CSUF Econ 335 Chapter 15 Test with Complete Solutions

CSUF Econ 335 Chapter 15 Test with Complete Solutions True or False: Fixed exchange rates tend to be used primarily by small, developing nations whose currencies are anchored to a key currency such as the U.S. dollar. - Answer-True Which of the following characterizes the operation of a managed floating exchange rate? A nation can initiate large fluctuations in its currency to improve its competitiveness. A nation can alter the degree that it intervenes in the foreign exchange market. A nation can make adjustments of par values. A nation is prevented from intervening in the exchange markets to avoid weakening its competitive position. - Answer-A nation can alter the degree that it intervenes in the foreign exchange market. Why were managed floating exchange rates adopted by the industrialized nations in 1973? Check all that apply. To enable nations to initiate fluctuations in exchange rates To enable dirty floats in order to offset free market forces of supply and demand To avoid delays in adjustments of exchange rates caused by procedural difficulties and political biases To enable more prompt and continuous adjustments of exchange rates in response to evolving market forces - Answer-To avoid delays in adjustments of exchange rates caused by procedural difficulties and political biases To enable more prompt and continuous adjustments of exchange rates in response to evolving market forces True or False: A currency board is a monetary authority that issues notes and coins convertible into a foreign anchor currency at a fixed exchange rate. Usually the fixed exchange rate is set by law, making changes to the exchange rate costly for governments. Currency boards offer the strongest form of a fixed exchange rate that is possible short of full currency union. - Answer-True Which of the following most accurately describe the operation of the Bretton Woods system of adjustable pegged exchange rates? Check all that apply. Countries can always reach their domestic stabilization objectives by devaluing their currencies. Adjustable pegged rates enable estimates of the equilibrium rate to which a currency should be re-pegged. A semi-fixed exchange rate system ties currencies to each other to provide stable exchange rates for commercial and financial transactions. Each member nation sets the par value of its currency in terms of gold or, alternatively, the gold content of the U.S. dollar. - Answer-A semi-fixed exchange rate system ties currencies to each other to provide stable exchange rates for commercial and financial transactions. Each member nation sets the par value of its currency in terms of gold or, alternatively, the gold content of the U.S. dollar. True or False: Under a crawling peg system, small, frequent changes are made to the par value of a country's currency to correct a balance-of-payments disequilibrium. Deficit and surplus nations both keep adjusting until the desired exchange rate level is attained. - Answer-True True or False: Capital controls are government-imposed barriers to foreign savers investing in domestic assets or to domestic savers investing in foreign assets. A government that has a virtual monopoly over foreign exchange dealings may require that all foreign exchange earnings be turned over to authorized dealers. The government then allocates foreign exchange among domestic traders and investors at government-set prices. - Answer-True