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12: Foreign Exchange

1. Money is the primary item transacted in: (a) money markets. (b) capital markets. (c) foreignexchange markets. (d) Wal-Mart and Best-Buy. (e) commodity markets. (f) real estate markets.

2. Of the following variables, the one that has increased at the fastest percentage rate duringthe past twenty years or so has been: (a) the U.S. money supply M1. (b) flows of funds acrossinternational borders. (c) the U.S. national debt. (d) total interest payments by corporate borrowers.(e) the exchange rate of the Japanese yen.

3. The value of one currency relative to another is called the (a) terms of trade. (b) exchangerate. (c) swap parameter. (d) arbitrage ratio. (e) currency coefficient.

4. A French speculator who bought real estate in Hawaii for $1 million when the euro was

trading at 1.1 per dollar and who sold the real estate for $1.1 million after the euro to dollarrate changed to 1.0 per dollar would have: (a) gained from bearing exchange rate risk. (b)broken even in real purchasing power expressed in euros. (c) lost approximately 2% on theinvestment. (d) been better off had the real estate been purchased originally with dollars. (e)lost even more by buying land in France.

5. A Japanese speculator who bought U.S. real estate for $13 million when the yen wastrading at 130 per dollar and who sold the real estate a year later for $14 million afterthe yen to dollar rate fell to 110 per dollar would have: (a) gained from bearingexchange rate risk. (b) broken even in purchasing power expressed in yen. (c) lost on thisfinancial investment. (d) been much better off had the real estate been purchasedoriginally with yen. (e) lost even more by buying land in Japan.

6. A stronger dollar will be most likely to benefit (a) textile producers in South Carolina. (b)

wheat farmers in Montana. (c) automobile manufacturers in Michigan. (d) Americanconsumers. (e) foreigners who buy products imported from the United States.

7. A Japanese speculator who bought California real estate for $6 million when the yen wastrading at 100 per dollar and who sold the real estate a year later for $5.8 million after the yen todollar rate rose to 120 per dollar would have: (a) gained from bearing exchange rate risk. (b)broken even in purchasing power expressed in yen. (c) lost roughly 2% on the investment. (d) beenbetter off had the real estate been purchased originally with dollars. (e) lost even more by buyingland in Japan.

8. If equilibrium real interest rates in the United States rise to an all time high, people in

China are more likely to: (a) buy U.S. bonds. (b) invest in economic capital in China. (c)import goods from the United States. (d) raise prices on all Chinese exports. (e) importgoods from Korea instead of the United States.

.9 Depreciation of a currency under a system of flexible exchange risk is most like (a)default risk in a corporate bond. (b) devaluation under a fixed exchange rate system. (c)inflation risk. (d) an import quota. (e) a subsidy on exports.

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10. Everything else constant, a stronger dollar will mean that (a) tourists vacationing in theUnited States can buy things at less cost to them. (b) Americans can vacation in Englandat less cost. (c) French cheese becomes more expensive. (d) Japanese cars become moreexpensive.

11.If one U.S. dollar exchanges for 1/2 British pound, 120 yen, and 12 French francs,then one French franc will be exchanged for: (a) 1/10 yen. (b) 1/20 pound. (c) 12

dollars. (d) 10 yen.

12. Potentially harmful effects to exporters or importers from exchange risk can bemitigated most efficiently by: (a) exchange controls. (b) forward markets. (c) prudentmacroeconomic policy. (d) a balanced capital account. (e) reserve currencyprovisions.

13. If U.S. balance of payments deficits indicate disequilibrium, the markets for

currencies of countries experiencing balance of payments surpluses are characterizedby: (a) shortages. (b) surpluses. (c) excessive scarcity. (d) overproduction.

14. If the exchange rate between the dollarand the Euro were flexible, it would movetoward equilibrium at: (a) XR1. (b) XR2. (c)XR3. (d) 0.

15. At XR1 in the diagram, there is: (a) a

dollar glut. (b) a dollar shortage. (c) neither adollar shortage nor a dollar glut. (d) a longterm equilibrium.

16. To maintain a pegged exchange rate ofXR1, the U.S. would be under pressure to: (a)sell convertible currencies and buy dollars. (b)sell dollars and purchase convertiblecurrencies. (c) allow the dollar to depreciate.(d) buy gold.

17. The theory that goods in one country will be identical in price to the goods in any othercountry after adjustments for exchange rates, necessary transactions costs, and barriers isknown as the: (a) the law of one price. (b) theory of value. (c) efficient exchange ratetheory. (d) natural rate theory. (e) free market theory.

