange rate system, the U.S. exchange stabilization fund could maintain a fixed exchange rate of $0.50 per franc by:a. Selling francs for dollars on the foreign exchange marketb. Selling dollars for francs on the foreign exchange marketc. Decreasing U.S. exports, thus decreasing the supply of francsd. Stimulating U.S. imports, thus increasing the demand for francs

Page 29: ECO 305 Week 10 Quiz

Table 15.1. The Market for Francs

Quantity of Dollar price Quantity offrancs demanded of francs francs supplied

600 $0.05 0500 0.10 100400 0.15 200300 0.20 300200 0.25 400100 0.30 500 0 0.35 600

52. Refer to Table 15.1. Under a system of floating exchange rates, the equilibrium exchange rate equals:a. $0.15 per francb. $0.20 per francc. $0.25 per francd. $0.30 per franc

53. Refer to Table 15.1. If monetary authorities fix the exchange rate at $0.10 per franc, there would be a:a. Shortage of 200 francsb. Shortage of 400 francsc. Surplus of 200 francsd. Surplus of 400 francs

54. Refer to Table 15.1. If monetary authorities fix the exchange rate at $0.30 per franc, there will be a:a. Shortage of 200 francsb. Shortage of 400 francsc. Surplus of 200 francsd. Surplus of 400 francs

55. Under managed floating exchange rates, the Federal Reserve could offset an appreciation of the dollar against the yen by:

Page 30: ECO 305 Week 10 Quiz

a. Increasing the money supply which promotes falling interest rates and net investment outflowsb. Increasing the money supply which promotes rising interest rates and net investment inflowsc. Decreasing the money supply which promotes falling interest rates and net investment outflowsd. Decreasing the money supply which promotes rising interest rates and net investment inflows

56. Under managed floating exchange rates, a central bank would initiate:a. Contractionary monetary policy to offset a depreciation of its currencyb. Contractionary monetary policy to offset an appreciation of its currencyc. Expansionary monetary policy to offset a depreciation of its currencyd. None of the above

57. To offset an appreciation of the dollar against the yen, the Federal Reserve would:a. Sell dollars on the foreign exchange market and lower domestic interest ratesb. Sell dollars on the foreign exchange market and raise domestic interest ratesc. Buy dollars on the foreign exchange market and lower domestic interest ratesd. Buy dollars on the foreign exchange market and raise domestic interest rates

58. To help insulate their economies from inflation, currency depreciation, and capital flight, developing countries have implemented:a. Regional trading blocsb. Currency boardsc. Central banksd. Regional fiscal policies

59. If Mexico dollarizes its economy, it essentiallya. Allows the Federal Reserve to be its lender of last resortb. Accepts the monetary policy of the Federal Reservec. Ensures that its business cycle was identical to that of the U.S.d. Abandons its ability to run governmental balanced budgets

Page 31: ECO 305 Week 10 Quiz

60. If Mexico fully dollarizes its economy, it agrees toa. Print pesos only to finance deficits of its national governmentb. Use the U.S. dollar alongside its peso to finance transactionsc. Have the U.S. Treasury be in charge of its tax collectionsd. Replace pesos with U.S. dollars in its economy

61. An objective of the dollarization of the Mexican economy would be to:a. Shield its economy from hyperinflation, currency depreciation, and capital flightb. Allow the Federal Reserve to be its lender of last resortc. Ensure that its monetary policy is independent of the Federal Reserved. Permit it to benefit from tariffs and subsidies imposed by the U.S. government

62. In order to stabilize a currency, the central bank will need to adopta. An expansionary monetary policy to offset currency depreciationb. An expansionary monetary policy to offset currency appreciationc. A contractionary policy to offset currency appreciationd. Both b and c

63. The crawling peg is aa. Fixed exchange rate systemb. Floating exchange rate systemc. Compromise between fixed and floating exchange ratesd. Exchange rate system used by nations experiencing no inflation

64. Exchange rate controlsa. Achieved prominence during the economic crises of the late 1930'sb. Were popular immediately after World War IIc. Are widely used by the developing nationsd. All of the above

65. The flexibility of floating rates may generate the problem ofa. Inflationary biasb. Deflationary biasc. Continuous depreciation

Page 32: ECO 305 Week 10 Quiz

d. Both a and c

TRUE/FALSE

1. By the early 1970s, gold had been phased out of the international monetary system.

2. Since 1974, the major industrial countries have operated under a system of fixed exchange rates based on the gold standard.

3. Today, fixed exchange rates are used primarily by small, developing countries that tie their currencies to a key currency such as the U.S. dollar.

4. Smaller nations with relatively undiversified economies and large trade sectors tend to peg their currencies to one of the world's key currencies.

