Macroeconomics Chapter 15 Test Questions – Flashcards
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Macroeconomics, Canadian Ed. (Hubbard et al.) Chapter 15 The International Financial System 15.1 Exchange Rate Systems 1) The gold standard is an example of A) a floating exchange rate system. B) a managed float exchange rate system. C) a fixed exchange rate system. D) a flexible exchange rate system. E) the Bretton Woods System.
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C
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2) China's exchange rate system from 1994 through 2005 is an example of A) a floating exchange rate system. B) a managed float exchange rate system. C) a fixed exchange rate system. D) a flexible exchange rate system. E) the Bretton Woods System.
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C
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3) Fluctuating exchange rates can alter a multinational firm's profits and losses. The Canadian corporation, Magna International, produces car parts and sells car parts in Europe. If the dollar depreciates against the euro, then Magna International's revenues from these operations should ________ and its costs from these operations should ________. A) rise; fall B) rise; rise C) fall; fall D) fall; rise
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B
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4) Airbus is a passenger aircraft manufacturer based in Europe, but like the rest of the global aerospace industry, conducts is business in U.S. dollars. Suppose Airbus sells an aircraft to Air France, and Air France pays Airbus in U.S. dollars. If the value of the U.S. dollar rises relative to the euro, Airbus's profits in Europe will ________ because it will receive ________ when it converts the dollars it earns from the sale into euros. A) rise; more B) rise; less C) fall; more D) fall; less
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A
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5) You decide to work in Japan for the next 10 years, accumulate some savings, then move back to Canada and convert your savings from yen to dollars. At the time of your move, economists predict that consumers in Canada have reignited their love of Japanese products, especially hybrid cars, and expect that this strong preference for Japanese products will continue for the next decade. How should this influence your decision to work and save in Japan? A) You should be discouraged as the growing Canadian preference for Japanese goods should increase the value of the yen to the dollar and decrease the value of your savings when converted to dollars. B) You should be discouraged as the growing Canadian preference for Japanese goods should decrease the value of the yen to the dollar and decrease the value of your savings when converted to dollars. C) You should be encouraged as the growing Canadian preference for Japanese goods should decrease the value of the yen to the dollar and raise the value of your savings when converted to dollars. D) You should be encouraged as the growing Canadian preference for Japanese goods should increase the value of the yen to the dollar and raise the value of your savings when converted to dollars.
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D
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6) During what period of time was the gold standard used? A) from the nineteenth century until the 1930s B) from the eighteenth century until the nineteenth century C) from 1914 until 1929 D) from 1944 until 1980
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A
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7) When the value of a currency is determined mostly by demand and supply, but with occasional government intervention, the exchange rate system is defined as A) fixed. B) floating. C) managed float. D) Bretton Woods.
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C
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8) Suppose an economy's exchange rate system is the gold standard and vast tracks of gold are discovered. If the economy is at full employment, what should this discovery do? A) It should raise the money supply but have no impact on the price level. B) It should raise the money supply and cause inflation. C) It should raise the money supply and cause disinflation. D) It should lower the money supply and cause deflation. E) it should not change the money supply.
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B
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9) If a country's currency is determined only by the demand and supply for that country's currency, the country is said to have a A) floating exchange rate. B) fixed exchange rate. C) gold standard. D) managed float.
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A
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10) If currencies around the world are based on the gold standard, and Japan raises the amount of gold for which the yen will trade, then holding all else constant A) the yen will depreciate against the dollar. B) the yen will appreciate against the dollar. C) the value of the yen relative to the dollar will stay constant. D) the value of U.S. exports to Japan in terms of the yen will increase.
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B
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11) Under the Bretton Woods exchange rate system, set up in 1944, which of the following was true? A) Americans could sell their dollars to the American government in exchange for gold. B) Americans could sell their dollars to the American government in exchange for silver. C) Americans could sell their dollars to foreign central banks in exchange for gold. D) Foreign central banks could sell their dollars to the American government in exchange for gold.
