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Exam 6 March 2018, questions and answers

Geology and International Development (University of Windsor)

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Shapiro’s Multinational Financial Management, 9th Edition Test Bank

CHAPTER 2
The Determination of Exchange Rates

EASY (definitional)

2.1 The most likely explanation for the rise of the U.S. dollar during the early 1980s is that the
U.S.
a) budget deficit lowered U.S. interest rates
b) trade deficit accelerated U.S. inflation
c) economy slowed dramatically
d) budget deficit raised U.S. interest rates

Ans: c
Section: Expectations and the asset market model of exchange rates
Level: Easy

2.2 The U.S. dollar weakened during the 1970s for the following reasons EXCEPT
a) U.S. inflation accelerated 加速的
b) the U.S. economy weakened
c) foreigners didn't want to hold as many dollars as before
d) foreigners did want to hold many more dollars than before

Ans: d
Section: Expectations and the asset market model of exchange rates
Level: Easy

2.3 Of the following, exchange rates depend the most upon relative
a) monetary systems
b) political systems
c) trade deficits
d) inflation rates between nations

Ans: d
Section: The nature of money and currency values
Level: Easy

2.4 ______ is another name for the complete replacement of the local currency with the U.S.
dollar.
a) Seignorage
b) Dollarization
c) Depreciation

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Shapiro’s Multinational Financial Management, 9th Edition Test Bank

d) Appreciation

Ans: b
Section: Dollarization
Level: Easy

2.5 To some U.S. manufacturers and labor unions, a cheap yuan value gives China’s
__________ an unfair advantage in the global economy.
a) imports
b) subsidies
c) bankers
d) exporters

Ans: d
Section: Mini-Case: A Yen for Yuan
Level: Easy

2.6 The asset market view of exchange rate determination does NOT state that the spot rate
a) should follow a random walk
b) is affected primarily by a nation's long-run economic prospects
c) is influenced by a nation’s annual economic growth
d) should be strongly affected by a nation's balance of trade

Ans: d
Section: Expectations and the asset market model of exchange rates
Level: Easy

2.7 When monetary authorities 金融当局 have not insulated 绝缘 their domestic money supplies
from the foreign exchange transactions, it is known as ________ intervention.
a) unsterilized 未杀菌的
b) sterilized
c) foreign market
d) subsidized

Ans: a
Section: Sterilized versus unsterilized intervention 非冲销式干预
Level: Easy

2.8 When the U.S. Federal Reserve sells or purchases Treasury securities 国库证券 in order to
sterilize the impact of their foreign exchange market interventions, it is referred to as a(n)
________ operation.

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Shapiro’s Multinational Financial Management, 9th Edition Test Bank

a) floating currency
b) spot rate
c) revaluation
d) open market 公开市场

Ans: d
Section: Sterilized versus unsterilized intervention
Level: Easy

2.9 During the 1994 peso problem, Mexico made a fundamental error by not allowing the
________ of pesos to fall.
a) demand
b) supply
c) devaluation
d) real exchange rate

Ans: b
Section: The peso problem
Level: Easy

MEDIUM (applied)

2.10 On Friday, September 13, 1992, the lira 里拉 was worth DM 0.0013. Over the weekend the
lira devalued 贬值 against the DM to DM 0.0012. By how much had the lira devalued against the
DM?
a) 7.69%
b) 8.33%
c) 5.21%
d) 9.27%

Ans: a
Section: Setting the equilibrium spot exchange rate
Level: Medium

2.11 Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how much will
the dollar appreciate 涨价 against the real?
a) 67%
b) 40%
c) 32%
d) 28%

Ans: a

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Shapiro’s Multinational Financial Management, 9th Edition Test Bank

Section: Setting the equilibrium spot exchange rate

Level: Medium

2.12 The French euro devalued by 17% against the U.S. dollar. This is equivalent 等价的 to a
revaluation 再评价 of the dollar against the euro by
a) 17%
b) 16.31%
c) 20.48%
d) 17.54%

Ans: c
Section: Setting the equilibrium spot exchange rate
Level: Medium

2.13 If the Australian dollar devalues against the Japanese yen by 10%, the yen will appreciate
by
a) 33.32%
b) 25.55%
c) 10.11%
d) 11.11%

Ans: d
Section: Setting the equilibrium spot exchange rate
Level: Medium

2.14 If the euro depreciates 贬值 against the U.S. dollar by 50%, the dollar appreciates against
the euro by
a) 55%
b) 100%
c) 200%
d) 1,000%

Ans: b
Section: Setting the equilibrium spot exchange rate
Level: Medium

2.15 If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira depreciates
against the dollar by
a) 60%
b) 75%
c) 125%
d) 300%

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Ans: a
Section: Setting the equilibrium spot exchange rate
Level: Medium

2.16 If the dinar devalues against the U.S. dollar by 45%, the U.S. dollar will appreciate against
the dinar by
a) 45%
b) 82%
c) 55%
d) 32%

