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Test bank International Finance MCQ (word)chap 357-2

26)TheUnitedStatescurren;A)crawlingpeg;B)pegged;C)floating;D)fixed;Answer:C;Topic:ExchangeRateRegime;Skill:Recognition;27)Basedonthepremisethat;Variableratesprovidestab;Answer:FALS


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26) The United States currently uses a ________ exchange rate regime.

A) crawling peg

B) pegged

C) floating

D) fixed

Answer: C

Topic: Exchange Rate Regimes

Skill: Recognition

27) Based on the premise that, other things equal, countries would prefer a fixed exchange rate:

Variable rates provide stability in international prices for the conduct of trade.

Answer: FALSE

Topic: Exchange Rate Regimes

Skill: Conceptual

28) Based on the premise that, other things equal, countries would prefer a fixed exchange rate,

which of the following statements is NOT true?

A) Fixed rates provide stability in international prices for the conduct of trade.

B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of

international reserves for use in the occasional defense of the fixed rate.

C) Fixed rates are inherently inflationary in that they require the country to follow loose

monetary and fiscal policies.

D) Stable prices aid in the growth of international trade and lessen exchange rate risks for

businesses.

Answer: C

Topic: Exchange Rate Regimes

Skill: Recognition

29) Which of the following is not an attribute of the "ideal" currency?

A) monetary independence

B) full financial integration

C) exchange rate stability

D) All are attributes of an ideal currency.

Answer: D

Topic: Exchange Rate Regimes

Skill: Conceptual

30) If exchange rates were fixed, investors and traders would be relatively certain about the

current and near future exchange value of each currency.

Answer: TRUE

Topic: Exchange Rate Regimes

Skill: Conceptual

31) The authors discuss the concept of the "Impossible Trinity" or the inability to achieve

simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve?

A) monetary independence and exchange rate stability

B) exchange rate stability and full financial integration

C) full financial integration and monetary independence

D) A country cannot attain any of the exchange rate goals with a pure float exchange rate

regime.

Answer: C

Topic: Currency Regimes

Skill: Conceptual

32) The attempt by many countries to stimulate their domestic economies and to gain access to

global financial markets, is causing more and more countries to choose a ________ or ________ exchange rate regime.

A) floating; monetary union

B) monetary union; full capital controls

C) full capital controls; floating

D) pegged; fixed

Answer: A

Topic: Currency Regimes

Skill: Recognition

33) Beginning in 1991 Argentina conducted its monetary policy through a currency board. In

January 2002, Argentina abandoned the currency board and allowed its currency to float against other currencies. The country took this step because

A) the Argentine Peso had grown too strong against major trading powers thus the

currency board policies were hurting the domestic economy.

B) the United States required the action as a prerequisite to finalizing a free trade zone

with all of North, South, and Central America.

C) the Argentine government lost the ability to maintain the pegged relationship as in fact

investors and traders perceived a lack of equality between the Argentine Peso and the U.S. dollar.

D) all of the above.

Answer: C

Topic: Currency Regimes

Skill: Recognition

34) In January 2002, the Argentine Peso was officially valued at a rate of Peso1.40/USD. More

recently the exchange rate is Peso 3.10/USD, thus, the Argentine Peso ________ against the U.S. dollar.

A) strengthened

B) weakened

C) remained neutral

D) all of the above

Answer: B

Topic: Currency Regimes

Skill: Analytical

35) On September 9, 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre,

with the U.S. dollar. This practice is known as ________.

A) bi -currencyism

B) sucrerization

C) a Yankee bailout

D) dollarization

Answer: D

Topic: Currency Regimes

Skill: Conceptual

36) You have been hired as a consultant to the central bank for a country that has for many years

suffered from repeated currency crises and depends heavily on the U.S. financial and

product markets. Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the United States?

A) dollarization

B) an exchange rate pegged to the U.S. dollar

C) an exchange rate with a fixed price per ounce of gold

D) an internationally floating exchange rate

Answer: A

Topic: Currency Regimes

Skill: Conceptual

37) A bank holiday

A) occurs every day after 3:00 p.m.

B) is a term used when a country's central government freezes (temporarily) all deposits

in commercial banks.

