Chapter 6—Government Influence on Exchange Rates

1. To force the value of the pound to appreciate against the dollar, the Federal Reserve should:
a.. sell dollars for pounds in the foreign exchange market and the European Central Bank
(ECB) should sell dollars for pounds in the foreign exchange market.
b. sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB)
should sell dollars for pounds in the foreign exchange market.
c. sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB)
should not intervene.
d. sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB)
should sell pounds for dollars in the foreign exchange market.

2. A weak 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.

3. 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.

4. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:
a. sell dollars for pounds in the foreign exchange market and the Bank of England should sell
dollars for pounds in the foreign exchange market.
b. sell pounds for dollars in the foreign exchange market and the Bank of England should sell
dollars for pounds in the foreign exchange market.
c.. sell pounds for dollars in the foreign exchange market and the Bank of England should
sell pounds for dollars in the foreign exchange market.
d. sell dollars for pounds in the foreign exchange market and the Bank of England should sell
pounds for dollars in the foreign exchange market.

5. Consider two countries that trade with each other, called X and Y. According to the text, inflation in Country
X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other
countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact
on unemployment in Country B under the ____ system.
a. floating rate; fixed rate
b. floating rate; floating rate
 c.. fixed rate; fixed rate
d. fixed rate; floating rate

8. Under a fixed exchange rate system:

a. a foreign exchange market does not exist.
b. central bank intervention in the foreign exchange market is not necessary.
c.. central bank intervention in the foreign exchange market is often necessary.
d. central bank intervention in the foreign exchange market is not allowed.

9. Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the
dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major
foreign countries.
a. weakening; increase
b.. weakening; decrease
c. strengthening; increase
d. strengthening; decrease

14. Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market, but
does not adjust for the resulting change in the money supply. This is an example of:
a. pegged intervention.
b. indirect intervention.
c.. nonsterilized intervention.
d. sterilized intervention.
e. A and D

15. If the Fed desires to weaken 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.

16. Which of the following is an example of direct intervention in foreign exchange markets?
a. lowering interest rates.
b. increasing the inflation rate.
 c. exchanging dollars for foreign currency.
d. imposing barriers on international trade.

17. 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

18. The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar's value
is expected to:
a. remain stable.
b. strengthen.
c. weaken.
d. none of the above will have an impact on inflation.

19. A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest
rates, which places ____ pressure on U.S. bond prices.
a. upward; downward; upward
b. upward; downward; downward
c. upward; upward; downward
d. downward; upward; upward
e. downward; downward; upward

20. 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

21. The euro has not been adopted by:

a. Slovenia.
b. the U.K.
c. Germany.
d. France.
23. Countries that have adopted the euro must agree on a single ____ policy.
a. monetary
b. fiscal
c. worker compensation
d. foreign relations

24. Countries that have adopted the euro tend to have very similar ____.
a. interest rates
b. inflation rates
c. income tax rates
d. budget deficits

26. 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.

27. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would
like to reduce unemployment. Which of the following is an appropriate action given this scenario?
a. Weaken the dollar
b. Strengthen the dollar
c. Buy dollars with foreign currency in the foreign exchange market
d. Implement a tight monetary policy

28. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would
like to reduce inflation. Which of the following is an appropriate action given this scenario?
a. Sell dollars for foreign currency
b. Buy dollars with foreign currency
c. Lower interest rates
d. None of the above

29. To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____
Treasury securities.
a. buy; sell
b. sell; buy
 c. buy; buy
d. sell; sell

30. 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

31. 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.

32. Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?
a. Thailand.
b. Indonesia.
c. Russia.
d. China.
e. Malaysia.

33. 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.
36.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
37.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.