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D
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12) The Bretton Woods system ended in A) the 1920s. B) the 1940s. C) the 1970s. D) the 1990s.
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C
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13) Why did Canada abandon the gold standard in the 1930s? A) The government wanted to rapidly expand the money supply in response to the Great Depression. B) The government wanted to move away from a floating exchange rate system to a fixed exchange rate system. C) The Treasury Department in the United States found it was cheaper to print paper money instead of gold coins. D) New sources of gold were discovered, so the price of gold plummeted, dramatically reducing the value of the dollar.
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A
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14) The current exchange rate system in Canada is best described as a A) silver standard. B) floating exchange rate system. C) fixed exchange rate system. D) gold standard.
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B
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15) In what year was the Bretton Woods system of currency exchange set up? A) 1912 B) 1924 C) 1944 D) 1969
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C
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16) Under which exchange rate system was a dollar redeemable for gold only if the dollar was presented by a foreign central bank? A) the gold standard B) a managed float exchange rate system C) the Bretton Woods System D) a fiat system
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C
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17) In Canada today, how much gold will the Bank of Canada give you in exchange for $1? A) none B) $1 worth of gold (based on the market price of an ounce of gold at the time you redeem the gold) C) 1 ounce of gold D) 1/35th of an ounce of gold
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A
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18) The exchange rate system agreed to in 1944 in which the U.S. government agreed to buy or sell gold at a fixed price of $35 per ounce is referred to as A) the gold standard. B) the Bretton Woods System. C) a floating currency standard. D) a flexible exchange rate system.
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B
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19) Under the gold standard, to increase the money supply in the country, the government must A) simply print more currency. B) have enough gold to back up the increase in the money supply. C) buy foreign currencies with dollars to increase foreign currency reserves. D) increase the value of the country's currency on foreign exchange markets.
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B
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20) Gold stored by Bank of Canada backs all Canadian currency.
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FALSE
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21) If two countries adhere to a gold standard, the exchange rate for their currencies is fixed.
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TRUE
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22) Managed float exchange systems were abandoned with the implementation of the gold standard.
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FALSE
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23) Expanding, contracting, and managing the money supply is easier for a central bank under the gold standard.
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FALSE
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15.2 The Current Exchange Rate System 1) The currency adopted by most countries in Western Europe is referred to as the A) euro. B) Eurodollar. C) yen. D) pound.
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A
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2) The current exchange rate system has which of the following characteristics? A) Canada allows the dollar to float against other major currencies. B) All developing countries allow their currencies to float against the dollar and other major currencies. C) The countries of the European Union have adopted the gold standard. D) Several developing countries in Asia have adopted the Bretton Woods system. E) The current global foreign exchange system is a fixed system.
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A
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3) From the beginning of 1974 until January 2013, the value of the Canadian dollar has ________ relative to the U.S. dollar and ________ relative to the Japanese yen. A) appreciated than depreciated; appreciated B) depreciated then appreciated; depreciated C) depreciated then appreciated; appreciated D) depreciated; depreciated
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B
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4) If one U.S. dollar could be exchanged for one Canadian dollar in 1970, and one U.S. dollar can now be exchanged for 1.13 Canadian dollars, which of the following is true? A) The U.S. dollar lost value against the Canadian dollar. B) The Canadian dollar lost value against the U.S. dollar. C) The Canadian dollar gained value against the U.S. dollar. D) Both A and C are true.
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B
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5) In 2011, a number of Canadians purchased homes in Arizona. Which of the following would not be a possible explanation for this? A) The value of the Canadian dollar relative to the U.S. dollar increased during this time. B) The U.S. dollar depreciated during this time. C) The Canadian dollar appreciated during this time. D) The U.S. dollar appreciated relative to the Canadian dollar during this time.