18. The fixed exchange rate agreement that lasted from 1945-1971 was called the: (a)General Agree on Trade and Tariffs. (b) World Trade Organization. (c) Bretton Woodssystem. (d) World Bank.

19. The gold standard that was in place before World War I was important because it: (a)allowed people engaging in monetary transactions to have a sense of reliability that is notthere today. (b) encouraged world trade by eliminating exchange rate risk. (c) gave

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people the chance to actually create their own money if gold was found. (d) allowed thecountry to have complete control over its monetary policy, which is unlike today.

20. Exchange rates are permitted to fluctuate from day to day but central banks consistentlyrein the value of their respective currency in by buying and selling currencies. This type

of system is known as a: (a) managed (dirty) float. (b) clean float. (c) top heavy float.(d) base structured float.

21. From the end of World War II until 1971, for purposes of international payments theUnited States backed the U.S. dollar with gold in accord with sections of the: (a) Treatyof Bretton Woods. (b) revised Federal Reserve Act, Regulation Q. (c) McFadden Act. (d)Charter of the United Nations. (e) Glass-Stiegel Act.

22. Eurodollars are: (a) money used in Europe. (b) money used in the United States. (c)European dollars deposited in foreign banks outside of the United States or in foreignbranches of U.S. banks. (d) U.S. dollars deposited in foreign banks outside of the UnitedStates or in foreign branches of U.S. banks.

23. Europeans increasingly substituting American jellybeans for French candy couldlogically be a consequence of: (a) depreciation of the dollar. (b) retaliation against aboycott on French wine by American consumers. (c) depreciation of the euro. (d)appreciation of the dollar. (e) the Adkins diet becoming a fad in France.

24. A central bank that allows the purchase or sale of domestic currency by foreigners toaffect the domestic monetary base and thus, the money supply, is pursuing a policyknown as: (a) sterilized foreign exchange intervention. (b) arbitrage. (c) exchange ratefixing. (d) unsterilized foreign exchange intervention. (e) dirty float.

25. Under the US bookkeeping system, the US Balance of Payments account would bedebited if: (a) a British tourist at Disney World bought a Mickey Mouse hat. (b) a

gourmet shop in Chapel Hill purchased a selection of foreign wines and cheeses for salein the store. (c) a German paid Euros far an LA Lakers jersey in a shop in Manila. (d) aninternational student pays tuition to attend this class.

26. Exchange rate risk has never been reduced for anyone by the: (a) introduction of the euro.(b) law of one price. (c) International Monetary Fund. (d) gold standard.

27. If people all over the world increasingly began to prefer the sleek designs of Americancars to the reliability of Japanese cars, a likely consequence would be: (a) appreciation ofthe dollar relative to the yen. (b) depreciation of the dollar relative to the euro. (c)appreciation of the yen relative to the euro. (d) depreciation of the euro relative to theyen. (e) appreciation of the euro relative to the dollar.

28. If the dollar depreciates relative to the euro: (a) Europeans become less interested inAmerican goods. (b) more Americans will vacation in Europe. (c) Americas net exportswill fall. (d) Americans goods become cheaper, relative to European goods.

29. A likely reason for a company to hold Eurodollars is that: (a) the dollar is the mostwidely used currency in the world, making it less costly to conduct transactions abroad.(b) Eurodollars have begun to replace the US dollar as the worlds preferred medium of


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exchange. (c) Eurodollars are subject to especially stringent reserve requirements. (d)interest rates on Eurodollars usually exceed interest rates on long term Certificates ofDeposit.

30. Foreign exchange markets have sometimes proven very profitable to those who invest in

them. This market is organized: (a) on the New York Stock Exchange. (b) as a very elite,private market. (c) as an over-the-counter market. (d) only through foreign investors.

31. Globally efficient markets require: (a) relative prices for all goods everywhere to beidentical after adjusting for exchange rates, tariffs and quotas, and minimally necessarytransaction costs. (b) stable and fixed exchange rates. (c) transaction costs to be equalaround the world. (d) trade barriers to be enacted and increased proportionally.

32. When a financial crisis causes domestic residents and foreigners to move their financialcapital out of a country, the countrys: (a) government usually issues new treasury bonds.(b) currency depreciates. (c) currency appreciates. (d) government usually buys foreigncurrency to counteract the loss.

33. Domestic currency tends to appreciate in response to increases in: (a) nominal interestrates in other countries. (b) domestic productivity. (c) the domestic money supply. (d)domestic real interest rates.

