chapter 17

Question 1

What is a disadvantage of dollarization?
a) Increased government revenue from seigniorage
b) Limited ability to pay government expenditures with newly issued currency
c) Reduced stability in the economy
d) Decreased reliance on foreign investment

Answer 1

b

Question 2

What is a key characteristic of a currency board?
a) It allows for flexible exchange rates
b) It sets a fixed exchange rate with a stable foreign currency by law
c) It relies on multiple foreign currencies for exchange
d) It issues its own currency without any fixed exchange rate

Answer 2

b

Question 3

When the exchange rate is increased, what happens to the domestic currency?
a) It appreciates
b) It depreciates
c) It remains unchanged
d) It fluctuates

Answer 3

A

Question 4

What happens to the foreign currency when the exchange rate is increased?
a) It appreciates
b) It depreciates
c) It remains unchanged
d) It fluctuates

Answer 4

b

Question 5

What is a disadvantage of dollarizing a country’s currency?
a. Dollarization allows a country to benefit from the stability in value of another country’s
currency
b. Dollarization prevents a country from having the value of its currency tied to the dollar or
another currency
c. Dollarization prevents a country from printing currency to generate tax revenue.
d. Dollarization means that the country whose currency it adopts takes control of the
government of the dollarizing country.

Answer 5

c

Question 6

What is an advantage of choosing to dollarize a country’s currency?
a. Dollarization allows a country to have a stable currency even if the government has had
irresponsible government and management in the past.
b. Dollarization prevents other countries from engaging from “beggar-thy-neighbor”
currency policies
c. Dollarization prevents other countries from adopting the US dollar as its currency since
only one country other than the US can use the dollar at a time
d. Dollarization allows countries to engage in seigniorage

Answer 6

a

Question 7

In a/an _____ exchange rate system the government or central bankers intervene to keep the
exchange rate virtually steady.
a. fixed
b. free floating
c. managed float
d. intermediate

Answer 7

A

Question 8

What is the main characteristic of a currency board?
a) Setting a flexible exchange rate
b) Allowing the currency to freely float in the market
c) Fixing the exchange rate with a stable foreign currency by law
d) Pegging the currency to gold reserves

Answer 8

c

Question 9

In which system does a country completely stabilize its exchange rate against a target, but the target is not set by law?
a) Currency board
b) Floating exchange rate
c) Fixed exchange rate (fixed pegs)
d) Managed float exchange rate

Answer 9

C

Question 10

Which of the following is an advantage of fixed exchange rate systems?
a) Potential for corruption
b) Exchange rate flexibility
c) Lowering exchange rate risk
d) Rapid currency value changes

Answer 10

c. Caused by fluctuations in value of country’s currency

Question 11

What disadvantage is associated with fixed exchange rate systems?
a) Lowers exchange rate risk
b) Encourages investment
c) Potential for corruption
d) Exchange rate flexibility

Answer 11

c

Question 12

Rapid increases in the U.S. exports of goods and services will result in a(n) _____ foreign
currency and a(n) _____ the U.S. dollars in the foreign exchange market.
a. increase in the demand for; increase in the supply of
b. increase in the supply of; increase in the demand for
c. shortage of foreign currency; surplus of
d. decrease in the supply of; decrease in the demand for

Answer 12

b

Question 13

A decrease in German residents’ willingness to invest in dollar-denominated assets will shift
the demand curve for:
a. Euros to the right.
b. Euros to the left.
c. Dollars to the right.
d. Dollars to the left

Answer 13

d

Question 14

In a floating exchange rate system, the dollar per pound exchange rate is determined by:
a. the American government.
b. the British government.
c. the interaction of the demand and supply of pounds in the foreign exchange market.
d. the interaction of the demand for and supply of dollar-denominated assets in the stock
market

Answer 14

c. floating/flexible

Question 15

Shifts in demand away from French products and toward the U.S. products (caused by forces
other than changes in the exchange rate) would result in extra attempts to:
a. buy both euros and dollars.
b. sell both euros and dollars.
c. sell Euros and buy dollars.
d. buy Euros and sell dollars.

