12. EXCHANGE RATES 2

Which of these exchange rate systems could be described as managed float regimes (a.k.a. soft pegs)?

(a) a free floating exchange rate (a.k.a. pure/clean float)

(b) a conventional peg

(c) a crawling peg

(d) an exchange rate pegged within horizontal bands

(e) a reserve currency standard ( with a currency board)

(f) no separate legal tender

• (a) only

• (e) and (f) only

• (b) and (c) only

• (b), (c) and (d)

A reduction of the value of a currency by the monetery authority under a fixed exchange rate system is called

• revaluation

• devaluation

• appreciation

• depreciation

The diagram represents the market of the Chinese yuan pegged to the U.S. dollar within an exchange rate band (indicated by the red lines). Which of the following actions has to be taken by the central bank of China after the increase in demand for the yuan to keep the currency within the exchange rate band?

• It has to sell (q4 - q3) of the yuan.

• It has to sell (q4 - q2) of the yuan.

• It has to buy (q4 - q3) of the yuan.

• It has to sell (q4 - q1) of the yuan.

Which of the following measures could be taken by Ukrainian authorities to prevent depreciation of their currency, hryvnia, to the Russian rouble?

(a) reduction of interest rates

(b) introduction of exchange controls for the rouble

(c) removal of barriers to imports from Russia

(d) intervention purchase of roubles for hryvnias

(e) intervention purchase of hryvnias for roubles

• (a), (c) and (d) only

• (b) and (e) only

• (a) and (e) only

• (c) and (d) only

In all fixed (i.e. pegged) exchange rate systems, the government will

• need to keep large foreign exchange reserves.

• allow market forces to determine the exchange rate, but may intervene if it changes too fast.

• allow market forces to determine the exchange rate.

• allow the exchange rate to fluctuate within a limited band.

A “dirty” (or managed) float of the Argentinean peso may involve buying pesos by which of the following

• International Monetary Fund (IMF)

• Central Bank of Argentina

• Foreign speculators

• the U.S. government

Under a managed float system, the Colombian peso is depreciating against the US dollar. If the Colombian monetary authorities wanted to

halt this depreciation, which one of the following actions would they be most likely to take?

• Widen the exchange rate bands.

• Lower interest rates.

• Sell US dollars for Colombian pesos in the foreign exchange market.

• Buy US dollars for Colombian pesos in the foreign exchange market.

Which of the following groups benefit from the fact that a currency is permanently undervalued as a result of government interventions in the currency market?

(a) domestic exporters

(b) domestic consumers

(c) domestic importers

(d) foreign exporters

(e) foreign consumers

(f) foreign importers

• (a), (b) and (c) only

• (d), (e) and (f) only

• (a) and (f) only

• (a), (f) and (e) only

Which one of the following newspaper headlines is based on a sound understanding of

exchange rate determination?

• Falling Interest Rates in Mexico Lead to an Appreciation of the Peso.

• High World Demand for Japanese Exports Strengthens the Yen.

• High Inflation Rates in Brazil and Venezuela may Boost their Exports.

• A Fall in Real Incomes in the USA Seen as the Cause of an Increase in Imports.

Which of the following are the advantages of a floating exchange rate system over a fixed exchange rate system?

(a) There is less uncertainty in foreign transactions.

(b) Discipline imposed on domestic fiscal and monetary policies prevents inflation and budget deficits.

(c) Inflation abroad does not automatically increase domestic inflation.

(d) Trade deficits are eliminated automatically.

(e) Monetary authorities have less need to keep large amounts of foreign (reserve) currencies.

• (a) and (b) only

• (c), (d) and (e) only

• (d) and (e) only

• (b) and (e) only