Econ Of Globalization. Spring 2009; Exam 3. For Final

Front 1

Uncovered Interest rate Parity says that interest rate differential equals

Back 1

expected appreciation/depreciation of the currency

Front 2

In a flexible exchange rate regime, suppose that US's economy goes into a recession. As a
result, US's residents purchase fewer goods from abroad. How does this affect the dollarpound
exchange rate?

Back 2

The result is a decrease in the exchange rate, implying a depreciation of the UK
pound and an appreciation of the U.S. dollar

Front 3

If the Japanese yen depreciates against other currencies in the exchange markets, this will:

Back 3

Tend to improve the Japanese balance of trade

Front 4

Suppose Sweden's inflation rate is less than that of its trading partner. Under a floating exchange rate system, Sweden would experience a:

Back 4

Appreciation in its currency

Front 5

The internal macroeconomic policy that the Eurozone adopts is:

Back 5

Fixed exchange rate and free movement of capital but no independent monetary
policy

Front 6

To temporarily offset an appreciation in the dollar's exchange value, the Federal Reserve
could ____ the U.S. money supply which would promote a (an) ____ in U.S. interest
rates and a (an) ____ in investment flows to the United States.

Back 6

Increase, decrease, decrease

Front 7

Under a floating exchange-rate system, if American exports increase and American
imports fall, the value of the dollar will:

Back 7

Appreciate

Front 8

Given an initial equilibrium in the money market and foreign exchange market, suppose
the Federal Reserve increases the money supply of the United States. Under a floating
exchange-rate system, the dollar would

Back 8

Depreciate in value relative to other currencies

Front 9

As a result of the __________, the dollar became the world’s chief reserve currency

Back 9

Bretton-Woods Conference

Front 10

Which statement is not valid regarding the Bretton Woods System?

Back 10

The exchange rates were flexible during that period of time

Front 11

Given a system of floating exchange rates, stronger U.S. preferences for imports would
trigger:

Back 11

An increase in the demand for imports and an increase in the demand for foreign currency

Front 12

With a fixed exchange rate and free movement of capital, the role of monetary policy
is directed towards:

Back 12

keeping the domestic interest rate at the world interest rate

Front 13

All of the following are problems with IMF except:

Back 13

Technical assistance for developing countries

Front 14

Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and:

Back 14

Increase the demand for dollars

Front 15

Refer to Figure 1. Suppose the United States decreases investment spending in
Switzerland, thus reducing the demand for francs from D0 to D2. Under a floating
exchange rate system, the new equilibrium exchange rate would be:

Back 15

$0.40 per franc

Front 16

Which of the following is likely to result in long-run appreciation of the U.S. dollar
relative to the peso?

Back 16

Stronger Mexican preferences for goods produced in the United States

Front 17

In the interbank market for foreign exchange, the ____ refers to the price for which a
bank is willing to buy a unit of foreign currency

Back 17

Bid rate

Front 18

Which exchange-rate system involves a "leaning against the wind" strategy in which
short-term fluctuations in exchange rates are reduced without adhering to any particular exchange rate over the long run?

Back 18

Managed floating exchange rates

Front 19

An exchange rate system such as Nicaragua’s where the currency value is maintained
against another currency, but the parity value is allowed to change at regular intervals is
called a

Back 19

crawling peg.

Front 20

Which of the following is a central feature in the Asian currency crises?

Back 20

Weak banking system

Front 21

Which of the following is not a central feature in first generation models of currency
crises?

Back 21

Reduction in the money supply

Front 22

Suppose the exchange value of the British pound is $2 per pound while the exchange
value of the Swiss franc is 50 (dollar) cents per franc. The cross exchange rate between the pound and the franc is:

Back 22

4 francs per pound

Front 23

When the central bank undertakes an open market purchase,

Back 23

the money supply increases

Front 24

When the dollar gets stronger the following is most accurate:

Back 24

Foreign tourists travel in the U.S. at a higher cost

Front 25

The gold standard era occurred

Back 25

prior to 1914.