Answer 15

c

Question 16

In a/an _____ exchange rate system the government or central bankers intervene to keep the
exchange rate virtually steady.
a. fixed
b. free floating
c. managed float
d. intermediate

Answer 16

a

Question 17

Which of the following groups is most likely to benefit from a strengthening of the U.S. dollar
against other major currencies?
a. U.S. exporters
b. The U.S. government
c. U.S. consumers
d. Foreign consumers

Answer 17

c

Question 18

Under a fixed exchange rate system, a fall in the market price (the exchange rate value) of a
currency is called a(n) _____ of that currency.
a. revaluation
b. devaluation
c. appreciation
d. depreciation

Answer 18

b

Question 19

Under a floating exchange rate system, an increase in the international demand for electronic
appliances manufactured in Japan will result in:
a. Deflation in the Japanese economy.
b. An increase in Japan’s trade deficit with other countries.
c. An appreciation of the yen vis-à-vis other currencies.
d. A depletion of international reserves held by the central bank of Japan.

Answer 19

c

Question 20

To maintain an undervalued currency, the country’s monetary authorities must intervene in the foreign exchange market to buy its currency in the foreign exchange market.

Answer 20

f

Question 21

Government officials wanting to defend a fixed exchange rate may not have sufficient reserves of foreign currency to keep the price fixed indefinitely.

Answer 21

t

Question 22

In the floating exchange rate system, government officials must intervene in the foreign exchange market to keep the exchange rate from fluctuating.

Answer 22

f

Question 23

French imports of goods and services will create a demand for foreign currency and a supply of euros.

Answer 23

t

Question 24

Most foreign exchange trading is done among the banks themselves in the retail part of the foreign exchange market.

Answer 24

f

Question 25

Under a floating exchange rate system, the value of the dollar per euro exchange rate rises when:
a. The U.S. trade deficit with the euro-area countries increases.
b. European demand for U.S. products increases.
c. The U.S. government raises personal income tax rates.
d. The inflation rate in the U.S. is much lower than the inflation rate in the euro-area.

Answer 25

a

Question 26

Under a fixed exchange rate system, a fall in the market price (the exchange rate value) of a currency is called a(n) _____ of that currency.
a. revaluation
b. devaluation
c. appreciation

Answer 26

b

Question 27

Under a floating exchange rate system, everything remaining constant, an increase in European exports to Japan is most likely to result in:
a. a decrease in the demand for euro in the foreign exchange market.
b. a decrease in the supply of euro in the foreign exchange market.
c. an appreciation of the Japanese yen vis-à-vis the euro.
d. an appreciation of the euro vis-à-vis the Japanese yen.

Answer 27

d

Question 28

Which of the following best characterizes the current U.S. exchange rate policy?
a. An adjustable pegged exchange rate
b. A crawling pegged exchange rate
c. A freely floating exchange rate
d. A fixed exchange rate

Answer 28

c

Question 29

Under the floating exchange rate system, a fall in the market price of a currency is called:
a. devaluation.
b. depreciation.
c. appreciation.
d. revaluation.

Answer 29

b

Question 30

n the foreign exchange market, what could be a possible consequence of an increase in the purchase of stocks of Toyota, a Japanese automobile firm, by U.S. residents? a.The dollar will depreciate;
b. Demand for dollarfollow will increase;
c. yen will depreciate;
d. supply curve for dollar will shift to the left

Answer 30

a

Question 31

An increase in the dollar per euro exchange rate will result in: a. an outward shift of the demand curve for dollar. b. an inward shift of the supply curve of euro. a decline in the quantity demanded for euro. d. a decline in the quantity demanded for dollar.

Answer 31

c

Question 32

An increase in capital inflows in the United States will result in a(n) _____ foreign currency and a(n) _____ the U.S. dollars in the foreign exchange market.

a. increase in the demand for; increase in the supply of

b. increase in the supply of; increase in the demand for

c. shortage of foreign currency; surplus of

d. decrease in the supply of; decrease in the demand for

Answer 32

b

Question 33

A deficit in the overall balance of payments of a nation generally is an indication that:

a. the country’s monetary authority is selling foreign currency.

b. the country’s monetary authority is buying foreign currency.

c. the country’s monetary authority is buying domestic government bonds.

d. the country’s monetary authority is selling domestic currency.

Answer 33

b

Question 34

. When a U.S. resident increases her holdings of a foreign financial asset, this item is recorded as a:

a. credit entry in the U.S. current account.

b. debit entry in the U.S. current account.

c. credit entry in the U.S. capital account.

d. debit entry in the U.S. capital account.

Answer 34

b

Question 35

When a foreign resident increases her holdings of a U.S. financial asset, the :

a. current account of the U.S. balance of payments will be credited.

b. current account of the U.S. balance of payments will be debited.

c. financial account of the U.S. balance of payments will be credited.

d. financial account of the U.S. balance of payments will be debited.

Answer 35

d