C) is observed in Europe every fourth Friday.

D) occurs the last three working days of the year to prepare financial statements for tax

purposes.

Answer: B

Topic: Bank Holiday

Skill: Recognition

38) Which of the following is NOT an argument against dollarization?

A) The dollarized country's central bank can no longer act as a lender of last resort.

B) The dollarized country can no longer profit from seignorage (the ability to profit from

the creation of money within its economy).

C) The dollarized country losses sovereignty over its own monetary policy.

D) All of the above are arguments against dollarization from the viewpoint of the affected

country.

Answer: D

Topic: Currency Regimes

Skill: Conceptual

39) The Euro currency is fixed against other currencies on the international currency exchange

markets, but allows member country currencies to float against each other.

Answer: FALSE

Topic: The Euro

Skill: Recognition

40) Even though the Euro currency has been designed and printed, it is still not available for

general use by the public, except for tourists, in the European Union.

Answer: FALSE

Topic: The Euro

Skill: Recognition

41) Which of the following is NOT a required convergence criteria to become a full member of

the European Economic and Monetary Union (EMU)?

A) National birthrates must be at 2.0 or lower per person.

B) The fiscal deficit should be no more than 3% of GDP.

C) Nominal inflation should be no more than 1.5% above the average inflation rate for the

three members with the lowest inflation rates in the previous year.

D) Government debt should be no more than 60% of GDP.

Answer: A

Topic: The Euro

Skill: Recognition

42) Which of the following groups of countries have replaced their individual currencies with

the Euro?

A) France, Germany, and the United Kingdom

B) Sweden, Denmark, and Greece

C) The United Kingdom, The Netherlands, and Austria

D) Germany, The Netherlands, and Italy

Answer: D

Topic: The Euro

Skill: Recognition

43) The tremendous international mobility of financial capital is forcing emerging market

nations to adopt one of two polarized choices, free float or currency board, for their foreign currency exchange regimes. Which of the following would NOT be a reason for an emerging nation to choose to have their currency freely float?

A) The country desires to lose political influence on the valuation of their currency.

B) The emerging nation desires an independent monetary policy.

C) The emerging nation is willing to tradeoff exchange rate stability to gain free

movement of capital.

D) All of the above.

Answer: A

Topic: Emerging Markets

Skill: Conceptual

44) According to the authors, what is the single most important mandate of the European

Central Bank?

A) Promote international trade for countries within the European Union.

B) Price, in euros, all products for sale in the European Union.

C) Promote price stability within the European Union.

D) Establish an EMU trade surplus with the United States.

Answer: C

Topic: The Euro

Skill: Conceptual

45) Ignoring transaction costs and based solely on the change in currency exchange rates, a

speculator who sold short a two-year contract for the euro (receiving dollars) in January 2006 would have realized a profit upon the exercise of the contract in January 2008.

Answer: FALSE

Topic: The Euro

Skill: Analytical

46) Which of the following is a way in which the euro affects markets?

A) Countries within the Euro zone enjoy cheaper transaction costs.

B) Currency risks and costs related to exchange rate uncertainty are reduced.

C) Consumers and business enjoy price transparency and increased price -based

competition.

D) All of the above.

Answer: D

Topic: The Euro

Skill: Conceptual

47) A special Drawing Right is a unit of account established by

A) the Federal Reserve Bank.

B) the World Bank.

C) the International Monetary Fund.

D) the European Central Bank.

Answer: C

Topic: International Monetary Fund

Skill: Recognition

48) A currency is considered hard if

A) it is expected to be revalued or appreciate.

B) it is expected to be devalued or depreciate.

C) it is backed in part by a precious metal such as gold.

D) it is difficult to trade on the international currency exchange markets.

Answer: A

Topic: Currency Terminology

Skill: Recognition

49) Under a fixed exchange rate regime, the government of the country is officially responsible

for

A) intervention in the foreign exchange markets using gold and reserves.

B) setting the fixed/parity exchange rate.

C) maintaining the fixed/parity exchange rate.

D) all of the above.

Answer: D

Topic: Currency Regimes

Skill: Recognition

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