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D
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6) You are a Canadian citizen who works in Toronto and owns a winter home in Phoenix, Arizona. When you spend the winters in Phoenix, an increase in the value of the Canadian dollar relative to the U.S. dollar should A) help you as each Canadian dollar of your salary is now worth more U.S. dollars. B) hurt you as each Canadian dollar of your salary is now worth less U.S. dollars. C) hurt you as it is now more expensive to live in Phoenix since the Canadian dollar appreciation. D) help you as it is now less expensive to live in Canada since the Canadian dollar appreciation.
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A
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7) An increase in the value of the U.S. dollar will A) reduce Canadian demand for winter homes in Arizona. B) increase Canadian demand for winter homes in Arizona. C) reduce the cost of homes in Arizona for Canadian buyers. D) increase the cost of homes in Arizona for American buyers.
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A
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8) What factors are not important in determining exchange rate fluctuations in the long run? A) relative price levels across countries B) relative rates of productivity growth across countries C) preferences for domestic and foreign goods across countries D) speculating in currency markets
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D
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9) Which of the following is most important in explaining exchange rate fluctuations in the short run? A) relative price levels across countries B) preferences for domestic and foreign goods C) interest rates D) relative rates of productivity growth across countries
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C
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10) Purchasing power parity is the theory that, in the long run, exchange rates should be at a level such that equivalent amounts of any country's currency A) will equalize nominal interest rates across countries. B) are valued inversely relative to the size of its GDP. C) should earn the same real rate of return. D) allow one to buy the same amount of goods and services.
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D
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11) If the exchange rate between the Canadian dollar and the Indian rupee (rupees per dollar) is greater than the relative purchasing power between the two countries, which of the following would be true? A) There are opportunities for profit by purchasing goods in India and then selling them in Canada. B) Purchasing power parity predicts that the value of the dollar will rise as traders take advantage of arbitrage opportunities. C) Purchasing power parity predicts that the dollar is undervalued as traders take advantage of arbitrage opportunities. D) There are no arbitrage opportunities for which traders can take advantage.
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A
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12) If the purchasing power of a dollar is greater than the purchasing power of the yen, purchasing power parity would predict that A) in the short run, exchange rates will move to equalize the purchasing power of the dollar and the yen. B) in the long run, exchange rates will move to equalize the purchasing power of the dollar and the yen. C) in the long run, interest rates will move to equalize the purchasing power of the dollar and the yen. D) in the short run, interest rates will move to equalize the purchasing power of the dollar and the yen.
answer
B
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13) A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, what is the dollar cost of a Big Mac in Brazil? A) $0.89 B) $2.25 C) $4.50 D) $8.00
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C
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14) A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, purchasing power parity predicts that A) the dollar will appreciate as the demand for dollars falls in the long run. B) the dollar will appreciate as the supply of dollars falls in the long run. C) the dollar will depreciate as the demand for dollars falls in the long run. D) the dollar will depreciate as the supply of dollars rises in the long run.
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B
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15) A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, purchasing power parity predicts that A) the dollar is undervalued. B) the dollar is overvalued. C) the real is undervalued. D) both B and C are correct.
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A
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16) If the implied exchange rate between Big Mac prices in Canada and Poland is 2.13 zlotys per dollar, but the actual exchange rate between Canada and Poland is 3.16 zlotys per dollar, which of the following would you expect to see? A) an appreciation of the dollar B) an increase in the demand for zlotys C) an increase in the demand for dollars D) Both A and C are correct.
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B
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17) If relative purchasing power between Canada and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"? A) if the actual exchange rate between the dollar and the Argentinean peso is 3.22 pesos per dollar B) if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar C) if the actual exchange rate between the dollar and the Argentinean peso is 0.22 pesos per dollar D) if the actual exchange rate between the dollar and the Argentinean peso is 3 pesos per dollar
answer
B
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18) Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates? A) Some goods and services produced in any country are not traded internationally. B) Consumer preferences for goods and services across countries are very similar. C) Most countries do not impose barriers to trade. D) Most countries have free markets with little, if any, government regulation.