34. A Eurodollar is: (a) an example of a Eurocurrency. (b) a European dollar. (c) theexchange rate between the Euro and the dollar. (d) central bank in Europe.

35. When the domestic currency is _______, the central bank must _______ domesticcurrency to keep the exchange rate fixed, but as a result it gains international reserves.:(a) undervalued \ sell. (b) undervalued \ buy. (c) overvalued \ sell. (d) overvalued \ buy.

36. An unsterilized intervention in which domestic currency is purchased by selling foreignassets leads to a ____ in international reserves, an ________ in the money supply, and a________of the domestic currency: (a) gain, increase, deprecation. (b) drop, decrease,appreciation. (c) gain, increase, appreciation. (d) drop, decrease, depreciation.

37. In the long run, if other countries do not retaliate, raising trade barriers against importsinto the home country under a system of flexible exchange rates causes the domesticcurrency to: (a) devaluate. (b) revaluate. (c) appreciate. (d) depreciate.

38. A change in the exchange rate has a direct effect on American consumers primarilybecause it affects the costs of: (a) domestic goods. (b) grocery store goods. (c) imported

goods. (d) all goods.

39. In the fixed exchange rate system, when the domestic currency is undervalued, the centralbank must ________ domestic currency to keep the exchange rate fixed, but as a result it________ international reserves: (a) sell, loses. (b) purchase, loses. (c) purchase, gains.(d) sell, gains.


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40. Absolute commitment to a fixed exchange rate system puts pressure on a nations centralbank to: (a) buy domestic currency if its currency is overvalued. (b) sell foreign currencyif its currency is overvalued. (c) buy domestic currency if its currency is undervalued. (d)float their currency if the foreign currency is overvalued.

41. A foreign exchange intervention with an offsetting open market operation that leaves thedomestic monetary base unchanged is called: (a) forward foreign exchange intervention.(b) sterilized foreign exchange intervention. (c) unsterilized foreign exchangeintervention. (d) none of the above.

42. When a central bank allows the purchase or sale of domestic currency by foreigners toaffect the monetary base and thus, the money supply, the process is termed: (a) a bilateralmonetization. (b) a fiat currency swap. (c) an unsterilized foreign exchange intervention.(d) forward foreign exchange intervention. (e) unilateral currency exchange. (f) sterilizedforeign exchange intervention.

43. When a countrys currency appreciates, the countrys goods abroad become ______ and

foreign goods in that country become _______. (a) more expensive; cheaper (b) cheaper;more expensive (c) taller; shorter (d) shorter; taller

44. When a countrys currency becomes more valuable compared to other currencies, thatcountrys goods overseas becomes ________ while imported goods become ________.(a) less expensive; less expensive (b) more expensive; more expensive (c) moreexpensive; less expensive (d) less expensive; more expensive

45. Nations absolutely committed to a fixed exchange rate system will usually be forced tohave their central banks: (a) buy domestic currency if their currency is overvalued. (b)sell foreign currency if their currency is overvalued. (c) buy foreign currency if theirdomestic currency is undervalued. (d) float their currency if the foreign currency is

overvalued.

46. The current account in a countrys balance of payments accounting includes the sum of thecountrys: (a) balance of trade and its capital account. (b) statistical discrepancy and its flows offunds. (c) net flows of payments for services and its balance of trade. (d) net currency flows and itscapital account.

47. Capital controls: (a domestic governments limits on international transactions) do notsuffer the disadvantage that they: (a) are seldom effective. (b) foster corruption. (c) makedevaluation less likely. (d) could allow governments to avoid taking the steps to reformtheir financial system to deal with a crisis.

48. When an industry suffers from increased foreign competition due to the appreciation ofits domestic currency, the industry will often: (a) pressure the central bank to pursue ahigher rate of money growth to lower the exchange rate. (b) pressure the central bank todecrease money supply to lower the exchange rate. (c) pressure the central bank to pursuea more contractionary monetary policy of increasing the money supply. (d) pressure thecentral bank to a lower rate of money growth to raise the exchange rate.


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49. Persistent deficits in the current account of the U.S. balance of payments and theaccompanying inflows of international financial capital during the 1980s and again in the2000s were at least partially reflective of: (a) the increasingly successful collusion ofOPEC countries in raising oil prices. (b) losses of virtually all U.S. comparativeadvantages. (c) persistent record-breaking federal budget deficits. (d) undervaluation of

the dollar in international financial markets.

