International Economics 6th Edition James Gerber Test Bank

International Economics 6th Edition
James Gerber Test Bank

Visit to download the full and correct content document: https://testbankdeal.com/dow
nload/international-economics-6th-edition-james-gerber-test-bank/
International Economics, 6e (Gerber)
Chapter 10 Exchange Rates and Exchange Rate Systems
10.1 Introduction: Fixed, Flexible, or In-Between?
1) There are no questions for this section.

Topic: Introduction: Fixed, Flexible, or In-Between?
10.2 Exchange Rates and Currency Trading
1) A firm that buys foreign exchange in order to take advantage of higher foreign interest rates is
A) speculating.
B) demonstrating purchasing power parity.
C) engaging in interest rate arbitrage.
D) responding to fluctuations in the business cycle.
E) ignoring the nominal rate of exchange.
Answer: C
Topic: Exchange Rates and Currency Trading
2) Suppose the dollar is subject to a floating exchange rate system and that R is the number of
dollars per unit of foreign exchange. If R increases, then the dollar
A) depreciates.
B) appreciates.
C) is devalued.
D) is revalued.
E) Both A and C.
Answer: A
3) When an individual or firm in the United States requests that a bank sell foreign exchange, the
bank will probably
A) call a foreign bank and arrange a purchase.
B) call the central bank and arrange a purchase.
C) call another bank customer with foreign exchange holdings.
D) call another domestic bank and arrange a purchase.
E) call a foreign exchange broker and arrange a purchase.
Answer: E
1
Copyright © 2014 Pearson Education, Inc.
4) In order to protect against foreign exchange risk, firms can use
A) the spot market for foreign exchange.
B) interest rate arbitrage.
C) purchasing power parity.
D) the forward market for foreign exchange.
E) the J-curve.
Answer: D
5) Covered interest arbitrage involves both

A) the purchase of a foreign asset and a forward contract in the market for foreign exchange.
B) the purchase of a domestic asset and a spot contract in the market for foreign exchange.
C) the sale of a foreign asset and the purchase of a forward contract in the market for foreign
exchange.
D) the sale of domestic stocks and the purchase of foreign bonds.
E) None of the above.
Answer: A
6) Which of the following institutions is the most important participant in foreign currency
markets?
A) A retail customer
B) A commercial bank
C) A foreign exchange broker
D) A central bank
Answer: B
7) The spot rate is the rate at which foreign currencies will be exchanged a specified number of
days in the future.
Answer: FALSE
8) A forward exchange market contract obligates the owner to make a trade at a specified
exchange rate a fixed number of days in the future.
Answer: TRUE
9) If Juana contracts to buy U.S. office equipment in U.S. dollars and her domestic currency
depreciates against the U.S. dollar between the time the contract is signed and the bill is paid, she
will wind up paying less for the equipment because she stayed in the spot market.
Answer: FALSE
2
10) When Jeneva went to Costa Rica in July 2008, a U.S. dollar was worth 550 colones. If today
a U.S. dollar is worth 650 colones, it means that the U.S. dollar has depreciated against the
colone.
Answer: FALSE
11) If the Costa Rican colone is expected to depreciate in the future, it will temporarily
appreciate as people move to take advantage based on this expectation.
Answer: FALSE
12) Speculation would involve using forward contracts and options to reduce the exchange rate
risk on future foreign exchange transactions.
Answer: FALSE
13) Most currency trades in London do not involve the British pound.
Answer: TRUE
14) Would each of the following groups be happy or unhappy if the Mexican peso appreciates
against the U.S. dollar? Answer the question for each of the following:
(a) The U.S. pension funds holding Mexican government bonds
(b) U.S. tourists planning a trip to Mexico
(c) Mexican exporting manufacturers
(d) A Mexican firm trying to buy properties overseas
Answer:
(a) Happy. The Mexican bonds are a safe haven for U.S. pension holders for now.
(b) Unhappy. It now costs more to travel to Mexico.
(c) Unhappy. The goods and services of Mexican exporters become relatively more expensive
than their counterparts in the United States.
(d) Happy. The Mexican peso can buy more American dollar and thus more property than would
be the case otherwise.
15) Suppose that the U.S. Open ticket costs $100 and the British Open ticket costs £50 and the
exchange rate is $1.43. How much does the British Open ticket cost for an American attending
the British Open?
Answer: $1.43 * 50 = $71.50
16) What is the largest center for currency trading?

