Madura Chapter 6
Madura Chapter 6
Madura Chapter 6
(ECB)
(ECB)
(ECB)
(ECB)
ANSWER: A
2. A weak dollar is normally expected to cause:
A) high unemployment and high inflation in the U.S.
B) high unemployment and low inflation in the U.S.
C) low unemployment and low inflation in the U.S.
D) low unemployment and high inflation in the U.S.
ANSWER: D
3. A strong dollar is normally expected to cause:
A) high unemployment and high inflation in the U.S.
B) high unemployment and low inflation in the U.S.
C) low unemployment and low inflation in the U.S.
D) low unemployment and high inflation in the U.S.
ANSWER: B
4. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:
A) sell dollars for pounds in the foreign exchange market and the Bank of England should sell
dollars for pounds in the foreign exchange market.
B) sell pounds for dollars in the foreign exchange market and the Bank of England should sell
dollars for pounds in the foreign exchange market.
C) sell pounds for dollars in the foreign exchange market and the Bank of England should sell
pounds for dollars in the foreign exchange market.
D) sell dollars for pounds in the foreign exchange market and the Bank of England should sell
pounds for dollars in the foreign exchange market.
ANSWER: C
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5. Consider two countries that trade with each other, called X and Y. According to the text, inflation in
Country X will have a greater impact on inflation in Country Y under the _______ system. Now,
consider two other countries that trade with each other, called A and B. Unemployment in Country
A will have a greater impact on unemployment in Country B under the _______ system.
A) floating rate; fixed rate
B) floating rate; floating rate
C) fixed rate; fixed rate
D) fixed rate; floating rate
ANSWER: C
6. A primary result of the Bretton Woods Agreement was:
A) the establishment of the European Monetary System (EMS).
B) establishing specific rules for when tariffs and quotas could be imposed by governments.
C) establishing that exchange rates of most major currencies were to be allowed to fluctuate 1%
above or below their initially set values.
D) establishing that exchange rates of most major currencies were to be allowed to fluctuate freely
without boundaries (although the central banks did have the right to intervene when necessary).
ANSWER: C
7. A primary result of the Smithsonian Agreement was:
A) the establishment of the European Monetary System (EMS).
B) establishing that exchange rates of most major countries were to be allowed to fluctuate 2.25%
above or below their initially set values.
C) establishing specific rules for when tariffs and quotas could be imposed by governments.
D) establishing that exchange rates of most major currencies were to be allowed to fluctuate freely
without boundaries (although the central banks did have the right to intervene when necessary).
ANSWER: B
8. Under a fixed exchange rate system:
A) a foreign exchange market does not exist.
B) central bank intervention in the foreign exchange market is not necessary.
C) central bank intervention in the foreign exchange market is often necessary.
D) central bank intervention in the foreign exchange market is not allowed.
ANSWER: C
9. Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy
by _______ the dollar. Such an adjustment in the dollars value should _______ the U.S. demand
for products produced by major foreign countries.
A) weakening; increase
B) weakening; decrease
C) strengthening; increase
D) strengthening; decrease
ANSWER: B
10. The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S.
dollar are part of a:
A) pegged system.
B) fixed system.
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15. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should:
A) exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings
for dollars.
B) exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings
for dollars.
C) exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
D) exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.
ANSWER: A
16. Which of the following is an example of direct intervention in foreign exchange markets?
A) lowering interest rates.
B) increasing the discount rate.
C) exchanging dollars for foreign currency.
D) imposing barriers on international trade.
ANSWER: C
17. A strong dollar places _______ pressure on inflation, which in turn places _______ pressure on the
dollar.
A) upward; upward
B) downward; upward
C) upward; downward
D) downward; downward
ANSWER: B
18. The Fed may use a stimulative monetary policy with least concern about causing inflation if the
dollars value is expected to:
A) remain stable.
B) strengthen.
C) weaken.
D) none of these will have an impact on inflation.
ANSWER: B
19. A weaker dollar places _______ pressure on U.S. inflation, which in turn places _______ pressure
on U.S. interest rates, which places _______ pressure on U.S. bond prices.
A) upward; downward; upward
B) upward; downward; downward
C) upward; upward; downward
D) downward; upward; upward
E) downward; downward; upward
ANSWER: C
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23.
A)
B)
C)
D)
ANSWER: A
24. The exchange rate mechanism (ERM) crisis in 1992 represents the _______ in German interest
rates that caused other European interest rates to _______, and resulted in less aggregate spending.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
ANSWER: A
25. The risk-free interest rates among countries that have adopted the euro should:
A) not necessarily be similar to risk-free rates in other countries.
B) equal the U.S. risk-free rate.
C) equal the risk-free rates in other European countries.
D) equal the risk-free rates in Asian countries.
ANSWER: A
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29.
ANSWER: C
30.
A)
B)
C)
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ANSWER: B
Which of the following countries was probably the least affected (directly or indirectly)
by the Asian crisis?
A) Thailand.
B) Indonesia.
C) Russia.
D) China.
E) Malaysia.
32.
