For More Articles Visit Here: http://www.budapp.net

1. 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:
a. Domestic prices rise--purchasing power of money falls--consumption falls
b. Domestic prices rise--purchasing power of money rises--consumption rises
c. Domestic prices fall--purchasing power of money rises--consumption falls
d. 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 inelastic
b. Home demand for imports is inelastic--foreign export demand is elastic
c. Home demand for imports is elastic--foreign export demand is inelastic
d. Home demand for imports is elastic--foreign export demand is elastic

2. 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 spending
b. Income rises, thus stimulating consumption
c. Output falls to a lower level
d. 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 States
b. Discourage Americans from purchasing foreign goods and services
c. Increase the number of dollars that could be bought with foreign currencies
d. Discourage Americans from traveling overseas
7. The Marshall-Lerner condition deals with the impact of currency
depreciation on:
a. Domestic income
b. Domestic absorption
c. Purchasing power of money balances
d. 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 mechanism
b. Likely to be adverse or negative in the short run
c. In the long run positive, given favorable elasticity conditions
d. 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 depreciation
b. Applies to the income effects of currency depreciation
c. Suggests that demand tends to be most elastic over the long run
d. Suggests that demand tends to be least elastic over the long run

3. 10. American citizens planning a vacation abroad would welcome:
a. Appreciation of the dollar
b. Depreciation of the dollar
c. Higher wages extended to foreign workers
d. 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 deficit
b. Improving trade balance--a smaller deficit
c. Unchanged trade balance
d. 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 deficit
b. Improving trade balance--a smaller deficit
c. Unchanged trade balance
d. 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-through
b. Complete currency pass-through
c. Partial J-curve effect
d. 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 run
b. Trade surplus in the long run

4. c. Trade deficit in the short run
d. 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 inelastic
b. Home demand for imports is elastic and foreign export demand is inelastic
c. Home demand for imports is inelastic and foreign export demand is elastic
d. 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
deficit
b. Shorten the amount of time in which the depreciation leads to a smaller trade
surplus
c. Lengthen the amount of time in which the depreciation leads to a smaller trade
deficit
d. 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 rates
b. Complete currency pass-through
c. Exchange arbitrage
d. 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 effect
b. The Marshall-Lerner effect
c. The absorption effect
d. Pass-through effect

5. 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 percent
b. Import prices to rise by 10 percent
c. Export prices to rise by 10 percent
d. 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 approach
b. The Marshall-Lerner approach
c. The monetary approach
d. The elasticities approach
21. Which approach analyzes a nation's balance of payments in terms of
money demand and money supply?
a. Expenditures approach
b. Absorption approach
c. Elasticities approach
d. 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-Lerner
b. J-curve
c. Absorption
d. Pass-through
23. The J-curve effect implies that following a currency appreciation, a
country's trade balance:
a. Worsens before it improves
b. Continually worsens
c. Improves before it worsens
d. Continually improves

6. 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 analysis
b. Absorption analysis
c. Expenditures analysis
d. 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 period
b. Longer the time period
c. Larger the spending cut
d. 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 period
b. Longer the time period
c. Larger the spending cut
d. 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 competitiveness
b. Worsens its international competitiveness
c. Does not affect its international competitiveness
d. 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 competitiveness
b. Worsens its international competitiveness
c. Does not affect its international competitiveness
d. None of the above

7. 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 decrease
b. Smaller increase, smaller decrease
c. Larger increase, smaller decrease
d. 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, increase
b. Increase, decrease
c. Decrease, decrease
d. Increase, increase
31. Given favorable elasticity conditions, an appreciation of the yen results
in
a. A smaller Japanese trade deficit
b. A larger Japanese trade surplus
c. Decreased prices for imported products for Japan
d. 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 Italy
b. Higher prices of imported products for Italy
c. A larger trade deficit for Italy
d. A smaller trade surplus for Italy

