TOPIC 26: EXCHANGE RATE

1.       Based on the supply and demand model of the exchange rate, which of the following should cause the Philippine peso to appreciate?

• A. Repayment by the Philippine government of its debt to the IMF.

• B. Increased imports by Philippine consumers of electronics made in Taiwan.

• C. An increase in Philippine savings that is used to purchase financial assets in Europe.

• D. An increase in remittances from Philippine workers abroad to their families at home.

2. Under fixed exchange rate system, exchange rate is determined by the:

•   A. Demand for exchange

• B. Supply and demand forces

• C. Supply of foreign exchange.

• D. Central bank

3. Managed exchange rate is called ‘managed’ because it is influenced by the steps taken by:

• A. Government

• B. Central Bank

• C. World Bank

• D. IMF

4. Devaluation of currency means:

• A. Reduction in the value of domestic currency by market forces.

• B. Reduction in the value of currency in floating exchange rate.

• C. Reduction in the value of currency by the central bank.

• D. Increase in the value of currency by the central bank.

5. The value of US Dollar $1 has gone down from RM4.20 to RM4.10. It means that:

• A. Malaysian ringgit has appreciated

• B. US Dollar has depreciated

• C. Both A and B

• D. No change in the value of US Dollar

6. Which of the following statements is true?

• A. The floating exchange rate system gives the government more flexibility to maintain a large stock of foreign exchange reserves.

• B. In a floating exchange rate system, the government intervene to buy and sell foreign currencies.

• C. In the fixed exchange rate system, market forces fix the exchange rate.

• D. In managed exchange rate system, the central bank intervenes to moderate exchange rate fluctuations.

7. A country currently operates a floating exchange rate system. Why might a government change to a fixed exchange rate?

• A. To increase the stock of foreign currency reserves

• B. To make the trading between countries more favourable

• C. To raise the level of certainty for businesses

• D. To use the value of the exchange rate to reduce domestic prices

8. Which of the following is most likely to happen to a country’s currency value as a result of increase in imports, assuming it is operating with a floating exchange rate system?

• A. Appreciation

• B. Depreciation

• C. Revaluation

• D. Devaluation

9. An economy imports most of the factors of production used in the manufacture of its exported goods. What effect would depreciation of this economy’s rate of exchange have on the price of imported goods and price exported goods in the domestic economy?

• A. Price of imported goods - FALL & price of exported goods - FALL

• B. Price of imported goods - FALL & price of exported goods - RISE

• C. Price of imported goods - RISE & price of exported goods - FALL

• D. Price of imported goods- RISE & price of exported goods- RISE

10. If the US dollar depreciates relative to the Swiss franc,

• A. Swiss chocolate will become more expensive in the United States.

• B. American computers will become less expensive in Switzerland.

• C. Swiss chocolate will become cheaper in the United States.

• D) both A and B will happen.