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A
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19) If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following exchange rates would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the hryvnia.) A) 0.80 hryvnias per dollar B) 1.25 hryvnias per dollar C) 2.80 hryvnias per dollar D) 28 hryvnias per dollar
answer
B
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20) If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.) A) The demand for the dollar will rise since the dollar is undervalued. B) The demand for the dollar will fall since the dollar is overvalued. C) The supply of the dollar will fall since the dollar is undervalued. D) No prediction regarding changes in the demand or supply of the dollar can be made without information on the exchange rate between the Canada and Ukraine.
answer
D
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21) Suppose the GDP deflator in Canada is 125 and the GDP deflator in Japan is 100. Also assume Canada has trade barriers on Japanese goods in the form of quotas. What does this imply about the exchange rate of yen per dollar under the theory of purchasing power parity in the long run? A) The exchange rate of yen per dollar will be equal to 1.25. B) The exchange rate of yen per dollar will be greater than 0.8. C) The exchange rate of yen per dollar will be equal to 0.8. D) The exchange rate of yen per dollar will be less than 0.8.
answer
D
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22) If the purchasing power of the dollar is greater than the purchasing power of the euro, purchasing power parity predicts that the exchange rate will A) increase if the exchange rate is greater than 1 euro per dollar. B) decrease if the exchange rate is less than 1 euro per dollar. C) be equal to the relative purchasing power across the currencies in the long run. D) not fluctuate and stay constant in the long run.
answer
C
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23) Countries that use the euro as their currency face similar concerns as countries did during the years of the gold standard in that each are (were) A) unable to conduct monetary policy. B) unable to conduct fiscal policy. C) using currency which is backed by gold. D) using a floating currency.
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A
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24) Because the value of the euro is determined by factors that affect the entire euro zone, during the recession of 2007-2009, individual countries using the euro A) were unable to have their exchange rates depreciate. B) were more insulated from unemployment increases than most countries. C) experienced a greater increase in exports than did most countries. D) were able to use expansionary monetary policy to lessen the impact of the recession.
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A
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25) The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory. In July 2011, the Economist reported that the average price of a Big Mac in the U.S. was $4.07. In Mexico, the average price of a Big Mac at that time was 32 pesos. What is the "implied exchange rate" between the peso and the dollar? A) 1.30 pesos per dollar B) 4.17 pesos per dollar C) 7.86 pesos per dollar D) 12.72 pesos per dollar
answer
C
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26) If, at the current exchange rate between the dollar and the Norwegian kroner of 5.78 kroner per dollar, the dollar is "overvalued," how do you expect demand and supply in the foreign exchange markets to respond? A) The demand for the dollar will rise, while the supply of the kroner will fall. B) The demand for the dollar will fall, while the supply of the kroner will rise. C) The supply of the dollar will rise, while the demand for the kroner will fall. D) The supply of the dollar will rise, while the demand for the kroner will rise.
answer
D
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Figure 15.1 27) Refer to Figure 15.1. Which of the following would cause the change depicted in the figure above? A) Canadian productivity rises relative to European productivity. B) Europeans decrease their preferences for Canadian goods relative to European goods. C) The European Union increases its quotas on French wine. D) an increase in the price level of Canadian goods relative to European goods
answer
A
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Figure 15.2 28) Refer to Figure 15.2. Which of the following would cause the change depicted in the figure above? A) Lack of investment in infrastructure causes Canadian productivity to fall relative to Chinese productivity. B) Tainted cat food from China causes Canadian consumers to decrease their preferences for Chinese goods relative to Canadian goods. C) A new trade agreement with China results in Canada removing all tariffs on clothing imported from China. D) An expansionary monetary policy causes an increase in the price level of Canadian goods relative to Chinese goods.