Front 26

The exchange rate between the U.S. dollar and the British pound is $1.55/pound. If you
wish to buy $1,000 worth of pounds, how many pounds could you get?

Back 26

645

1000/1.55 = 645

Front 27

Which of the following is not a valid statement regarding Fixed Exchange Rate
Regimes?

Back 27

Fixed exchange rate regime can be designed to last forever

Front 28

Assume that the Japan faces a 6 percent inflation rate while no (zero) inflation exists in
US. According to the purchasing-power parity theory, the dollar would be expected to:

Back 28

Appreciate by 6 percent against the yen

Front 29

A country can operate a fixed exchange rate and practice independent monetary policy
if and only if:

Back 29

it restricts inflows and outflows of financial capital

Front 30

Assume the following: (1) the interest rate on 6-month treasury bills is 12 percent per
annum in the United Kingdom and 4 percent per annum in the United States; (2) today's
spot price of the pound is $1.50 while the 6-month forward price of the pound is $1.485

Refer to Exhibit 2. By investing in U.K. treasury bills rather than U.S. treasury bills, and not covering exchange rate risk, U.S. investors earn an extra return of:

Back 30

8 percent per year, 4 percent for the 6 months

Front 31

Refer to Exhibit 2. If U.S. investors cover their exchange rate risk, the extra return for the 6 months on the U.K. treasury bills is:

Back 31

3.0 percent

Front 32

An appreciation in the value of the U.S. dollar against the British pound would tend to:

Back 32

Discourage the British from buying American goods

Front 33

The desirable policy choices according to the Macroeconomic Policy Trilemma, are:

Back 33

Fixed exchange rate, free movement of capital, and independent monetary policy.

Front 34

The “Outsourced” movie touches all of the followings except:

Back 34

highly skilled Indian workers migrating to US

Front 35

All of the followings are accurate except:

Back 35

The “Outsourced” movie advocates cultural condescending to foreign culture

Front 36

According to the “Federal Reserve System and the interest rates” article, The FOMC
moved aggressively to change the target federal funds rate in meetings on January 22 and
January 30. Which of the following events would most likely cause the FOMC to decrease the target federal funds rate in future meetings?

Back 36

Rising unemployment and continued weakness in consumption and investment
expenditures

Front 37

The Bretton Woods Agreement of 1944 established a monetary system based on:

Back 37

Gold and pegged exchange rates

Front 38

Scenario: Assume that there are only two countries in the world and flexible exchange rates:
UK and US. Suppose that C, I, and G all stay the same in the UK and the United States.
Answer the following two questions.

Assume that that net exports from the UK increase As a result, what will happen to GDP in each country?

Back 38

GDP will increase in the UK and decrease in the United States.

Front 39

What happens with the exports from the UK when the exchange rate (measured in dollars per pound) decreases?

Back 39

The quantity of exports is higher

Front 40

The original purpose of the World Bank, as discussed at the Bretton Woods conference,
was to

Back 40

lend funds to war-torn countries to rebuild infrastructure

Front 41

Second generation models of currency crises can most reliably explain

Back 41

the 1992 crisis in the European Exchange Rate Mechanism (ERM)

Front 42

Assume that interest rates on comparable securities are identical in the United States and
foreign countries. Now suppose that investors anticipate that in the future the U.S. dollar will depreciate against foreign currencies. Investment funds would thus be expected to:

Back 42

Flow from the United States to foreign countries

Front 43

A devaluation is when a country

Back 43

lowers the fixed value of its currency.

Front 44

Suppose that on the gold standard, the U.S. fixes the price of an ounce of gold at $25. Great Britain fixes the price of gold at £16 per ounce. What is the implied exchange rate between the dollar and the pound?

Back 44

$1.5625 / £

Front 45

The organization that was founded to lend reserves to member countries experiencing a temporary shortage in foreign exchange reserves is the

Back 45

International Monetary Fund.

