Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of:

Accepted Answer

A)   pegged intervention.
B)   indirect intervention.
C)   nonsterilized intervention.
D)   sterilized intervention.
E)   A and DF) C) and D)
G) A) and D)

Question 3

The term "target zone arrangement" refers to a:

Accepted Answer

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 country's 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.E) B) and C)
F) A) and B)

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

Currency devaluation can boost a country's exports, but currency revaluation can increase foreign competition.

Accepted Answer

A) True 
 B)False

Question 6

Countries that have adopted the euro must agree on a single ____ policy.

Accepted Answer

A)   monetary
B)   fiscal
C)   worker compensation
D)   foreign relationsE) None of the above
F) B) and C)

Question 7

In a sterilized exchange rate arrangement, a country's home currency value is pegged to a foreign currency or to some unit of account.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following are examples of currency controls?

Accepted Answer

A)   Import restrictions
B)   Prohibition of remittance of funds
C)   Ceilings on granting credit to foreign firms
D)   All of the aboveE) C) and D)
F) B) and C)

Question 9

If the European Central Bank desires to weaken the euro without affecting the euro money supply, it should:

Accepted Answer

A)   exchange euros for foreign currencies, and sell some of its existing Treasury security holdings for euros.
B)   exchange foreign currencies for euros, and sell some of its existing Treasury security holdings for euros.
C)   exchange euros for foreign currencies, and buy existing Treasury securities with euros.
D)   exchange foreign currencies for euros, and buy existing Treasury securities with euros.E) A) and C)
F) All of the above

Question 10

It has been argued that the exchange rate can be used as a policy tool. Assume that the UK government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?

Accepted Answer

A)   Weaken the pound
B)   Strengthen the pound
C)   Buy pounds with foreign currency in the foreign exchange market
D)   Implement a tight monetary policyE) A) and B)
F) All of the above

Question 11

A primary result of the Bretton Woods Agreement was:

Accepted Answer

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) .E) B) and D)
F) A) and B)

Question 12

During the period 1944-1971, the UK used a ____ system.

Accepted Answer

A)   euro exchange rate
B)   fixed
C)   dirty float
D)   flexibleE) A) and B)
F) None of the above

Question 13

To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:

Accepted Answer

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.E) None of the above
F) A) and C)

Question 14

Which of the following is an example of direct intervention in foreign exchange markets?

Accepted Answer

A)   Lowering interest rates
B)   Increasing the discount rate
C)   Exchanging pounds for foreign currency
D)   Imposing barriers on international tradeE) C) and D)
F) A) and B)

Question 15

All European countries now use the euro as their currency.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following are true about the Southeast Asian currency crisis?

Accepted Answer

A)   It was preceded by several years of large capital inflows to Asia.
B)   It was preceded by a five-year recession in Asia.
C)   Asian interest rates declined during the crisis.
D)   Asian exchange rates were converted from floating to fixed to resolve the crisis.E) None of the above
F) A) and B)

Question 17

The exchange rate mechanism (ERM)  refers to the method of linking ____ currencies to each other within boundaries.

Accepted Answer

A)   Latin American
B)   European
C)   Asian
D)   North AmericanE) B) and D)
F) A) and C)

Question 18

A weaker pound places ____ pressure on UK inflation, which in turn places ____ pressure on UK interest rates, which places ____ pressure on UK bond prices.

Accepted Answer

A)   upward; downward; upward
B)   upward; downward; downward
C)   upward; upward; downward
D)   downward; upward; upward
E)   downward; downward; upwardF) A) and D)
G) B) and D)

Question 19

When using indirect intervention, a central bank is likely to focus on:

Accepted Answer

A)   inflation.
B)   interest rates.
C)   income levels.
D)   expectations of future exchange rates.E) All of the above
F) C) and D)

Question 20

Under a managed float exchange rate system, the Bank of England may attempt to stimulate the UK economy by ____ the pound. Such an adjustment in the pound's value should ____ the UK demand for products produced by major foreign countries.

Accepted Answer

A)   weakening; increase
B)   weakening; decrease
C)   strengthening; increase
D)   strengthening; decreaseE) A) and D)
F) None of the above

Exam 6: Exchange Rate History and the Role of Governments

The term "target zone arrangement" refers to a:

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In a sterilized exchange rate arrangement, a country's home currency value is pegged to a foreign currency or to some unit of account.

Correct AnswerverifiedShow Answer

If the European Central Bank desires to weaken the euro without affecting the euro money supply, it should:

Correct AnswerverifiedShow Answer

Which of the following are examples of currency controls?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following is an example of direct intervention in foreign exchange markets?

Correct AnswerverifiedShow Answer

A primary result of the Bretton Woods Agreement was:

Correct AnswerverifiedShow Answer

A weaker pound places ____ pressure on UK inflation, which in turn places ____ pressure on UK interest rates, which places ____ pressure on UK bond prices.

Correct AnswerverifiedShow Answer

The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries.

Correct AnswerverifiedShow Answer

To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:

Correct AnswerverifiedShow Answer

Under a managed float exchange rate system, the Bank of England may attempt to stimulate the UK economy by ____ the pound. Such an adjustment in the pound's value should ____ the UK demand for products produced by major foreign countries.

Correct AnswerverifiedShow Answer

Countries that have adopted the euro must agree on a single ____ policy.

Correct AnswerverifiedShow Answer

Which of the following are true about the Southeast Asian currency crisis?

Correct AnswerverifiedShow Answer

When using indirect intervention, a central bank is likely to focus on:

Correct AnswerverifiedShow Answer

During the period 1944-1971, the UK used a ____ system.

Correct AnswerverifiedShow Answer

It has been argued that the exchange rate can be used as a policy tool. Assume that the UK government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?

Correct AnswerverifiedShow Answer

Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of:

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

All European countries now use the euro as their currency.

Correct AnswerverifiedShow Answer

Currency devaluation can boost a country's exports, but currency revaluation can increase foreign competition.

Correct AnswerverifiedShow Answer

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A weaker pound places pressure on UK inflation, which in turn places pressure on UK interest rates, which places pressure on UK bond prices.

Correct Answer
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Under a managed float exchange rate system, the Bank of England may attempt to stimulate the UK economy by the pound. Such an adjustment in the pound's value should the UK demand for products produced by major foreign countries.

Correct Answer
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