answer
B
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29) If the average productivity of Canadian firms is rising more quickly than the average productivity of Indian firms, which of the following would you expect to see? (India's currency is the rupee.) A) an increase in the value of the rupee relative to the dollar B) a decrease in the prices of Indian products C) a decrease in the quantity demanded of Indian products relative to Canadian products D) an increase in the quantity demanded of Indian products relative to Canadian products
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C
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30) How will the exchange rate (foreign currency per dollar) respond to an increase in the relative rate of productivity growth in Canada in the long run? A) Exchange rates will rise. B) Exchange rates will fall. C) Exchange rates will be unaffected by changes in the relative rate of productivity growth in Canada, both in the short run and in the long run. D) The exchange rate will be affected in the short run, but not in the long run.
answer
A
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31) If inflation in Russia is higher than it is in Canada A) the purchasing power of the ruble in buying Russian goods will rise relative to the dollar. B) the value of the dollar will rise in the long run. C) the value of the ruble will rise in the long run. D) Both A and C are correct.
answer
B
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32) Which of the following would increase the value of the dollar in the long run? A) an increase in inflation in Canada relative to other countries B) an increase in the demand for Canadian goods relative to goods from other countries C) a decrease in Canadian tariffs on foreign goods D) an increase in the supply of dollars on the foreign exchange market
answer
B
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33) What explains the appreciation of the Japanese yen relative to the Canadian dollar from 1970 to the early 1990s? A) Japanese productivity rose faster than Canadian productivity. B) Japanese inflation rose faster than Canadian inflation. C) Canadian consumers reduced their preferences for Japanese goods. D) High tariffs and restrictive quotas in Canada caused the value of the dollar to decline.
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A
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34) The central bank of the European Union is called the A) Bundesbank. B) Banco Europe. C) Federal Reserve. D) European Central Bank.
answer
D
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35) By 2013, how many European countries were members of the European Union? A) 12 B) 15 C) 27 D) 57
answer
C
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36) Members of the European Union decided to adopt a single currency by what year? A) 2008 B) 2005 C) 1999 D) 1992
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C
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37) Which of the following is a drawback to having a common currency across countries, as in the European Union? A) A common currency increases barriers to trade across countries, reducing opportunities for economic growth. B) With a common currency, individual countries are no longer able to run independent monetary policies. C) Having a common currency implies that the prices of goods across countries must always be the same, regardless of consumer preferences for goods across countries. D) None of the above is a drawback to a common currency.
answer
B
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38) The currencies of Poland and Iceland (the zloty and the krona, respectively) declined in value relative to the euro following the financial crisis of 2008. This means that the A) zloty and krona appreciated in value against the euro. B) euro depreciated in value against the zloty and the krona. C) zloty and krona depreciated in value against the euro. D) zloty depreciated in value against the krona. E) Both A and B are correct.
answer
C
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39) Should European nations which are not currently using the euro choose to adopt the euro as their currency, these countries would risk giving up the ability to use ________ to stabilize their economies in the event of a recession. A) expansionary fiscal policy B) contractionary fiscal policy C) expansionary monetary policy D) contractionary monetary policy
answer
C
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40) Pegging a country's exchange rate to the dollar can be advantageous if A) the country does not trade much with Canada. B) investors believe the dollar to be more stable than the domestic country's currency. C) a country wishes to conduct independent monetary policy. D) imports are not a significant fraction of the goods the country's consumers buy.
answer
B
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41) Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major currency, rather than choosing a floating exchange rate? A) Pegging allows the country more flexibility in conducting monetary policy. B) Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with significant levels of imports. C) Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of the currency. D) Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business planning.
answer
A
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42) You are made better off in which of the following situations? A) You borrow 10,000 pesos, you earn income in dollars, the dollar depreciates against the peso, you must pay back the loan in pesos. B) You borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars. C) You borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars. D) You borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos.