8. 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 run
b. No impact on a U.K. balance-of-trade deficit in the long run
c. An immediate negative effect on the U.K. balance of trade
d. 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 run
b. No impact on the Japanese trade balance in the long run
c. An immediate negative effect on the Japanese trade balance
d. 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. 0.1
b. 0.5
c. 1.0
d. 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. 0.2
b. 0.5
c. 1.0
d. 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. 0.5
b. 1.0
c. 1.5
d. 2.0

9. 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 rates
b. A rise in domestic imports
c. A rise in government spending
d. A decline in domestic absorption
39. The absorption approach to currency depreciation is represented by
one of the following equations:
a. B = Y - A
b. Y = C + I + G + (X-M)
c. I + X = S + M
d. 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 lag
b. Replacement lag
c. Decision lag
d. 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 lag
b. Decision lag
c. Replacement lag
d. Production lag
42. According to the J-curve effect, currency appreciation:
a. Decreases a trade surplus
b. Increases a trade surplus
c. Decreases a trade surplus before increasing a trade surplus
d. Increases a trade surplus before decreasing a trade surplus

10. 43. According to the J-curve effect, currency depreciation:
a. Decreases a trade deficit
b. Increases a trade deficit
c. Decreases a trade deficit before increasing a trade deficit
d. 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 approach
b. Elasticity approach
c. Fiscal approach
d. 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 increases
b. Y decreases and A decreases
c. Y increases and/or A decreases
d. 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 approach
b. Monetary approach
c. Fiscal approach
d. 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 0.2
b. Elasticity of demand for French exports is 0.6 while the French elasticity of
demand for imports is 0.4

11. c. Elasticity of demand for French exports is 0.5 while the French elasticity of
demand for imports is 0.7
d. 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 1,200,000
Materials
Steel 800,000
Other materials 1,600,000
Total material costs 2,400,000
Other costs 400,000
Total 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. $5000
b. $10,000
c. $15,000
d. $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 yen
b. 6,000,000 yen
c. 8,000,000 yen
d. 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. $10,000
b. $20,000
c. $30,000

12. 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 yen
b. 3,000,000 yen
c. 3,600,000 yen
d. 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. $24,000
b. $30,000
c. $36,000
d. $42,000
53. The lag that occurs between changes in relative prices and the
quantities of goods traded is the
a. Recognition lag
b. Recovery lag
c. Implementation lag
d. Legislative lag
54. The Marshall-Lerner condition illustrates
a. The price effects of a nation's currency depreciation on its trade deficit
b. The price effects of a nation's currency appreciation on its trade deficit
c. The effect of fixed exchange rate systems on the trade balance
d. None of the above

13. 55. The absorption approach to currency depreciation focuses on the
a. Purchasing power of money
b. Relative price effects
c. Income effects
d. Price elasticity of demand
56. Reversing balance of payments disequilibria may came at the expense
of
a. Economic relations with our trading partners
b. Domestic recession
c. Price inflation
d. 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.

14. 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.

15. 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.

16. 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.

17. 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?

18. 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 rates
b. Adjustable pegged exchange rates
c. Managed floating exchange rates
d. 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 rates
b. Managed floating exchange rates
c. Adjustable pegged exchange rates
d. 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 rates
b. Adjustable pegged exchange rates
c. Managed floating exchange rates
d. Crawling pegged exchange rates

19. 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 currencies
b. Depreciate against foreign currencies
c. Be officially revalued by the government
d. 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 fall
b. U.S. imports tend to rise and exports tend to fall
c. U.S. foreign exchange reserves tend to rise
d. 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 domestically
b. Foreigners discriminate against domestic products
c. Technological advance is superior abroad
d. 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 rates
b. Pegged exchange rates
c. Managed floating exchange rates
d. 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 transactions
b. Unilateral transfers
c. Merchandise trade transactions
d. Capital account transactions