Ans: b
Section: Setting the equilibrium spot exchange rate
Level: Medium

2.17 If the peso depreciates against the U.S dollar by 80%, the US dollar will appreciate against
the peso by
a) 300%
b) 200%
c) 250%
d) 400%

Ans: d
Section: Setting the equilibrium spot exchange rate
Level: Medium

2.18 If the U.S. dollar appreciates against the euro by 25%, the euro will depreciate against the
U.S. dollar
a) 25%
b) 20%
c) 30%
d) 10%

Ans: b
Section: Setting the equilibrium spot exchange rate
Level: Medium

2.19 If a foreigner purchases a U.S. government security the

a) supply of dollars rises
b) federal government deficit declines
c) demand for dollars rises

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Shapiro’s Multinational Financial Management, 9th Edition Test Bank

d) U.S. money supply rises

Ans: c
Section: Setting the equilibrium spot exchange rate
Level: Medium

2.20 The price of foreign goods in terms of 折合 domestic goods is called

a. the real exchange rate 实际汇率
b. the balance of trade
c. the trade-weighted exchange rate
d. purchasing parity

Ans: a
Section: The fundamentals of central bank intervention
Level: Medium

2.21 An increase in the real exchange rate will

a. raise national income
b. lower national income
c. make a country less competitive in international trade
d. lower the cost of foreign goods
e. c and d

Ans: e
Section: The fundamentals of central bank intervention
Level: Medium

2.22 A slowdown in U.S. economic growth will

a. boost the value of the dollar because inflation fears will be calmed
b. boost the value of the dollar because the Federal Reserve will expand the money supply
c. lower the value of the dollar because the U.S. will be a less attractive place to investors
d. lower the value of the dollar because interest rates will rise

Ans: c
Section: The fundamentals of central bank intervention
Level: Medium

2.23 The willingness of people to hold money

a. increases with the interest rate
b. rises with price stability
c. rises with national income
d. b and c only

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Ans: d
Section: The fundamentals of central bank intervention
Level: Medium

2.24 Sound 健全的 economic policies will

a. raise the value of a nation's currency by boosting the economy
b. lower the value of a nation's currency by increasing the precautionary demand for money
c. lower the value of a nation's currency by leading to lower interest rates
d. both b and c

Ans: a
Section: The fundamentals of central bank intervention
Level: Medium

2.25 Large government budget deficits 预算赤字 will

a. raise the value of a nation's currency by raising domestic interest rates
b. raise the value of a nation's currency by stimulating the domestic economy
c. lower the value of a nation's currency by leading to higher inflation
d. lower the value of a nation's currency by leading to added political risk
e. be irrelevant 不相干的 since historical experience shows no correlation 相互关系 between
government budget deficits and the value of the nation's currency

Ans: e
Section: The nature of money and currency values
Level: Medium

DIFFICULT (applied)

2.26 Which type of money is most likely to see its value fluctuate 波动 in the foreign exchange
market?
a. fiat money 法定货币
b. commodity money
c. price-indexed money
d. pegged-exchange rate

Ans: a
Section: Central bank reputations and currency values
Level: Difficult

2.27 An increase in the supply of U.S. dollars by the Federal Reserve 联邦储备系统 will

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Shapiro’s Multinational Financial Management, 9th Edition Test Bank

a. raise the value of the dollar because it will stimulate U.S. economic growth
b. raise the value of the dollar because it will lead to higher U.S. interest rates
c. reduce the value of the dollar because of inflation fears in the United States
d. decrease the value of the dollar because it will force other countries to raise their interest rates

Ans: c
Section: The fundamentals of central bank intervention
Level: Difficult

2.28 On July 19, 1985, the Italian lira devalued by 17% against the U.S. dollar. This is
equivalent to a revaluation of the dollar against the lira of
a) 17%
b) 16.31%
c) 20.48%
d) 17.54%

Ans: c
Section: Setting the equilibrium spot exchange rate
Level: Difficult

2.29 Which of the following is an example of foreign exchange market intervention 市场干预?
a) the U.S. government pays Social Security checks to pensioners living in Poland
b) IBM sells euros it received in international trade
c) the Canadian government pays interest to Saudi Arabian investors
d) the French government sells dollars in the foreign exchange market to prop up 支持 the
value of the euro

Ans: d
Section: The fundamentals of central bank intervention
Level: Difficult

2.30 During 1995, the yen went from $0.0125 to $0.0095238. By how much did the dollar
appreciate against the yen?
a) 23.81%
b) 31.25%
c) 15.67%
d) 40.78%

Ans: b
Section: Setting the equilibrium spot exchange rate
Level: Difficult

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Shapiro’s Multinational Financial Management, 9th Edition Test Bank

2.31 The _______ for/of foreign currency in the U.S. is derived from 来源于 the demand for
___________ by American consumers.
a) Demand, foreign products
b) Demand, tax loopholes 漏税
c) Supply, lower tariffs
d) Supply, local products

Ans: a:
Section: Setting the equilibrium spot exchange rate
Level: Difficult

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