answer
B
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43) If a country's currency is "pegged" to the dollar, its exchange rate is A) floating. B) flexible. C) fixed. D) undervalued.
answer
C
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44) A currency pegged at a value below the market equilibrium exchange rate is A) overvalued. B) undervalued. C) achieving purchasing power parity. D) None of the above are correct.
answer
B
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Figure 15.3 45) Refer to Figure 15.3. At what level should the Thai government peg its currency to the dollar to make Thai exports cheaper to Canada? A) greater than $.03/baht B) less than $.03/baht C) equal to $.03/baht D) $1/baht
answer
B
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46) Refer to Figure 15.3. Which of the following is not true? A) Canadian imports are cheaper at exchange rates greater than $.03/baht than at the equilibrium exchange rate. B) The baht is overvalued at exchange rates greater than $.03/baht. C) To achieve an exchange rate greater than $.03/baht, the Bank of Thailand must buy surplus dollars with bahts. D) Thai exports to Canada are more expensive at exchange rates greater than $.03/baht than at the equilibrium exchange rate.
answer
C
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47) Refer to Figure 15.3. If the Thai government pegs its currency to the dollar at a value above $.03/baht, we would say the currency is A) undervalued. B) overvalued. C) parity valued. D) equilibrium valued.
answer
B
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Figure 15.4 48) Refer to Figure 15.4. The equilibrium exchange rate is at A, $3/pound. Suppose the British government pegs its currency at $4/pound. At the pegged exchange rate A) there is a shortage of pounds equal to 600 million. B) there is a surplus of pounds equal to 400 million. C) there is a shortage of pounds equal to 400 million. D) there is a surplus of pounds equal to 600 million. E) there is a shortage of pounds equal to 200 million.
answer
B
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49) Refer to Figure 15.4. The equilibrium exchange rate is at A, $3/pound. Suppose the British government pegs its currency at $4/pound. Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D2. After the shift A) there is a shortage of pounds equal to 600 million. B) there is a surplus of pounds equal to 400 million. C) there is a shortage of pounds equal to 400 million. D) there is a surplus of pounds equal to 600 million. E) there is a shortage of pounds equal to 200 million.
answer
D
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50) Refer to Figure 15.4. The equilibrium exchange rate is originally at A, $3/pound. Suppose the British government pegs its currency at $4/pound. Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D2. If the government abandons the peg, the equilibrium exchange rate would be A) $4/pound. B) $3/pound. C) $2/pound. D) less than $2/pound.
answer
C
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Figure 15.5 51) Refer to Figure 15.5. The Chinese government pegs the yuan to the U.S. dollar, at one of the specified exchange rates on the graph, such that it undervalues its currency. Using the figure above, this would generate a A) a shortage of yuan equal to 400 million. B) a shortage of yuan equal to 200 million. C) a surplus of yuan equal to 200 million. D) a surplus of yuan equal to 400 million. E) a surplus of yuan equal to 300 million.
answer
A
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52) Refer to Figure 15.5. Suppose the Chinese government decides to abandon pegging the yuan to the U.S. dollar at a rate which undervalues the yuan. Using the figure above, the equilibrium exchange rate would be ________ and Chinese exports to the United States would ________ in price. A) $0.11/yuan; decrease B) $0.11/yuan; increase C) $0.14/yuan; increase D) $0.13/yuan; increase E) $0.13/yuan; decrease
answer
D
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53) Refer to Figure 15.5. Suppose the pegged exchange rate is $0.11/yuan. Because of safety concerns and numerous product recalls, U.S. consumers lower their demand for Chinese products. Using the figure above, this would A) increase the surplus of Chinese yuan. B) decrease the surplus of Chinese yuan. C) decrease the shortage of Chinese yuan. D) increase the shortage of Chinese yuan.