20. 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 system
b. Dual exchange rate system
c. Jointly floating exchange rate system
d. 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 currencies
b. Officially devaluing their currencies
c. Allowing their currencies to depreciate in the free market
d. 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 rates
b. Adjustable pegged exchange rates
c. Managed floating exchange rates
d. 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 rates
b. Managed floating rates to adjustable pegged rates
c. Crawling pegged rates to freely floating rates
d. 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 rates
b. Gold and adjustable pegged exchange rates
c. Special Drawing Rights and managed floating exchange rates

21. 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 tranche
b. Special Drawing Rights
c. Primary reserve asset
d. 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 rates
b. Freely floating exchange rates
c. Managed floating exchange rates
d. 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. Gold
b. Silver
c. A single currency
d. 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. Appreciate
b. Depreciate
c. Be officially revalued
d. 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. Appreciate
b. Depreciate

22. c. Be officially revalued
d. 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 yen
b. Decrease, inducing a depreciation in the yen
c. Increase, inducing an appreciation in the yen
d. 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 currencies
b. Depreciate in value relative to other currencies
c. Be officially devalued by the government
d. 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 currencies
b. Depreciate in value relative to other currencies
c. Be officially devalued by the government
d. 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 francs
b. American exports to Switzerland will be more expensive in francs
c. American imports from Switzerland will be cheaper in dollars
d. None of the above
23. If the Japanese yen depreciates against other currencies in the
exchange markets, this will:

23. a. Have no effect on the Japanese balance of trade
b. Tend to worsen the Japanese balance of trade
c. Tend to improve the Japanese balance of trade
d. 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 trade
b. Tend to improve the Japanese balance of trade
c. Tend to worsen the Japanese balance of trade
d. 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 currency
b. Depreciation in its currency
c. Fall in the level of its exports
d. 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 pounds
b. Depreciate due to the increased demand for francs
c. Appreciate due to the increased demand for francs
d. 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 supply
b. A fall in the Canadian interest rate
c. An increase in national income overseas
d. Rising inflation overseas

24. 28. A market-determined increase in the dollar price of the pound is
associated with:
a. Revaluation of the dollar
b. Devaluation of the dollar
c. Appreciation of the dollar
d. Depreciation of the dollar
29. A market-determined decrease in the dollar price of the pound is
associated with:
a. Revaluation of the dollar
b. Devaluation of the dollar
c. Appreciation of the dollar
d. 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
systems
b. Demand schedules for imports and exports may be price speculation
c. There may occur large amounts of destabilizing speculation
d. 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 rates
b. The system allows policy makers freedom in pursuing domestic economic
goals
c. Inelastic demand schedules prevent large fluctuations in exchange rates
d. 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 markets
b. Be a lack of incentive to initiate exchange arbitrage
c. Be excessive amounts of destabilizing speculation
d. Exist a devaluation bias in the exchange markets

25. 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 francs
b. American exports to France will be more expensive in francs
c. American imports from France will be more expensive in dollars
d. 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 Japan
b. The U.S. government to ration yen to U.S. importers
c. An increase in the dollar price of yen
d. 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 otherwise
b. Countries are unable to initiate economic policies to combat unemployment
c. Exchange rates may experience wide and frequent fluctuations
d. 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, decrease
b. Increase, increase, decrease
c. Decrease, decrease, decrease
d. 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, decrease
b. Increase, increase, increase
c. Decrease, decrease, increase
d. Decrease, increase, increase

26. 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, expansionary
b. Expansionary, contractionary
c. Contractionary, expansionary
d. Contractionary, contractionary
39. The central bank of the United Kingdom could prevent the pound from
appreciating by:
a. Selling pounds on the foreign exchange market
b. Buying pounds on the foreign exchange market
c. Reducing its inflation rate relative to its trading partners
d. Promoting domestic investment and technological development
40. A surplus nation can reduce its payments imbalance by:
a. Applying tariffs and trade restrictions on imports
b. Revaluing its national currency
c. Increasing its labor productivity
d. 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 markets
b. Permit a country to undervalue its currency in the exchange markets
c. Increase the supply of foreign currency when imports exceed exports
d. 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 countries
b. Imposes hardships on exporters of the devaluing country
c. Is generally followed by unemployment in the devaluing country
d. Is generally followed by price deflation in the devaluing country