Answer: London
3
17) How does the growth in the daily volume of foreign currency transactions compare with the
growth rate of the global economy?
Answer: Currency transactions are growing more rapidly.
18) Which currency is most commonly traded?

Answer: The U.S. dollar
19) If the forward rate is greater than the spot rate, what are markets signaling about their
expectations for the future spot rates for the home currency?
Answer: The home currency is expected to depreciate over the maturity period of the forward
contact.
20) The most important participants in foreign exchange markets are ________.
Answer: Commercial banks
10.3 The Supply and Demand for Foreign Exchange
1) All else equal and given the current system of exchange rates, if the United States enters a
period of exceptionally strong growth,
A) the pressure on the dollar is to revalue.
B) the pressure on the dollar is to devalue.
C) the pressure on the dollar is to depreciate.
D) the pressure on the dollar is to appreciate.
E) Both A and D.
Answer: C
Topic: The Supply and Demand for Foreign Exchange
2) All else equal, if Canada raises its interest rates,

A) the dollar depreciates.
B) the U.S. demand for Canadian dollars increases.
C) the Canadian supply of Canadian dollars increases.
D) Both A and B.
E) Both A and C.
Answer: D
4
3) An American firm that buys foreign exchange because its managers expect the dollar to
depreciate is
A) increasing the supply of foreign exchange.
B) increasing the demand for foreign exchange.
C) speculating.
D) Both A and B.
E) Both B and C.
Answer: E
4) Suppose the exchange rates between the United States and Canada are in long-run equilibrium
as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then
differences between U.S. and Canadian rates of inflation would
A) have no effect on nominal exchange rates.
B) be completely offset by changes in the real exchange rate.
C) be completely offset by changes in the nominal exchange rate.
D) violate the conditions for the law of one price.
E) lead to a change in the real purchasing power of each country's currency when it is converted
to the other country's currency.
Answer: C
5) Which of the following is a FALSE statement concerning purchasing power parity?

A) Purchasing power parity states that dollars will tend to exchange for pounds at a rate that
maintains a constant purchasing power of a given quantity of a currency.
B) Over the long term, a Big Mac in New York will tend to cost the same as a Big Mac in
London.
C) There should not be significant deviations in the long-run value of purchasing power parity.
D) Over the long run, purchasing power parity exerts influence over exchange rates.
E) An overvalued dollar buys more in Britain than it does in the United States.
Answer: C
6) An increase in the U.S. demand for the Mexican peso

A) causes an increase in the U.S. dollar price of a Mexican peso.
B) causes the Mexican peso to appreciate.
C) causes the U.S. dollar to depreciate.
D) causes Mexican goods to be relatively more expensive.
E) All of the above.
Answer: E
5
7) According to the text, which of the following factors may make the theory of purchasing
power parity unrealistic?
A) Purchasing power parity works only with traded goods.
B) Trading countries may stop exchanging goods once prices between them equalize.
C) Shipping, insurance, and transaction costs may reduce the implication of purchasing power
parity.
D) Prices may not equalize if goods arbitrage is reduced by trade barriers.
E) The effects of purchasing power parity may not show up until many years have passed.
Answer: B
8) Which of the following would NOT be a cause for an increased American demand for the
Mexican peso?
A) The United States having lower interest rates than Mexico
B) Increased American demand for Mexican goods
C) The expectation by speculators that the value of the peso is edging up
D) More economic expansion in the United States
Answer: D
9) A weak U.S. dollar leads to a higher volume of U.S. imports.