answer
C
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54) If a country sets a pegged exchange rate that is above the equilibrium exchange rate, how can the country maintain the peg? A) by purchasing surplus domestic currency at the pegged rate B) by selling surplus domestic currency at the pegged rate C) by purchasing surplus domestic currency at the equilibrium exchange rate D) by increasing the pegged exchange rate
answer
A
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55) During the Chinese experience with pegging the yuan to the dollar, the yuan was undervalued. As a result A) there was a surplus of yuan on the market that the Chinese government had to purchase to maintain the peg, depleting China's reserves of dollars. B) there was a surplus of dollars on the market that the Chinese government had to purchase to maintain the peg. C) the prices of Chinese exports were higher than they would have been without the peg. D) the equilibrium value of the yuan was below the pegged value of the yuan.
answer
B
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56) When foreign investors in Thailand began to realize that Thailand could not maintain its peg to the dollar indefinitely, they began to sell off their investments in Thailand and exchange the baht they received for dollars. This reduction in investment by foreigners is termed A) foreign direct investment. B) capital flight. C) capital inflow. D) stabilizing capitalization.
answer
B
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57) Which of the following did not help Thailand maintain its peg against the dollar in the 1990s? A) borrowing dollars from the International Monetary Fund in exchange for baht B) buying baht on the foreign exchange market to support higher demand for the baht C) increasing domestic interest rates to attract more foreign investors D) foreigners selling off of new investments in Thailand
answer
D
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58) Firms in Thailand that had borrowed dollars while the baht was pegged to the dollar faced interest payments that were ________ than they had planned while the Thai government continued trying to defend the peg, because the baht had been pegged ________ the equilibrium exchange rate for the baht. A) higher; above B) higher; below C) lower; above D) lower; below
answer
A
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59) Destabilizing speculation refers to A) actions taken by the International Monetary Fund that increase lending to countries who have pegged their currencies against the dollar. B) actions taken by currency traders to sell a currency that is undervalued. C) actions taken by investors who sell a country's currency in anticipation of buying it back later at a lower price. D) any depreciation of a country's currency as a result of long-run adjustments to purchasing power parity.
answer
C
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60) As foreign investors began to sell off investments they had made in Thailand, they traded in their baht for dollars. The result of this was A) pressure for the value of the baht to decline. B) pressure for the value of the baht to rise. C) an increase in the equilibrium value of the baht. D) a decrease in the supply of the baht in foreign exchange markets.
answer
A
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61) China began pegging its currency, the yuan, to the U.S. dollar in 1994. Because the yuan has been ________ at the pegged exchange rate, the Chinese government ________ its reserves of U.S. dollars as the government purchased more ________ to maintain the pegged exchange rate. A) undervalued; increased; dollars B) undervalued; decreased; yuan C) overvalued; decreased; yuan D) overvalued; increased; yuan
answer
A
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62) Although the pegged exchange rate between the yuan and the U.S. dollar has undervalued the yuan, China has been reluctant to abandon the peg for fear that abandoning the peg would A) increase exports and increase the current account deficit. B) reduce capital inflows. C) reduce exports and reduce economic growth. D) increase Chinese holdings of dollars.
answer
C
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63) South Korea suffered a destabilizing speculation in the late 1990s. This had the effect of ________ for the won. South Korean government tried to counteract this by raising interest rates which should have ________ the won. A) decreasing demand; increased demand for B) decreasing the supply; increased supply of C) increasing demand; decreased demand for D) decreasing the supply; increased demand for
answer
A
question
64) Under pressure from Japan, the United States and Europe, China announced it switched from pegging the yuan against the dollar to linking the value of the yuan to a 'basket' of currencies. The result of this change was A) the value of the yuan increased slightly relative to the dollar. B) the value of the yuan has become very responsive to changes in demand and supply in the foreign currency market. C) the value of the yuan has increased dramatically and is beginning to remove the trade imbalance between the United States and China. D) the value of the yuan has decreased dramatically and has further spurred Chinese exports.
