CHAPTER 19 CURRENCIES AND FOREIGN EXCHANGE

Transcription

1 CHAPTER 19 CURRENCIES AND FOREIGN EXCHANGE MULTIPLE CHOICE 1. A currency becomes hard when a) it is backed by gold b) a government declares that it is an international currency c) it has been around for a long time d) people trust it (X) 2. The world s most international currency is the a) U.S. dollar (X) b) British pound c) euro d) Japanese yen 3. This currency dominates nations official foreign exchange reserves. a) U.S. dollar (X) b) British pound c) euro d) Japanese yen 4. An international currency does not fulfill this function. a) medium of exchange b) mode of communication (X) c) store of value d) unit of account 5. The foreign exchange market does not perform this function. a) financing b) clearing c) consulting (X) d) hedging 6. This is a cash market where foreign exchange is available for immediate delivery. a) options b) spot (X) c) futures d) forward 7. The exchange rate affects a) the cost of imported goods b) the cost of exported goods c) the country's inflation rate d) a firm's employment e) all of the above (X) 8. Countries that wish to stimulate exports want the value of their own currency to a) rise b) drop (X) c) hold steady 9. When the U.S. dollar is devalued, it adversely affects a) U.S. exports b) U.S. employment c) U.S. consumer welfare (X) 1

2 10. A country wanting to maximize consumer welfare should attempt to make the value of its currency a) steady b) increase (X) c) decline d) weak 11. The J Curve explains that, right after devaluation, a country s trade deficit will a) quickly improve b) worsen over the long term c) worsen initially before recovering sharply (X) d) unpredictable 12. Price-specie-flow mechanism maintains the equilibrium exchange rate for this system. a) gold standard (X) b) crawling peg c) sliding parity d) wide band e) floating 13. This is a fixed system of exchange rate. a) par value (X) b) wide band c) crawling peg d) flexible 14. This exchange-rate system adjusts the rate slowly by small amounts on a continuous basis. a) par value b) wide band c) crawling peg (X) d) flexible e) gold standard 15. Brazil adjusts its currency continuously while keeping the adjustment small at any point in time. This system is a) adjustable peg b) wide band c) gold standard d) floating e) crawling peg (X) 16. This exchange-rate system does not allow the value of a currency to fluctuate at all. a) gold standard b) soft peg c) par value d) wide band e) all of them allow some degree of fluctuation (X) 17. The United States employs this exchange rate system. a) fixed rate b) gold standard c) semi-fixed rate d) floating rate (X) 18. One problem of the floating system is that it encourages a) uncertainty b) speculation c) inflation d) short-term volatility (X) 2

3 19. When a central bank intervenes to influence exchange rates, the float of a currency is a) clean b) dirty (X) c) filthy 20. Smaller companies have trouble obtaining contracts in this market. a) spot b) futures c) forward (X) d) options 21. This contract is not "standardized." a) futures b) forward (X) c) options 22. A buyer of this contract has the right but not the obligation to complete a transaction. a) futures b) forward c) options (X) d) spot 23. When foreign currencies are rising against the U.S. dollar, a U.S. firm should a) make immediate payments to foreign creditors (i.e., leading) (X) b) delay making payments to foreign creditors (i.e., lagging) c) hasten collection of debts from abroad 24. When the buyer is in a soft currency but the seller is in a hard currency, the seller should use the... currency for invoicing. a) seller's (X) b) buyer's c) third 25. A seller should bill in a... currency. a) strong (X) b) moderate c) weak TRUE OR FALSE 1. A hard currency is hard because of its gold backing. (F) 2. For a currency to become an international currency, the issuing country must possess financial markets that are substantially free of controls. (T) 3. A currency becomes hard or international when the issuing country passes a law for this purpose. (F) 4. A global currency is impossible. (T) 5. Inflation makes it impossible to have a global currency. (T) 6. The foreign exchange market has a central trading floor where buyers and sellers meet. (F) 3

4 7. Business firms do not need to hedge their currency exposure because losses from currency fluctuation are offset by windfall profit in the long run. (F) 8. The spot rate is irrelevant for the preparation of price quotations. (T) 9. The foreign exchange rate is simply a price. (T) 10. A currency's tendency to get out of equilibrium is caused by trade deficits but not trade surpluses. (F) 11. When the U.S. dollar declines in value, American exporters find it more difficult to export. (F) 12. When the U.S. dollar rises in value, it maximizes U.S. consumer welfare but adversely affects U.S. exports and employment. (T) 13. Dollar devaluation makes U.S. products competitive abroad but does not maximize American consumers' welfare. (T) 14. The J Curve phenomenon explains why the trade deficit may get worse after devaluation before recovering later. (T) 15. Devaluation may aggravate inflation. (T) 16. The price-specie-flow mechanism explains that imports will lead to less gold at home, resulting in less money supply. (T) 17. The IMF discourages any use of multiple exchange rates. (T) 18. Dirty floating means that central banks are not willing or able to intervene to support their currencies. (F) 19. Central banks combined resources are not adequate to reverse a fundamental trend in the foreign exchange market. (T) 20. There is evidence that countries have moved away from intermediate exchange rate regimes toward floating. (T) 21. The fixed rate system provides speculators a one-way, no-lose bet. (T) 22. Floating rates do not work well during recessions. (T) 23. Floating rates create a high degree of short-term volatility and the large medium-term swings in exchange rates. (T) 24. Developing countries have realized more benefits than problems from floating exchange rates. (T) 25. Other systems have just as much, if not more of the same flaws, as the floating system. (T) 26. The financial crises were experienced by many emerging markets that maintained soft pegs. (T) 4

5 27. Regarding foreign exchange management products, the first-generation product (i.e., forward contracts) is more popular among users than the second-generation (e.g., options) and third-generation products (e.g., warrants). (T) 28. Multinationals may be able to employ a natural hedge by matching resources and costs in the same currency. (T) 29. There is no relationship between a country's inflation rate and the value of its currency. (F) 30. When both the buyer and the seller are in soft currencies, they should consider a third currency for invoicing. (T) 31. Globalization offers some protection from currency fluctuations. (T) 32. The local (overseas) manufacturing market-entry strategy does not reduce currency risk. (F) 5