Answer: FALSE
10) If inflation in the rest of the world is lower than inflation in Brazil, Brazil's currency (the
real) would tend to appreciate.
Answer: FALSE
11) If Mexicans increasingly lose confidence in their domestic financial markets and move their
assets to other countries, the peso will depreciate.
Answer: TRUE
12) Imports tend to fall whenever a nation's currency appreciates because foreign products
become more expensive to domestic consumers.
Answer: FALSE
13) A country that experiences higher real interest rates than other countries would expect its
currency to depreciate.
Answer: FALSE
6
14) If more European and Japanese firms want to build factories and expand their offshore
investments in the United States, the supply of U.S. dollars on foreign exchange markets will
increase as a result of this investment activity.
Answer: FALSE
15) If U.S. consumers increase their demand for foreign products and foreign travel, the U.S.
dollar would tend to depreciate as more dollars are supplied to foreign exchange markets.
Answer: TRUE
16) If the Japanese central bank sells yen and buys U.S. dollars, the U.S. dollar will appreciate.
Answer: TRUE
17) Draw the demand for and supply of the U.S. dollar in each of the following cases. Diagram
and explain in words the effect of each of the following events in the short run. Make sure to
properly label the axes. In each case, assume the two countries under consideration are important
trading partners.
(a) There is an increase in the real interest rates in the United States relative to Japan.
(b) Investment returns in the United States decrease relative to expected returns in Japan.
(c) Inflation in Japan fell relative to the inflation rate in the United States.
(d) The Japanese expect the value of the U.S. dollar to decline.
(e) The Federal Reserve raised interest rates fearing the inflationary pressures of a booming U.S.
economy.
Answer:
(a) Both holders of yen and holders of U.S. dollars would now favor U.S. assets. This results in
a shift of the demand curve for U.S. dollars to the right. The supply curve for U.S. dollars would
likely shift to the left. Consequently, the U.S. dollar appreciates while the yen depreciates.
(b) Investment in the United States becomes relatively unattractive. As a result, both holders of
yen and holders of dollars prefer yen denominated assets. This will increase the supply of U.S.
dollars and decrease the demand for U.S. dollars. The dollar depreciates while the yen
appreciates.
(c) This makes Japan's products more attractive so it will decrease the demand for U.S. dollars
and increase the supply of U.S. dollars as more dollar holders seek Japanese goods. The dollar
depreciates while the yen appreciates.
(d) The demand for U.S. dollars decreases, causing the yen to appreciate while the dollar
depreciates.
(e) In the short run, the dollar may appreciate due to the higher interest rates, increasing the
demand for U.S. dollars and decreasing the supply as people seek to earn these higher rates.
7
18) If inflation is higher in the home market, what is expected to happen to the real value of the
home currency as time passes?
Answer: Appreciates
19) How does rapid economic growth at home affect foreign exchange markets?
Answer: It increases home country demand for foreign currencies as it increases imports. The
home currency depreciates.
10.4 The Real Exchange Rate
1) Suppose that the nominal exchange rate between the U.S. dollar and the Mexican peso is 0.10
dollars per peso. If Mexico's inflation is 10 percent and the United States' inflation is 0 percent,
from the U.S. point of view, the real exchange rate
A) appreciates to 0.11 dollars per peso.
B) depreciates to 0.11 dollars per peso.
C) appreciates to 0.09 dollars per peso.
D) depreciates to 0.09 dollars per peso.
E) appreciates to 0.2 dollars per peso.
Answer: B
Topic: The Real Exchange Rate
2) Suppose that the nominal exchange rate between the U.S. dollar and the Canadian dollar is
0.75 U.S. dollars per Canadian dollar. If Canada's rate of inflation is 0 percent and the U.S. rate
is 10 percent, then the real exchange rate for the U.S. dollar will
A) appreciate by about 9 percent.
B) appreciate by 10 percent.
C) depreciate by about 9 percent.
D) depreciate by 10 percent.
Answer: A
3) According to purchasing power parity, which of the following is FALSE about an overvalued
dollar compared to the Japanese yen?
A) U.S. merchants would be motivated to import more Japanese goods.
B) Japanese merchants would tend to export more to the United States.
C) Prices in the United States would tend to fall.
D) Over the long term, the exchange rate would fall.
E) Prices in Japan would tend to rise.
Answer: D
8
4) What matters most to importers and exporters is the nominal exchange rate.
Answer: FALSE
10.5 Alternatives to Flexible Exchange Rates
1) Which of the following is true?

A) If an exchange rate is allowed to vary across a fixed basket of currencies, it is called a hard
peg.
B) If an exchange rate is not allowed to vary against the target currency, it is called a soft peg.
C) If an exchange is only allowed to fluctuate within a set band, it is considered to be a flexible
exchange rate system.
D) A soft peg is when a currency's exchange rate is only allowed to fluctuate within a set band.
E) Any exchange rate policy other than completely flexible exchange rate systems is extremely
uncommon today for currencies.
Answer: D
Topic: Alternatives to Flexible Exchange Rates
10.6 Fixed Exchange Rate Systems
1) Under a gold standard, countries should