answer
A
question
65) South Korea recovered from the exchange rate crisis much more quickly than Thailand and Indonesia. Which of the following is not a reason why South Korea recovered quickly? A) The Korean banking system recovered quickly and was able to loan money for investment. B) South Korea was able to borrow billions from the IMF and this stabilized the won. C) South Korean firms were able to obtain funds for investment by issuing stocks and bonds. D) South Korean wages fell, offsetting large corporate losses.
answer
A
question
66) Thailand's experience with pegging the baht to the dollar failed because the baht was ________ relative to the dollar, and China's experience with pegging the yuan to the dollar has run into difficulties because the yuan has been ________ relative to the dollar. A) overvalued; overvalued B) undervalued; overvalued C) undervalued; undervalued D) overvalued; undervalued
answer
D
question
67) How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar? A) Because the yuan was undervalued at the pegged exchange rate, the level of Chinese exports remained higher than they would have been if the exchange rate was allowed to float freely. B) Because the yuan was overvalued at the pegged exchange rate, competing firms from other countries feared that abandoning the peg would lead to an increase in Chinese exports. C) Competitors feared that the declining value of the dollar would continue to make Chinese goods more expensive. D) Because China's population is so large relative to other countries, the pegged exchange rate made the goods of foreign competing firms much less expensive than domestic Chinese goods.
answer
A
question
68) An easy way to determine if a currency is undervalued at a point in time is to use the model of purchasing power parity.
answer
FALSE
question
69) One reason purchasing power parity does not exactly hold is that many goods are not traded internationally.
answer
TRUE
question
70) If purchasing power parity tells us that if the exchange rate is a pound for a dollar, then price of a haircut in London should cost the same as a haircut in Toronto.
answer
FALSE
question
71) A depreciation of a country's currency always lowers the domestic firm's profits.
answer
FALSE
question
72) Both countries involved in a pegging of currency must agree to the terms of the pegging.
answer
FALSE
question
15.3 International Capital Markets 1) Between 2007 and 2011, foreign purchases of Canadian corporate stocks and bonds A) grew. B) fell. C) grew at a faster pace than foreign investment in Canadian government bonds. D) grew at a faster pace than Canadian investment in foreign corporate bonds.
answer
A
question
2) Shares of stock and long-term debt, including corporate and government bonds and bank loans, are bought and sold on A) the stock market. B) capital markets. C) foreign exchange markets. D) commodity markets.
answer
B
question
3) Investors in which country accounted for about half of all foreign purchases of Canadian stocks and bonds in 2011? A) the United States B) the United Kingdom C) China D) Mexico
answer
A
question
4) If interest rates in Canada rise A) the value of the dollar will fall as foreign investors sell their Canadian investments. B) the value of the dollar will rise as the foreign investors increase their holdings of Canadian investments. C) the value of the dollar will fall as foreign investors increase their holdings of Canadian investments. D) the value of the dollar will rise as foreign investors sell their Canadian investments.
answer
B
question
5) The three most important international financial centers today are A) New York, Los Angeles, and London. B) London, Tokyo, and Beijing. C) San Francisco, Paris, and Mexico City. D) Tokyo, London, and New York.
answer
D
question
6) If the U.S. government places tariffs on imports from countries that have been accused of deliberately undervaluing their currencies, the price of these imports will ________ and the demand for the undervalued currency will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall
answer
B
question
7) China has been accused of deliberately undervaluing its currency, the yuan, in order to A) increase its exports. B) increase its imports. C) prevent deflation. D) maintain purchasing power parity.
answer
A
question
8) Among countries that purchased Canadian stocks and bonds in 2011, China was the biggest customer, accounting for over 50 percent of all purchases.
answer
FALSE
question
9) Foreign portfolio investment in Canada has continually declined since 1995.
answer
FALSE
question
10) Before 1980, Canadian investors rarely invested in foreign capital markets.
answer
TRUE