27. 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 currency
b. An appreciation in the Swedish currency
c. An appreciation in both currencies
d. 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 markets
b. Imports becoming expensive in the Japanese market
c. Unemployment for Japanese workers
d. Full employment for Japanese workers
45. To defend a pegged exchange rate that overvalues its currency, a
country could:
a. Discourage commodity exports
b. Encourage commodity imports
c. Purchase its own currency in international markets
d. 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 currencies
b. A depreciation in the value of both currencies
c. An appreciation in the value of the yen against the won
d. 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 currencies
b. A depreciation in the value of both currencies
c. An appreciation in the value of the yen against the won
d. A depreciation in the value of the yen against the won

28. 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 franc
b. $0.50 per franc
c. $0.60 per franc
d. $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 franc
b. $0.50 per franc
c. $0.60 per franc
d. $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 franc
b. $0.50 per franc
c. $0.60 per franc
d. $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 market
b. Selling dollars for francs on the foreign exchange market
c. Decreasing U.S. exports, thus decreasing the supply of francs
d. Stimulating U.S. imports, thus increasing the demand for francs

29. Table 15.1. The Market for Francs
Quantity of Dollar price Quantity of
francs demanded of francs francs supplied
600 $0.05 0
500 0.10 100
400 0.15 200
300 0.20 300
200 0.25 400
100 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 franc
b. $0.20 per franc
c. $0.25 per franc
d. $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 francs
b. Shortage of 400 francs
c. Surplus of 200 francs
d. 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 francs
b. Shortage of 400 francs
c. Surplus of 200 francs
d. Surplus of 400 francs
55. Under managed floating exchange rates, the Federal Reserve could
offset an appreciation of the dollar against the yen by:

30. a. Increasing the money supply which promotes falling interest rates and net
investment outflows
b. Increasing the money supply which promotes rising interest rates and net
investment inflows
c. Decreasing the money supply which promotes falling interest rates and net
investment outflows
d. 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 currency
b. Contractionary monetary policy to offset an appreciation of its currency
c. Expansionary monetary policy to offset a depreciation of its currency
d. 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 rates
b. Sell dollars on the foreign exchange market and raise domestic interest rates
c. Buy dollars on the foreign exchange market and lower domestic interest rates
d. 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 blocs
b. Currency boards
c. Central banks
d. Regional fiscal policies
59. If Mexico dollarizes its economy, it essentially
a. Allows the Federal Reserve to be its lender of last resort
b. Accepts the monetary policy of the Federal Reserve
c. Ensures that its business cycle was identical to that of the U.S.
d. Abandons its ability to run governmental balanced budgets

31. 60. If Mexico fully dollarizes its economy, it agrees to
a. Print pesos only to finance deficits of its national government
b. Use the U.S. dollar alongside its peso to finance transactions
c. Have the U.S. Treasury be in charge of its tax collections
d. 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
flight
b. Allow the Federal Reserve to be its lender of last resort
c. Ensure that its monetary policy is independent of the Federal Reserve
d. 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 adopt
a. An expansionary monetary policy to offset currency depreciation
b. An expansionary monetary policy to offset currency appreciation
c. A contractionary policy to offset currency appreciation
d. Both b and c
63. The crawling peg is a
a. Fixed exchange rate system
b. Floating exchange rate system
c. Compromise between fixed and floating exchange rates
d. Exchange rate system used by nations experiencing no inflation
64. Exchange rate controls
a. Achieved prominence during the economic crises of the late 1930's
b. Were popular immediately after World War II
c. Are widely used by the developing nations
d. All of the above
65. The flexibility of floating rates may generate the problem of
a. Inflationary bias
b. Deflationary bias
c. Continuous depreciation

32. 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.

33. 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.

34. 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.

35. 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.

36. 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?