Chapter 6 - Multiple Choice ID

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1. To force the value of the dollar to appreciate against the pound, the Federal Reserve should: a. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. b. sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. c. sell dollars for pounds in the foreign exchange market and the Bank of England should not intervene. d. sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market. 2. A weak euro is normally expected to cause: a. high unemployment and high inflation in the euro area b. high unemployment and low inflation in the euro area c. low unemployment and low inflation in the euro area d. low unemployment and high inflation in the euro area 3. A strong euro is normally expected to cause: a. high unemployment and high inflation in the euro area b. high unemployment and low inflation in the euro area c. low unemployment and low inflation in the euro area d. low unemployment and high inflation in the euro area 4. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should: a. sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market. b. sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market. c. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. d. sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market. 5. Consider two countries that trade with each other, called X and Y. According to the text, inflation in Country X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the ____ system. a. floating rate; fixed rate b. floating rate; floating rate c. fixed rate; fixed rate d. fixed rate; floating rate 6. Under a fixed exchange rate system: a. a foreign exchange market does not exist. b. central bank intervention in the foreign exchange market is not necessary. c. central bank intervention in the foreign exchange market is often necessary. d. central bank intervention in the foreign exchange market is not allowed. 7. Under a managed float exchange rate system, the Bank of England may attempt to stimulate the UK economy by ____ the pound. Such an adjustment in the pound's value should ____ the UK demand for products produced by major foreign countries. a. weakening; increase b. weakening; decrease c. strengthening; increase d. strengthening; decrease

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8. The interest rate of a country with a currency board: a. is less stable than it would be without a currency board. b. is typically below the interest rate of the currency to which it is tied. c. will move in tandem with the interest rate of the currency to which it is tied. d. is completely independent of the interest rate of the currency to which it is tied. 9. The currency of country X is pegged to the currency of country Y. Assume that county Y's currency depreciates against the currency of country Z. It is likely that country X will export ____ to country Z and import ____ from country Z. a. more; more b. less; less c. more; less d. less; more

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____ 10. Assume countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that country A's currency floats against country B's currency, and that country C's currency is pegged to B's. If A's currency depreciates against B, then A's exports to C should ____, and A's imports from C should ____. a. decrease; increase b. decrease; decrease c. increase; decrease d. increase; increase ____ 11. Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of: a. pegged intervention. b. indirect intervention. c. nonsterilized intervention. d. sterilized intervention. e. A and D ____ 12. Which of the following is an example of direct intervention in foreign exchange markets? a. lowering interest rates. b. increasing the discount rate. c. exchanging pounds for foreign currency. d. imposing barriers on international trade. ____ 13. A strong pound places ____ pressure on inflation, which in turn places ____ pressure on the euro. a. upward; upward b. downward; upward c. upward; downward d. downward; downward ____ 14. The Bank of England may use a stimulative monetary policy with least concern about causing inflation if the pound's value is expected to: a. remain stable. b. strengthen. c. weaken. d. none of the above will have an impact on inflation. ____ 15. A weaker pound places ____ pressure on UK inflation, which in turn places ____ pressure on UK interest rates, which places ____ pressure on UK bond prices. a. upward; downward; upward b. upward; downward; downward c. upward; upward; downward d. downward; upward; upward e. downward; downward; upward

____ 16. To strengthen the pound using sterilized intervention, the Bank of England would ____ pounds and simultaneously ____ Treasury securities. a. buy; sell b. sell; buy c. buy; buy d. sell; sell ____ 17. When using indirect intervention, a central bank is likely to focus on: a. inflation. b. interest rates. c. income levels. d. expectations of future exchange rates. ____ 18. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system. a. true. b. false. ____ 19. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries. a. true. b. false. ____ 20. Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system. a. true. b. false.