50. Financial systems in developing and ex-communist countries that face low rates ofgrowth are said to be financially repressed. Financial repression is not commonly cited asarising from: (a) poor legal systems. (b) weak accounting standards. (c) inadequategovernment regulation. (d) nationalization of banks. (e) lack of foreign investment.

51. When persistent federal budget deficits cause foreigners to buy US real estate orcorporate assets or corporate stocks or bonds, their purchases are: (a) exerting pressurefor the dollar to devalue. (b) likely to be unprofitable investments if the dollar depreciatessignificantly. (c) exporting their debts to the United States. (d) exerting pressure for theirown countries currencies to appreciate.

52. When foreign central banks buy US Treasury bonds when the dollar is under pressure todepreciate because of persistent federal deficits, the foreign central banks are effectively:(a) artificially supporting the dollar. (b) facilitating the ability of the US federalgovernment to run deficits. (c) often making financial investments contrary to theinterests of their own citizens. (d) all of the above.

53. Not among reasons that the adoption of the Euro is expected to increase economicprosperity in Europe is because it will: (a) reduce the need for flows of goods andresources between regions. (b) reduce transactions costs. (c) encourage politicalcooperation. (d) increase market competition.

54. Developing nations seeking assistance from the International Monetary Fund are notcommonly required to: (a) reduce their government budget deficits. (b) reduce theircurrent account deficit, effectively resolving balance of payments problems. (c) maintaina tight fiscal policy. (d) reduce their capital account deficits, effectively reducing theirbalance of payments problems.

55. When large U.S. balance-of-trade deficits lead to balance-of-trade surpluses in othercountries, this leads to: (a) decreases in US international reserves. (b) no change indomestic or international reserves. (c) increases in US international reserves. (d)increases in US domestic reserves.

56. The Bretton Woods system that operated from 1946 until 1971 was one in which centralbanks agreed: (a) to buy and sell their own currencies to keep their exchange rates fixed. (b) not tointervene in the foreign exchange market to maintain a fixed exchange rate regime that had existedprior to World War I. (c) to limit domestic money growth to the average of the five largest industrialnations. (d) to limit domestic money growth to the growth rates of their real GDPs.


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57. Most of the world switched from being on a fixed exchange rate system to a floatingexchange rate system [the dirty float]: (a) at the beginning of World War II, when financial andpolitical instability in Europe proved highly contagious. (b) in 1971, when President Nixonannounced that the United States dollar was no longer backed with gold in any fashion. (c) at the endof World War I, under the terms of the Treaty of Versailles. (d) when the Soviet Union collapsed and

became 15 separate and sovereign nations between 1989 and 1990.

58. The enormous federal budget deficits of the 1980s, the early-1990s, and from 2001 onwardhave been largely accommodated through: (a) more severe tradeoffs between unemployment andinflation. (b) large trade deficits. (c) the specie-flow mechanism. (d) inflation of the domesticexchange rate.

59. Historically, the single most profitable category of export per unit for citizens of theUnited States as a whole has been: (a) iron and steel. (b) U.S. currency. (c) financialtechnology. (d) laissez faire economic policies.

60. If transaction costs were zero, relative prices for goods or resources would be identical

everywhere in the world after adjusting for exchange rates, according to the: (a) classicalexchange rate theory. (b) law of one price. (c) relative exchange currency theorem. (d)theory of zero purchasing parity disparity. (e) theory of currency equalization.

61. The theory of purchasing power parity suggests that long-run changes in the exchangerates between two countries are determined by changes in the relative: (a) structures ofquotas and tariffs between the countries. (b) ratios of net exports relative to eachcountrys GDP. (c) price levels of the countries. (d) productivity of labor between thecountries.

62. If a central bank does not want the purchase or sale of domestic currency to affect the

monetary base and the money supply, the central bank can: (a) change the exchange rate.(b) engage in unsterilized intervention. (c) reduce tariffs and other trade barriers toimports. (d) engage in sterilized intervention.

63. A situation in which the residents of a relatively small and unstable country abandon thecountrys own currency and begin using currency issued in a significantly larger andmore stable economy is called: (a) paritization. (b) dollarization. (c) commodification. (d)empoundment. (e) a currency swap.

64. The process wherein one country stops issuing its own currency and uses a differentcurrency as its medium of exchange is called: (a) internationalization. (b) dollarization.

(c) unitization. (d) privatization. (e) unification.

65. All of the following countries have been dollarized at one time or another except for: (a)Panama. (b) El Salvador. (c) Argentina. (d) Germany. (e) Italy.


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