5. Large industrial nations with diversified economies and small trade sectors have generally pegged their currencies to one of the world's key currencies.

6. Small nations, such as Angola and Barbados, peg their currencies to the U.S. dollar since the prices of many of their traded goods are determined in markets in which the dollar is the key currency.

7. Many developing nations with low inflation rates have pegged their currencies to the U.S. dollar as a way of allowing modest increases in domestic inflation rates.

8. Pegging to a single currency is generally done by developing nations whose trade and financial relationships are mainly with a single industrial-country partner.

Page 33: ECO 305 Week 10 Quiz

9. Developing countries with more than one major trading partner often peg their currencies to a group or basket of those trading partner currencies.

10. Most developing countries have chosen to allow their currencies to float independently in the foreign exchange market.

11. Today, special drawing rights (SDRs) represent the most important currency basket against which developing countries maintain pegged exchange rates.

12. The special drawing right is a currency basket of five major industrial country currencies.

13. The Australian dollar is currently regarded is the key currency of the international monetary system.

14. A "key currency" is one that is widely traded on world money markets, has demonstrated relative stable values over time, and has widely been accepted as a means of international settlement.

15. The U.S. dollar is generally regarded as the major "key currency" of the international monetary system.

16. Most nations currently allow their currencies' exchange values to be determined solely by the forces of supply and demand in a free market.

17. Under the gold standard, the official exchange rate would be $2.80 per pound as long as the United States bought and sold gold at a fixed price of $35 per ounce and Britain bought and sold gold at 12.5 pounds per ounce.

18. The par values of most developing-country currencies are currently defined in terms of gold.

Page 34: ECO 305 Week 10 Quiz

19. The purpose of an exchange stabilization fund is to ensure that the market exchange rate does not deviate beyond unacceptable levels from the official exchange rate.

20. To keep the pound's exchange value from depreciating against the franc, the British exchange stabilization fund would sell pounds for francs on the foreign exchange market.

21. To keep the yen's exchange value from appreciating against the dollar, Japan's exchange stabilization fund would buy yen for dollars on the foreign exchange market.

22. The purpose of currency devaluation is to cause the home country's exchange value to appreciate, thus reducing a balance of trade surplus.

23. If Uganda devalues its shilling by 10 percent and Burundi devalues its franc by 5 percent, the shilling's exchange value appreciates 10 percent against the franc.

24. If Uganda sets its par value at 400 shillings per SDR and Burundi sets its par value at 200 francs per SDR, the official exchange rate is 1 franc = o.5 shillings.

25. If Uganda revalues its shilling by 20 percent and Burundi devalues its franc by 5 percent, the shillings exchange value will appreciate by 25 percent against the franc.

26. Unlike floating exchange rates, fixed exchange rates are not characterized by par values and central bank intervention in the foreign exchange market.

Page 35: ECO 305 Week 10 Quiz

27. Because there is no exchange stabilization fund under floating exchange rates, any holdings of international reserves serve as working balances rather than to maintain a given exchange rate for any currency.

28. Under an adjustable-pegged system, market exchange rates are intended to be maintained within a narrow band around a currency's official exchange rate. In the case of fundamental disequilibrium, the currency can be devalued or revalued to promote current-account equilibrium.

29. In 1973 the major industrial countries terminated managed-floating exchange rates and adopted an adjustable-pegged exchange rates.

30. A "dirty float" occurs when a nation used central bank intervention in the foreign exchange market to promote a depreciation of its currency's exchange value, thus gaining a competitive advantage compared to its trading partners.

31. Under managed-floating exchange rates, market forces are allowed to determine exchange rates in the short run while central bank intervention is used to stabilize exchange rates in the long run.

32. Under managed floating exchange rates, central bank intervention is used to offset temporary fluctuations in exchange rates that contribute to uncertainty in carrying out transactions in international trade and finance.

33. To offset an appreciation in the dollar's exchange value, the Federal Reserve can nudge interest rates down in the United States which results in net investment outflows.

34. When pursued over the long run, a policy of increasing the domestic money supply to offset an appreciation of the home country's currency results in inflation and a decrease in home-country competitiveness in key industries.

Page 36: ECO 305 Week 10 Quiz

35. At the Maastricht Treaty of 1991, members of the European Community established a blueprint for an Economic and Monetary Union with a single currency and a European central bank overseeing a single monetary policy.

36. It is universally recognized that Europe fulfills the conditions of an optimum currency area.

SHORT ANSWER

1. Which nations use multiple exchange rates the most and why?

2. What is an SDR?

ESSAY

1. What is the difference between the crawling peg and adjustable pegged exchange rates?

2. How can currency boards and dollarization prevent currency crises?