Question 1

Which of the following best describes a managed float exchange rate system?

Accepted Answer

A system where exchange rates are mostly determined by demand and supply, with occasional government intervention.

Question 2

Suppose the price of a Big Mac is $5 in the U.S. and £3 in the U.K. According to purchasing power parity, what should the exchange rate be?

Accepted Answer

$$ \1$$ = £0.60 $

Question 3

Which of the following is NOT a reason why purchasing power parity may not hold perfectly between two countries?

Accepted Answer

All currencies are backed by gold.

Question 4

If the U.S. dollar appreciates relative to the euro, which of the following is a likely consequence for U.S. firms?

Accepted Answer

U.S. exports become more expensive for Europeans, potentially reducing U.S. exports.

Question 5

Which of the following is a disadvantage of pegging a currency to the U.S. dollar?

Accepted Answer

It can require large reserves to maintain the peg and exposes the country to destabilizing speculation.

Question 6

During the Bretton Woods system, what was the role of the International Monetary Fund (IMF)?

Accepted Answer

To provide loans to central banks and oversee fixed exchange rates.

Question 7

If a country experiences higher productivity growth than its trading partners, what is the likely long-run effect on its currency?

Accepted Answer

Its currency will appreciate as foreign demand for its less expensive goods increases.

Question 8

Which of the following best explains why the gold standard limited a country's ability to use expansionary monetary policy during the Great Depression?

Accepted Answer

Countries could only issue currency backed by gold, limiting the money supply.

Question 9

A country pegs its currency above the market equilibrium exchange rate. What is the likely result?

Accepted Answer

A surplus of the domestic currency, requiring the central bank to buy up the excess.

Question 10

Which of the following is a key feature of the current international exchange rate system?

Accepted Answer

The U.S. dollar floats against other major currencies.

Question 11

Why did some European countries recover more quickly from the 2007-2009 financial crisis than others?

Accepted Answer

They were able to depreciate their currencies, boosting exports.

Question 12

Which of the following is an example of destabilizing speculation in a pegged exchange rate system?

Accepted Answer

Investors sell off the domestic currency, expecting the peg to fail, causing further depreciation.

Question 13

If the exchange rate moves to equalize the purchasing power of two currencies, this is an example of which theory?

Accepted Answer

Purchasing power parity

Question 14

Which of the following is a likely effect of high tariffs or restrictive quotas on a country's currency?

Accepted Answer

The domestic currency will appreciate due to reduced demand for foreign goods.

Question 15

Which of the following best describes the main advantage of adopting a common currency, such as the euro, among several countries?

Accepted Answer

It reduces exchange rate instability and encourages trade within the region.

Question 16

Which of the following is a consequence of increased globalization of financial markets?

Accepted Answer

Shocks in one market are transmitted globally much faster than before.

Question 17

If the Bank of Thailand must buy baht with U.S. dollars to maintain a pegged exchange rate above equilibrium, what is the likely long-term outcome if the market pressure continues?

Accepted Answer

The Bank of Thailand will eventually run out of U.S. dollar reserves and be forced to abandon the peg.

Question 18

Which of the following is NOT a feature of the Bretton Woods system?

Accepted Answer

All currencies were allowed to float freely against each other.

Question 19

If the demand for a country's currency increases due to foreign consumers' preference for its goods, what is the likely effect on the exchange rate?

Accepted Answer

The currency will appreciate.

Question 20

Which of the following best explains why the Chinese yuan was considered undervalued in the early 2000s?

Accepted Answer

The yuan's fixed exchange rate gave Chinese exporters an advantage over foreign competitors.

The International Financial System: Exchange Rates, Capital Markets, and Historical Systems

Study Guide - Practice Questions

Study Guide - Flashcards