MCQ6

Question 1

A strong dollar is normally expected to cause:

a. high unemployment and high inflation in the U.S.
b. high unemployment and low inflation in the U.S.
c. low unemployment and low inflation in the U.S.
d. low unemployment and high inflation in the U.S.

Answer 1

ANS: B

Question 2

A primary result of the Smithsonian Agreement was:
a. the establishment of the European Monetary System (EMS).
b. establishing that exchange rates of most major countries were to be allowed to fluctuate
2.25% above or below their initially set values.
c. establishing specific rules for when tariffs and quotas could be imposed by governments.
d. establishing that exchange rates of most major currencies were to be allowed to fluctuate
freely without boundaries (although the central banks did have the right to intervene when
necessary).

Answer 2

ANS: B

Question 3

A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.

a. upward; upward
b. downward; upward
c. upward; downward
d. downward; downward

Answer 3

ANS: B

Question 4

The euro is the currency:

a. adopted in all western European countries as of 1999.
b. adopted in all eastern European countries as of 1999.
c. adopted in all European countries as of 1999.
d. none of the above

Answer 4

ANS: D

Question 5

The euro has not been adopted by:

a. Slovenia.
b. the U.K.
c. Germany.
d. France

Answer 5

ANS: B

Question 6

The exchange rate mechanism (ERM) refers to the method of linking \_\_\_\_ currencies to each other within
boundaries.
a. Latin American
b. European
c. Asian
d. North American

Answer 6

ANS: B

Question 7

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

a. monetary
b. fiscal
c. worker compensation
d. foreign relations

Answer 7

ANS: A

Question 8

Countries that have adopted the euro tend to have very similar ____.

a. interest rates
b. inflation rates
c. income tax rates
d. budget deficits

Answer 8

ANS: A

Question 9

Which of the following is true regarding the euro?
a. Exchange rate risk between participating European currencies is completely eliminated,
encouraging more trade and capital flows across European borders.
b. It allows for more consistent economic conditions across countries.
c. It prevents each country from conducting its own monetary policy.
d. All of the above are true

Answer 9

ANS: D

Question 10

As foreign exchange activity has grown, a given degree of central bank intervention has become:

a. more effective.
b. more frequent.
c. less effective.
d. none of the above

Answer 10

ANS: C

Question 11

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

a. inflation.
b. interest rates.
c. income levels.
d. expectations of future exchange rates

Answer 11

ANS: B

Question 12

Which of the following is not true regarding Thailand?
a. Thailand was one of the slowest growing countries before the Asian crisis.
b. High levels of spending and low levels of saving placed upward pressure on prices of real
estate, products, and on Thailand’s local interest rate.
c. Thailand’s baht was linked to the dollar prior to July 1997, which made Thailand an
attractive site for foreign investors.
d. Thai banks provided many loans that were very risky in their attempt to make use of all of
their funds.
e. All of the above are true.

Answer 12

ANS: A

Question 13

Which of the following are examples of currency controls?

a. import restrictions.
b. prohibition of remittance of funds.
c. ceilings on granting credit to foreign firms.
d. all of the above

Answer 13

ANS: D

Question 14

From a financial management perspective, which of the following is true regarding the introduction of the
Euro?
a. U.S.-based MNCs are not subject to exchange rate risk when they have transactions in
euros.
b. The euro is pegged to all other European currencies.
c. Transactions costs decline for MNCs that conduct transactions within Europe.
d. The euro replaced the British pound.

Answer 14

ANS: C

Question 15

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

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 pegged to the Japanese yen to resolve the crisis

Answer 15

ANS: A

Question 16

Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other
countries than it would under a freely floating exchange rate system.
a. True
b. False

Answer 16

ANS: T

Question 17

An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in
the foreign exchange market to maintain exchange rates within specified boundaries.
4
a. True
b. False

Answer 17

ANS: F

Question 18

A major advantage of the euro is the complete elimination of exchange rate risk on transactions between
participating European countries, which encourages more trade and capital flows within Europe.
a. True
b. False

Answer 18

ANS: T

Question 19

The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.

a. 2.25
b. 6
c. 10
d. 8

Answer 19

ANS: D

Question 20

Which of the following did not occur as a result of Bretton Woods Agreement?
a. Each currency was valued in terms of gold.
b. Values of all currencies were fixed with respect to each other.
c. Currencies were allowed to fluctuate no more than 1% above or below the initially set
rates.
d. The United States experienced no balance-of-trade deficits.

Answer 20

ANS: D

Question 21

A “dirty” float represents a system of:

a. freely floating exchange rates.
b. fixed exchange rates.
c. floating exchange rates, but the central bank can manipulate the currency.
d. fixed exchange rates, but the central bank can manipulate the currency.

