Chapter 6—Government Influence on Exchange Rates

1. To force the value of the pound to appreciate against the dollar, the Federal Reserve should:
a. sell dollars for pounds in the foreign exchange market and the European Central Bank
(ECB) should sell dollars for pounds in the foreign exchange market.
b. sell pounds for dollars in the foreign exchange market and the European Central Bank
(ECB) should sell dollars for pounds in the foreign exchange market.
c. sell pounds for dollars in the foreign exchange market and the European Central Bank
(ECB) should not intervene.
d. sell dollars for pounds in the foreign exchange market and the European Central Bank
(ECB) should sell pounds for dollars in the foreign exchange market.

2. A weak dollar is normally expected to cause:

a. high unemployment and high inflation in the U.S.
b. high unemployment and low inflation in the U.S.
c. low unemployment and low inflation in the U.S.
d. low unemployment and high inflation in the U.S.

3. A strong dollar is normally expected to cause:

a. high unemployment and high inflation in the U.S.
b. high unemployment and low inflation in the U.S.
c. low unemployment and low inflation in the U.S.
d. low unemployment and high inflation in the U.S.

9. Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by
____ the dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products
produced by major foreign countries.
a. weakening; increase
b. weakening; decrease
c. strengthening; increase
d. strengthening; decrease

19. A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S.
interest rates, which places ____ pressure on U.S. bond prices.
a. upward; downward; upward
b. upward; downward; downward
c. upward; upward; downward
d. downward; upward; upward

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 e. downward; downward; upward

26. Which of the following is true regarding the euro?

a. Exchange rate risk between participating European currencies is completely eliminated,
encouraging more trade and capital flows across European borders.
b. It allows for more consistent economic conditions across countries.
c. It prevents each country from conducting its own monetary policy.
d. All of the above are true.

27. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S.
government would like to reduce unemployment. Which of the following is an appropriate action
given this scenario?
a. Weaken the dollar
b. Strengthen the dollar
c. Buy dollars with foreign currency in the foreign exchange market
d. Implement a tight monetary policy

29. To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously
____ Treasury securities.
a. buy; sell
b. sell; buy
c. buy; buy
d. sell; sell

30. As foreign exchange activity has grown, a given degree of central bank intervention has become:
a. more effective.
b. more frequent.
c. less effective.
d. none of the above

31. 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.

54. The Fed's indirect method of intervention is to trade dollars for or against other currencies.
a. True
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 b. False

55. China is commonly criticized for keeping the yuan's value at superficially high levels.
a. True
b. False

60. An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use
interest rates to increase the value of the yen vs. the dollar.
a. True
b. False

62. An advantage of freely floating exchange rates is that a country with floating exchange rates is more
insulated from unemployment problems in other countries.
a. True
b. False

64. A country with a currency board does not have control over its local interest rates.
a. True
b. False

77. A "dirty" float represents a system of:

a. freely floating exchange rates.
b. fixed exchange rates.
c. floating exchange rates, but the central bank can manipulate the currency.
d. fixed exchange rates, but the central bank can manipulate the currency.

82. Assuming no credit risk, the interest rates among countries in the eurozone should be similar.
a. True
b. False

87. If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:
a. exchange dollars for foreign currencies, and sell some of its existing Treasury security

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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 holdings for dollars.
b. exchange foreign currencies for dollars, and sell some of its existing Treasury security
holdings for dollars.
c. exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
d. exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

88. Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This
will cause an ____ U.S. dollars and an ____ euros.
a. inward shift in demand for; outward shift in supply of
b. inward shift in demand for; inward shift in supply of
c. outward shift in supply of; outward shift in demand for
d. outward shift in supply of; inward shift in demand for

92. If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would
most likely ____ to capitalize on this intervention.
a. purchase yen put options
b. sell yen futures contracts
c. purchase yen call options
d. buy U.S. Treasury bonds

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115. Assume that the dollar has been consistently depreciating over a long period. The Fed decides to
counteract this movement by intervening in the foreign exchange market using sterilized intervention.
The Fed would
a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
e. none of the above

ANS: B PTS: 1

© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.