INTERNATIONAL FINANCE

Homework Topic 6
Government Influence on Exchange Rates

PLEASE ADDRESS ALL THE QUESTIONS 1-16

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. 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.
4. 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
5. 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.
6. 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
7. The interest rate of a country with a currency board:
a. is less stable than it would be without a currency board.
b. is typically below the interest rate of the currency to which it is tied.
c. will move in tandem with the interest rate of the currency to which it is tied.
d. is completely independent of the interest rate of the currency to which it is
tied.
8. The currency of Country X is pegged to the currency of Country Y. Assume that
Country Y's currency depreciates against the currency of Country Z. It is likely that
Country X will export ____ to Country Z and import ____ from Country Z.
a. more; more
b. less; less
 c. more; less
d. less; more
9. 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
10. 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. pegged intervention AND sterilized intervention
11. 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.
12. 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
13. Under a pegged exchange rate system, the home currency's value is pegged to a
foreign currency.
a. True
b. False
14. Which one is NOT a disadvantage of a freely floating exchange rate system?
a. It can adversely affect a country that has high unemployment.
b. It can adversely affect a country that has high inflation.
c. The government may intervene to change the value of a given currency.
d. The exchange rate risk is high and may be costly to manage.
15. Which of the following is NOT a reason for devaluation of a currency?
a. high inflation
b. to reduce balance-of-trade deficit
c. to decrease the amount of imports
d. high unemployment
16. Vietnam is planning to increase interest rates this year while the U.S. rate remains
the same this year.
a. How does it affect USD to VND exchange rates?
b. If the Central Bank of Vietnam would like to maintain the previous rate, what actions
should they take?