Answer 21

ANS: C

Question 22

Which of the following is not true regarding the eurozone?

a. Members cannot set unique monetary policy individually.
b. Members cannot apply their own fiscal policies.
c. Members have to agree on the ideal monetary policy.
d. Its creation allowed for greater political union among its members.

Answer 22

ANS: B

Question 23

Which of the following is not a reason for devaluation of a currency?
a. high inflation.
5
b. to reduce balance-of-trade deficit.
c. to decrease the amount of imports.
d. high unemployment.

Answer 23

ANS: A

Question 24

Which of the following is the most likely reason for revaluation of a currency?

a. To reduce inflation.
b. To stimulate the local economy.
c. To increase the amount of exports.
d. To increase balance-of-trade surplus.

Answer 24

ANS: A

Question 25

Direct intervention is usually more effective than indirect intervention.

a. True
b. False

Answer 25

ANS: F

Question 26

A primary result of the Bretton Woods Agreement was:
a. the establishment of the European Monetary System (EMS).
b. establishing specific rules for when tariffs and quotas could be imposed by governments.
c. establishing that exchange rates of most major currencies were to be allowed to fluctuate
1% above or below their initially set values.
d. establishing that exchange rates of most major currencies were to be allowed to fluctuate
freely without boundaries (although the central banks did have the right to intervene when
necessary).

Answer 26

ANS: C

Question 27

Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries
engage in trade with each other. Assume that Country A’s currency floats against Country B’s
currency, and that Country C’s currency is pegged to B’s. If A’s currency depreciates against B, then
A’s exports to C should ____, and A’s imports from C should ____.
a. decrease; increase
b. decrease; decrease
c. increase; decrease
d. increase; increase

Answer 27

ANS: C

Question 28

If foreign investors fear that a peg may be broken because of fund outflows from that country, they may
attempt to purchase more of that currency before the peg is broken.
a. True
b. False

Answer 28

ANS: F

Question 29

To weaken the dollar using sterilized intervention, the Fed will \_\_\_\_ U.S. dollars and simultaneously \_\_\_\_
Treasury securities.
a. buy; sell
b. sell; sell
c. sell; buy
d. buy; sell

Answer 29

ANS: B

Question 30

If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:
a. exchange dollars for foreign currencies, and sell some of its existing Treasury security
holdings for dollars.
b. exchange foreign currencies for dollars, and sell some of its existing Treasury security
holdings for dollars.
c. exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
d. exchange foreign currencies for dollars, and buy existing Treasury securities with dollars

Answer 30

ANS: D

Question 31

If the Fed ____ the interest rates when inflationary expectations remain unchanged, the most likely result is
that the value of dollar will ____ and the economy may ____.
a. increases; appreciate; weaken
b. decreases; appreciate; weaken
c. increases; depreciate; strengthen
d. decreases; appreciate; strengthen

Answer 31

ANS: A

Question 32

A common way to reduce inflation is to weaken the value of the domestic currency.

a. True
b. False

Answer 32

ANS: F

Question 33

In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the
depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign
competition.
a. True
b. False

Answer 33

ANS: T

Question 34

Which of the following is not true regarding the Mexican peso crisis?
a. Mexico encouraged firms and consumers to buy an excessive amount of imports because
the peso was stronger than it should have been.
b. Many speculators based in the U.S. speculated on the potential decline in the peso by
7
investing their funds in Mexico.
c. In December of 1994, the central bank of Mexico allowed the peso to float freely.
d. The central bank of Mexico increased interest rates after the peso declined in value in
order to prevent investors from withdrawing their investments in Mexico’s debt securities.
e. All of the above are true.

Answer 34

ANS: B

Question 35

Which of the following is an appropriate form of indirect intervention?

a. To strengthen the dollar, the Fed increases the money supply to lower interest rates.
b. To weaken the dollar, the Fed reduces the money supply to increase interest rates.
c. To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation.
d. To weaken the dollar in the long run, the Fed attempts to reduce U.S. inflation.

Answer 35

ANS: C

Question 36

Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract
this movement by intervening in the foreign exchange market using sterilized intervention. The Fed
would
a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
e. none of the above

Answer 36

ANS: B

Question 37

While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the
attractive foreign prices that result from a strong home currency.
a. True
b. False

Answer 37

ANS: T

Question 38

While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local
companies are better able to raise prices.
a. True
b. False

Answer 38

ANS: T

Question 39

Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury
securities, this is an example of sterilized intervention.
a. True
b. False

Answer 39

ANS: T

Question 40

An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in
the foreign exchange market to maintain exchange rates within specified boundaries.
a. True
b. False

Answer 40

ANS: F