A) keep the supply of their domestic money constant.
B) keep the supply of their domestic money fixed in proportion to their gold holdings.
C) keep the supply of foreign exchange less than their domestic money supply.
D) restrict the demand for foreign goods.
E) outlaw speculation.
Answer: B
Topic: Fixed Exchange Rate Systems
2) Under a fixed exchange standard, if the domestic demand for foreign exchange increases
A) the central monetary authority must meet the demand out of its reserves.
B) the central monetary authority must increase the supply of domestic money.
C) the fixed exchange standard will breakdown.
D) inflation will increase.
E) the domestic currency must be depreciated.
Answer: A
9
3) The Bretton Woods exchange rate system was an example of a
A) target zone.
B) managed float.
C) pure gold standard.
D) modified gold standard.
E) floating exchange rate system.
Answer: D
4) The Smithsonian Agreement of 1971 was hailed by President Nixon as a fundamental

reorganization of the international monetary system. In fact, what it accomplished was
A) the revaluation of the dollar.
B) the devaluation of the dollar.
C) the reduction of the gold content of the dollar.
D) the elimination of gold backing for the dollar.
E) Both B and C.
Answer: E
5) The biggest disadvantage of a fixed exchange rate is the

A) increased probability of high inflation.
B) tradeoff between supporting the exchange rate and adjusting the trade balance.
C) tradeoff between supporting the exchange rate and maintaining economic growth.
D) increased probability of a trade deficit.
E) tradeoff between supporting the exchange rate and maintaining a balanced budget.
Answer: C
6) What are the differences and similarities between a depreciation and devaluation of a
currency?
Answer: A depreciation of a currency takes place due to the mechanics of supply and demand
and belongs to a flexible or floating exchange rate system. On the other hand, devaluation is due
to the intervention by the monetary authority of a central bank of a country following a fixed
exchange rate system. They both result in a lower value of the currency.
7) When did major currencies begin floating against each other, ending the Bretton Woods
system?
Answer: March 1973
10
10.7 Choosing the Right Exchange Rate System
1) Which type of exchange rate system minimizes external shocks to an economy?

Answer: A flexible exchange rate system
Topic: Choosing the Right Exchange Rate System
2) How is dollarization different from monetary union?

Answer: The nations do not share a central bank and monetary policy.
Topic: Choosing the Right Exchange Rate System
10.8 Single Currency Areas
1) A single currency area requires

A) mobile labor and synchronized business cycles.
B) immobile labor and synchronized business cycles.
C) immobile labor and mobile capital.
D) a political union.
E) mobile labor and unsynchronized business cycles.
Answer: A
Topic: Single Currency Areas
2) Which of the following is NOT one of the determinants of the gains of adopting a single
currency?
A) A well-synchronized business cycle involving all member countries
B) The possibility of factors of production to freely move across borders
C) The willingness and ability of member countries to design policies to address regional
imbalances that may develop
D) Widening the common market by allowing other countries to join
Answer: D
3) Currently the NAFTA nations do not meet the conditions for an optimal currency area. What
are the two main reasons why?
Answer: Historically Mexico's business cycle has not been correlated with the cycles in the
United States and Canada; labor mobility is limited.
11

International Economics 6th Edition James Gerber Test Bank

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

International Economics 6th Edition James Gerber Test Bank

Uploaded by

Copyright:

Available Formats

International Economics 6th Edition

James Gerber Test Bank

10.1 Introduction: Fixed, Flexible, or In-Between?

1) There are no questions for this section.

10.2 Exchange Rates and Currency Trading

5) Covered interest arbitrage involves both

16) What is the largest center for currency trading?

18) Which currency is most commonly traded?

10.3 The Supply and Demand for Foreign Exchange

2) All else equal, if Canada raises its interest rates,

5) Which of the following is a FALSE statement concerning purchasing power parity?

6) An increase in the U.S. demand for the Mexican peso

9) A weak U.S. dollar leads to a higher volume of U.S. imports.

10.4 The Real Exchange Rate

10.5 Alternatives to Flexible Exchange Rates

1) Which of the following is true?

10.6 Fixed Exchange Rate Systems

1) Under a gold standard, countries should

4) The Smithsonian Agreement of 1971 was hailed by President Nixon as a fundamental

5) The biggest disadvantage of a fixed exchange rate is the

1) Which type of exchange rate system minimizes external shocks to an economy?

2) How is dollarization different from monetary union?

10.8 Single Currency Areas

1) A single currency area requires

You might also like