Currency and Foreign Exchange Market

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CHAPTER 2

THE DETERMINATION OF EXCHANGE RATES

2.3Exchange rates depend on
a.relative inflation rates
b.relative interest rates
c.relative wages
d.a and b

2.5During the second half of 1997, currencies and stock market prices plunged in value across Southeast Asia, beginning in a. Thailand
b. Malaysia
c. Indonesia
d. South Korea

2.7When monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions, it is known as ________ intervention.
a.unsterilized
b.sterilized
c.foreign market
d.subsidized

8. When the U.S. Federal Reserve sells or purchases Treasury securities in order to sterilize the impact of their foreign exchange market interventions, it is referred to as a(n) ________ operation. a. floating currency

b. spot rate
c. revaluation
d. open market

9. Under which one of the following systems is there no central bank? a. Floating exchange rates
b. Currency board
c. Pegged exchange rates
d. Sterilized intervention

MODERATE

2.10On Friday, September 13, 1992, the lira was worth DM 0.0013. Over the weekend the lira devalued against the DM to DM 0.0012. By how much had the lira devalued against the DM? a. 7.69%

b. 8.33%
c. 5.21%
d. 9.27%
ANSWER:a: Setting the Equilibrium Spot Exchange Rate

2.11Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how much will the dollar appreciate against the real? a.67%
b40%
c.32%
d.28%
ANSWER:a: Setting the Equilibrium Spot Exchange Rate

2.12If the French euro devalued by 17% against the U.S. dollar, this is equivalent to a revaluation of the dollar against the euro by a. 17%
b. 16.31%
c. 20.48%
d. 17.54%
ANSWER:c: Setting the Equilibrium Spot Exchange Rate

2.13If the Australian dollar devalues against the Japanese yen by 10%, the yen will appreciate by a.33.32%
b.25.55%
c.10.11%
d.11.11%
ANSWER:d: Setting the Equilibrium Spot Exchange Rate

2.14If the euro depreciates against the U.S. dollar by 50%, the dollar appreciates against the euro by a. 55%
b. 100%
c. 200%
d. 1,000%
ANSWER:b: Setting the Equilibrium Spot Exchange Rate

2.15If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira depreciates against the dollar by a. 60%
b. 75%
c. 125%
d. 300%
ANSWER:a: Setting the Equilibrium Spot Exchange Rate

2.16If the dinar devalues against the U.S. dollar by 45%, the U.S. dollar will appreciate against the dinar by a. 45%
b. 82%
c. 55%
d. 32%
ANSWER:b: Setting the Equilibrium Spot Exchange Rate

2.17If the peso depreciates against the U.S dollar by 80%, the US dollar will appreciate against the peso by a. 300%
b. 200%
c. 250%
d. 400%
ANSWER:d: Setting the Equilibrium Spot Exchange Rate

2.18If the U.S. dollar appreciates against the euro by 25%, the euro will depreciate against the U.S. dollar a. 25%
b. 20%
c. 30%
d. 10%
ANSWER:b: Setting the Equilibrium Spot Exchange Rate

2.19If a foreigner purchases a U.S. government security
a.the supply of dollars rises
b.the federal government deficit declines
c.the demand for dollars rises
d.the U.S. money supply rises

2.20The price of foreign goods in terms of domestic goods is called a.the real exchange rate
b.the balance of trade
c.the trade-weighted exchange rate
d.purchasing parity
ANSWER:a: The Fundamentals of Central Bank Intervention

2.21An increase in the real exchange rate will
a.raise national income
b.lower national...
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