Front 46

Rather than constructing their own currency baskets, many nations peg the value of their currencies to a currency basket defined by the International Monetary Fund. Which of the following illustrates this basket?

Back 46

Special Drawing Rights

Front 47

Proponents of freely floating exchange rates maintain that:

Back 47

The system allows the central bank independency in pursuing domestic economic goals

Front 48

As a result of the __________, the dollar became the world’s chief reserve currency.

Back 48

Bretton-Woods Conference

Front 49

The original purpose of the World Bank, as discussed at the Bretton Woods conference, was to

Back 49

lend funds to war-torn countries to rebuild infrastructure

Front 50

Small nations (e.g., the Ivory Coast) whose trade and financial relationships are mainly with a single partner tend to utilize:

Back 50

Pegged exchange rates

Front 51

The central bank of the United Kingdom could prevent the pound from appreciating by:

Back 51

Selling pounds on the foreign exchange market

Front 52

If Canadian speculators believed the Swiss franc was going to depreciate against the U.S. dollar, they would:

Back 52

Purchase U.S. dollars

Front 53

In first-generation models of currency crises, speculators

Back 53

exacerbate the crisis when foreign reserves are depleted to a critical level

Front 54

If the Japanese yen appreciates against other currencies in the exchange markets, this will:

Back 54

Tend to worsen the Japanese balance of trade

Front 55

If Mexico fully dollarizes its economy, it agrees to

Back 55

Replace pesos with U.S. dollars in its economy

Front 56

Which exchange-rate system involves a "leaning against the wind" strategy in which short-term fluctuations in exchange rates are reduced without adhering to any particular exchange rate over the long run?

Back 56

Managed floating exchange rates

Front 57

To offset an appreciation of the dollar against the yen, the Federal Reserve would:

Back 57

Sell dollars on the foreign exchange market and lower domestic interest rates

Front 58

The third generation financial crises occurred in

Back 58

Asia

Front 59

Which exchange-rate mechanism calls for frequent redefining of the par value by small amounts to remove a payments disequilibrium?

Back 59

Crawling pegged exchange rates

Front 60

To defend a pegged exchange rate that overvalues its currency, a country could:

Back 60

Purchase its own currency in international markets

Front 61

A surplus nation can reduce its payments imbalance by:

Back 61

Revaluing its national currency

Front 62

To help insulate their economies from inflation, currency depreciation, and capital flight, developing countries have implemented:

Back 62

Currency Boards

Front 63

he Federal Reserve Bank uses open market operations to directly affect:

Back 63

The money supply

Front 64

Suppose that the one year Swiss franc interest rate is 5% and the one year U.K. interest rate is 4%. If the one year forward rate is 0.45 pounds per francs what must the spot exchange rate be (£/Sfr) if covered interest parity holds?

Back 64

0.4545

Front 65

Assets of the central bank include:

Back 65

Domestic Credit & Foreign Reserves

Front 66

A country can operate a fixed exchange rate and practice independent monetary policy if and only if

Back 66

it restricts inflows and outflows of financial capital

Front 67

The difference between covered and uncovered interest parity is that

Back 67

the former uses forward contracts to eliminate interest rate risk; the latter is based on the expectations about exchange rates

Front 68

With a flexible exchange rate and free movement of capital, the role of monetary policy is directed towards:

Back 68

inflation and unemployment

Front 69

In the case of fixed exchange rate, the Uncovered Interest rate Parity reduces to:

Back 69

Interest rates are equal between countries

Front 70

With a fixed exchange rate and free movement of capital, the role of monetary policy is directed towards:

Back 70

keeping the domestic interest rate at the world interest rate

Front 71

Given a system of floating exchange rates, an expansionary monetary policy by the Federal Reserve will cause

Back 71

the dollar to depreciate and will increase U.S. net exports

Front 72

In the Eurozone, the ___________ policies include free movement of capital, single currency but no independent national monetary policies while the ____________ policies include free movement of capital, independent monetary policy, and flexible exchange rates:

Back 72

Internal, External