Exercises
1.Single-choice questions
(1)A “good” (or ideal)international monetary system should provide________.
a.liquidity, elasticity and flexibility b.elasticity, sensitivity and reliability
c.liquidity, adjustments and confidence d.None of the above.
(2)Advantages of a flexible exchange rates include________.
a.national policy autonomy
b.easier external adjustments
c.the government can use monetary and fiscal policies to pursue whatever economic goals it chooses
d.All of the above.
(3)Advantages of a fixed exchange rates include________.
a.reduction in exchange rate risk for businesses
b.reduction in transactions costs
c.reduction in trading frictions
d.All of the above.
(4)Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate.Why?
a.The market forces may be stronger than the exchange rate intervention that the government can muster.
b.Portfolio managers will not invest in countries with fixed exchange rates.
c.Because of the Tobin Tax.
d.None of the above.
(5)Consider the supply-demand framework for the British pound relative to the US dollar shown in the nearby chart.The exchange rate is currently $1.80 = £1.00.Which of the following is correct?
a.At an exchange rate of $1.80 = £1.00, demand for British pounds exceeds supply.
b.At an exchange rate of $1.80 = £1.00, supply for British pounds exceeds demand.
c.Under a flexible exchange rate regime, the US dollar will depreciate to an exchange rate of $1.90 = £1.00.
d.a and c are correct.
(6)Consider the supply-demand framework for the British pound relative to the US dollar shown in the nearby chart.The exchange rate is currently $1.80 = £1.00.Which of the following is correct?
a.To “fix” the exchange rate at $1.80 = £1.00, the Federal Reserve could use contractionary monetary policy to shift the demand curve to the left.
b.To “fix” the exchange rate at $1.80 = £1.00, the US government could use contractionary fiscal policy to shift the demand curve to the left.
c.The British Government could use fiscal or monetary policy to shift the supply curve to the right to fix the exchange rate to $1.80 = £1.00.
d.All of the above.
(7)In a________exchange rate system there is no intervention by the government or central bankers.
a.fixed b.pegged c.floating d.managed float
(8)Which of the following best characterizes the current US exchange rate policy?
a.An adjustable pegged rate. b.A crawling pegged rate.
c.A freely floating. d.A fixed exchange rate.
(9)If American exports to Japan increase and American imports from Japan decrease, then, under a floating exchange rate system, we would expect the dollar to________.
a.weaken against the Japanese yen
b.depreciate against the Japanese yen
c.devalue against the Japanese yen
d.strengthen against the Japanese yen
(10)Under a fixed exchange rate system a fall in the market price (the exchange rate value)of
a currency is called a(n)________of that currency.
a.revaluation b.devaluation c.appreciation d.depreciation
2.Noun explanation
(1)The spot exchange rate
(2)The forward exchange rate
(3)Nominal exchange rate
(4)Real exchange rate
3.Essay questions
(1)What’s Real Effective Exchange Rate?
(2)Talk about the measurement of exchange rate change.
(3)What’s the economic impact of exchange rate depreciation?
(4)Discuss the advantages of fixed exchange rate system.
(5)Discuss the advantages of floating exchange rate system.