CHAPTER 2 1. 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% e) none of the above

2. Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how much will the dollar appreciate against the real? a) 67% b) 40% c) 32% d) 28% e)none of the above

3. If a foreigner purchases a U.S. government security a) the supply of dollars rises  b) the federal government deficit declines c) the demand for dollars rises  d) the U.S. money supply rises e)none of the above

 4. The asset market view of exchange rate determination says that the spot rate   a) should follow a random walk as the value of financial assets are also unpredictable    b) is affected primarily by a nation's long-run economic prospects     c) both a and b    d) should be strongly affected by a nation's balance of trade      e) none of the above         5. The fall of communism in East Germany   a) raised the value of the DM because of expectations that the West German economy would benefit from the opening of East Germany    b)raised the value of the DM because of expectations that the Bundesbank would ease up on the money supply    c) hurt the value of the DM because of political uncertainties   d) hurt the value of the DM because of fears of German inflation   e) none of the above

6. The price of foreign goods in terms of domestic goods is called   a) the real exchange rate
b) the terms of trade    c) the trade-weighted exchange rate   d) all of the above   e) a and b only

7. An increase in the 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

8. Which of the following is an example of foreign exchange market intervention?
a) the U.S. government pays Social Security checks to pensioners living in Poland
b) IBM sells DM 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 the value of the franc
e) all of the above

9. The plunge in the value of the Mexican peso in 1995 was due to   a) A outflow of capital from Mexico   b ) An attempt by the Mexican Central Bank to sterilize its intervention.    c) a sudden change in the country's terms of trade    d) all of the above e) both a and b

10. The most likely explanation for the rise of the U.S. dollar during the early 1980s is that   a) the U.S. budget deficit raised U.S. interest rates  b) the U.S. trade deficit held down U.S. inflation   c) the U.S. economy improved dramatically   d) all of the above  e) none of the above

 11. The U.S. dollar weakened during the 1970s because  a) U.S. inflation accelerated b)the U.S. economy weakened
c) foreigners didn't want to hold as many dollars as before d)U.S. political risk increased significantly  e) all of the above

12. 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 invest in   d) lower the value of the dollar because interest rates will rise

13. The willingness of people to hold money (all else the same)  a) increases with the interest rate  b) rises with price stability  C) both of the above

14. Sound 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

16. Which of the following currencies is linked to the price of gold?  a) U.S. dollar b) Japanese yen c) Deutsche mark d) British pound e) none of the above

17. The dollar fell when tough, cigar-smoking, Paul Volcker resigned as Fed chairman because a) U.S. interest rates rose b) expectations of future U.S. economic growth slowed  c) the perceived risk of holding dollars rose
d) U.S. monetary policy became more uncertain   e) c and d

18. An increase in the supply of U.S. dollars by the Federal Reserve will
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 raised inflationary fears in the United States
d) decrease the value of the dollar because it will force other countries to raise their interest rates
 
 

answers (1. c 2. a 3. c  4. c 5.  a  6. b  7. e  8.  d 9. e  10.  d   11. e  12. c   13. c 14. a. 15.  16. e  17. e  18.  c )