Exam (elaborations) MBA MKT640

MBA MKT 640 / MKT640 FOREIGN INVESTMENT DECISIONS Question 1 Under a purely flexible exchange rate system: Governments can set the exchange rate by buying or selling reserves Governments can set exchange rates with fiscal policy Supply and demand set the exchange rates Both supply and demand set the exchange rates and governments can set exchange rates with fiscal policy Question 2 Under the Bretton Woods system: each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary all of the above the U.S. dollar was the only currency that was fully convertible to gold there was an explicit set of rules about the conduct of international monetary policies Question 3 Since the SDR is a “portfolio” of currencies: Its value tends to be more stable than the value of any of the individual currencies included in the SDR None of the above Its value tends to be as stable as the average of the individual currencies included in the SDR Its value tends to be less stable than the value of any of the individual currencies included in the SDR Question 4 Under a gold standard, if Britain exported more to France than France exported to Great Britain: Such international imbalances of payment will be corrected automatically Net export from Britain will be accompanied by a net flow of gold in the opposite direction This type of imbalance will not be able to persist indefinitely All of the above Question 5 With regard to the current exchange rate arrangement between the U.S. and the U.K., it is best characterized as: Currency board Pegged exchange rate within a horizontal band. Managed float Independent floating (market determined) Question 1 Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = £1. What should an ounce of gold be worth in U.S. dollars? $1.20 $0.83 $30.00 $29.40 Question 2 A currency board arrangement is: When the country belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. When the currency of another country circulates as the sole legal tender Where the country pegs its currency at a fixed rate to a major currency where the exchange rate fluctuates within a narrow margin of less than one percent. A monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. Question 3 The main cost of monetary union is Lessened political integration Increased exchange rate uncertainty The loss of national monetary and exchange rate policy independence None of the above Question 4 During the period between World War I and World War II, many central banks followed a policy of sterilization of gold: By matching inflows and outflows of gold respectively with reductions and increases in domestic money and credit. This restricted the rate of growth in the supply of gold By matching inflows and outflows of gold respectively with increases and reductions in domestic money and credit. None of the above. Question 5 Benefits from adopting a common European currency include: Elimination of exchange rate risk Increased price transparency will promote Europe-wide competition Reduced transaction costs All of the above Question 6 Under the gold standard, international imbalances of payment will be corrected automatically under the: Price-specie-flow mechanism Bretton Woods Accord Gresham Exchange Rate regime European Monetary System Question 7 During the period between World War I and World War II: The major European powers and the U.S. returned to the gold standard and fixed exchange rates. While most countries abandoned the gold standard during World War I, international trade and investment flourished during the interwar period under a coherent international monetary system. The U.S. dollar emerged as the dominant world currency, gradually replacing the British pound for the role. None of the above. Question 8 At the outbreak of World War I: Major countries such as Great Britain, France, Germany and Russia imposed embargoes on the export of gold The classical gold standard was abandoned Major countries such as Great Britain, France, Germany and Russia suspended redemption of banknotes in gold All of the above. Question 1 A currency board arrangement is: Where the country pegs its currency at a fixed rate to a major currency where the exchange rate fluctuates within a narrow margin of less than one percent. A monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. When the currency of another country circulates as the sole legal tender When the country belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. Question 2 The European Monetary System (EMS) has the following chief objectives: to coordinate exchange rate policies vis-à-vis the non-EMS currencies to pave the way for the eventual European monetary union to establish a “zone of monetary stability” in Europe all of the above Question 3 At the outbreak of World War I: Major countries such as Great Britain, France, Germany and Russia imposed embargoes on the export of gold The classical gold standard was abandoned Major countries such as Great Britain, France, Germany and Russia suspended redemption of banknotes in gold All of the above. Question 4 Under the Bretton Woods system: Each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary The U.S. dollar was pegged to gold at $35 per ounce. all of the above Each country established a par value for its currency in relation to the dollar. Question 5 Gresham’s Law states that: Bad money drives good money out of circulation Good money drives bad money out of circulation If a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate. None of the above. Question 1 A currency board arrangement is: Where the country pegs its currency at a fixed rate to a major currency where the exchange rate fluctuates within a narrow margin of less than one percent. A monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. When the country belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. When the currency of another country circulates as the sole legal tender A monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. Correct View solution Question 2 The European Monetary System (EMS) has the following chief objectives: to establish a “zone of monetary stability” in Europe to coordinate exchange rate policies vis-à-vis the non-EMS currencies to pave the way for the eventual European monetary union all of the above all of the above Correct View solution Question 3 Under the Bretton Woods system: Each country established a par value for its currency in relation to the dollar. Each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary The U.S. dollar was pegged to gold at $35 per ounce. all of the above all of the above Correct View solution Question 4 Gresham’s Law states that: Good money drives bad money out of circulation If a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate. Bad money drives good money out of circulation None of the above. Bad money drives good money out of circulation Correct View solution Question 5 Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = £1. What should an ounce of gold be worth in U.S. dollars? $29.40 $1.20 $0.83 $30.00 $30.00 Correct View solution Question 6 Under the gold standard, international imbalances of payment will be corrected automatically under the: Price-specie-flow mechanism Gresham Exchange Rate regime European Monetary System Bretton Woods Accord Price-specie-flow mechanism Correct View solution Question 7 Benefits from adopting a common European currency include: Reduced transaction costs Increased price transparency will promote Europe-wide competition Elimination of exchange rate risk All of the above All of the above Correct View solution Question 8 Since the SDR is a “portfolio” of currencies: Its value tends to be less stable than the value of any of the individual currencies included in the SDR Its value tends to be more stable than the value of any of the individual currencies included in the SDR None of the above Its value tends to be as stable as the average of the individual currencies included in the SDR Its value tends to be more stable than the value of any of the individual currencies included in the SDR Correct