ANSWER: D
33.
Which of the following is not true regarding Thailand?
A) Thailand was one of the slowest growing countries over the 19851994 period.
B) High levels of spending and low levels of saving placed upward pressure on prices of real
estate, products, and on Thailands local interest rate.
C) Thailands baht was linked to the dollar prior to July 1997, which made Thailand an attractive
site for foreign investors.
D) Thai banks provided many loans that were very risky in their attempt to make use of all of their
funds.
E) All of these are true.
ANSWER: A
34. The term target zone arrangement refers to a:
A) situation where countries adjust their national economic policies to maintain exchange rates
within some predetermined limits.
B) system where several central banks act in a coordinated intervention to keep the price of one
countrys currency within reasonable trading ranges.
C) system where currencies are pegged to gold, or to hard currency.
D) system where local currencies are replaced by dollars.
ANSWER: A
35. During the period 19441971, the U.S. used a _______ system.
A) euro exchange rate
B) fixed
C) dirty float
D) flexible
ANSWER: B
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41.
ANSWER: B
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42.
Under the system known as the dirty float, official boundaries for the exchange rate
exist, but they are wider than they are under a fixed exchange rate system.
A) true.
B) false.
ANSWER: B
43. Under a pegged exchange rate system, the home currencys value is pegged to a foreign currency or
to some unit of account.
A) true.
B) false.
ANSWER: A
44.
A major advantage of the euro is the complete elimination of exchange rate risk on
transactions between participating European countries, which encourages more trade and capital
flows within Europe.
A) true.
B) false.
ANSWER: A
45.
The European countries conforming to the euro are completely insulated from
movements in the euros value with respect to other currencies.
A) true.
B) false.
ANSWER: B
46.
The establishment of the euro allows for more consistent economic conditions across
countries but eliminates the power of any individual European country to solve local economic
problems with its own unique monetary policy.
A) true.
B) false.
ANSWER: A
47.
A) true.
B) false.
ANSWER: B
48.
A possible reason why China was less affected by the Asian crisis is that its
government exerts more influence on private enterprise than the governments of other Asian
countries.
A) true.
B) false.
ANSWER: A
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Market forces are the determinant of exchange rates in a freely floating exchange rate
ANSWER: A
51.
If a government wishes to stimulate its economy in the form of increased foreign
demand for its countrys products, it could attempt to weaken its currency.
A) true.
B) false.
ANSWER: A
52.
In a sterilized exchange rate arrangement, a countrys home currency value is pegged to
a foreign currency or to some unit of account.
A) true.
B) false.
ANSWER: B
53.
The Bank of England is responsible for setting the monetary policy for the European
countries participating in the euro.
A) true.
B) false.
ANSWER: B
54.
The Feds indirect method of intervention is to trade dollars for or against other
currencies.
A) true.
B) false.
ANSWER: B
55.
A potential advantage of exchange rate target zones is that they may stabilize
international trade patterns by reducing exchange rate volatility.
A) true.
B) false.
ANSWER: A
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56.
The Bretton Woods Agreement created a system under which exchange rates are
determined by market forces without intervention by various governments.
A) true.
B) false.
ANSWER: B
57.
Nonsterilized intervention is intervention by a central bank in the foreign exchange
market without adjusting for the change in money supply.
A) true.
B) false.
ANSWER: A
58.
The euro is pegged to other currencies of European countries that have not adopted the
euro.
A) true.
B) false.
ANSWER: A
59.
The Smithsonian Agreement was reached in September 1985 by seven major
industrialized countries to systematically weaken the dollar.
A) true.
B) false.
ANSWER: B
An example of indirect intervention by the Bank of Japan would be for the Bank of
Japan to use interest rates to increase the value of the yen vs. the dollar.
A)
true.
B)
false.
60.
ANSWER: A
61.
A strong home currency can harm exports; exporters typically benefit from a weaker
home country currency.
A)
true.
B)
false.
ANSWER: A
62.
An advantage of freely floating exchange rates is that a country with floating exchange
rates is more insulated from unemployment problems in other countries.
A) true.
B) false.
ANSWER: A
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ANSWER: B
64.
A country with a currency board does not have control over its local interest rates.
A) true.
B) false.
ANSWER: A
65.
A) true.
B) false.
ANSWER: A
66.
A) true.
B) false.
ANSWER: A
67.
currency.
A) true.
B) false.
The Bretton Woods Agreement called for the establishment of a single European
ANSWER: B
68.
The European Central Bank is responsible for monetary policy in all participating
European countries.
A) true.
B) false.
ANSWER: A
69. A currency peg is insulated from economic or political conditions, such that the exchange rate in the
market will only change if the countrys government breaks the peg and sets a new exchange rate.
A) true.
B) false.
ANSWER: B
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70. If foreign investors fear that a peg may be broken because of fund outflows from that country, they
may attempt to purchase more of that currency before the peg is broken.
A) true.
B) false.
ANSWER: B
71. Normally, a broken peg in a country places downward pressure on the local currency of that
country.
A) true.
B) false.
ANSWER: B