Chapter 18 : The International Financial System

1. The gold standard is an example of

A. a floating exchange rate system.
B. a managed float exchange rate system.
C. a fixed exchange rate system.
D. a flexible exchange rate system.
E. the Bretton Woods System.
Answer: C
Diff: 1

2. China's exchange rate system from 1994 through 2005 is an example of

A. a floating exchange rate system.
B. a managed float exchange rate system.
C. a fixed exchange rate system.
D. a flexible exchange rate system.
E. the Bretton Woods System.
Answer: C
Diff: 1

3. Fluctuating exchange rates can alter a multinational firm's profits and losses. The U.S. corporation, Motorola,
produces cell phones and sells cell phones in Mexico. If the dollar depreciates against the peso, then
Motorola's revenues from these operations should ________ and its costs from these operations should
________.
A. rise; fall
B. rise; rise
C. fall; fall
D. fall; rise
Answer: B
Diff: 1

4. Molson Coors is a brewing company with headquarters in both Montreal and Colorado, and sells beer in
North America, Latin America, Europe, and Asia. If the value of the U.S. dollar falls relative to the British
pound, Molson Coors profits in the United States will ________ because it will receive ________ when it
converts the pounds it earns from sales in the United Kingdom into U.S. dollars.
A. rise; more
B. rise; less
C. fall; more
D. fall; less
Answer: A
Diff: 1

5. You decide to work in Japan for the next 10 years, accumulate some savings, then move back to the United
States and convert your savings from yen to dollars. At the time of your move, economists predict that
consumers in the United States have reignited their love of Japanese products, especially hybrid cars, and
expect that this strong preference for Japanese products will continue for the next decade. How should this
influence your decision to work and save in Japan?
A. You should be discouraged as the growing U.S. preference for Japanese goods should increase the value
of the yen to the dollar and decrease the value of your savings when converted to dollars.
B. You should be discouraged as the growing U.S. preference for Japanese goods should decrease the value
of the yen to the dollar and decrease the value of your savings when converted to dollars.
C. You should be encouraged as the growing U.S. preference for Japanese goods should decrease the value
of the yen to the dollar and raise the value of your savings when converted to dollars.
D. You should be encouraged as the growing U.S. preference for Japanese goods should increase the value
of the yen to the dollar and raise the value of your savings when converted to dollars.
Answer: D
Diff: 2

6. During what period of time did the United States most consistently adhere to the gold standard?
A. from the nineteenth century until the 1930s
B. from the eighteenth century until the nineteenth century
C. from 1914 until 1929
D. from 1944 until 1980
Answer: A
Diff: 1

7. When the value of a currency is determined mostly by demand and supply, but with occasional government
intervention, the exchange rate system is defined as
A. fixed.
B. floating.
C. managed float.
D. Bretton Woods.
Answer: C
Diff: 1

8. Suppose an economy's exchange rate system is the gold standard and vast tracks of gold are discovered, as is
what happened in the United States in 1849. If the economy is at full employment, what should this discovery
do?
A. It should raise the money supply but have no impact on the price level.
B. It should raise the money supply and cause inflation.
C. It should raise the money supply and cause disinflation.
D. It should lower the money supply and cause deflation.
E. it should not change the money supply.
Answer: B
Diff: 3

9. If a country's currency is determined only by the demand and supply for that country's currency, the country
is said to have a
A. floating exchange rate.
B. fixed exchange rate.
C. gold standard.
D. managed float.
Answer: A
Diff: 1

10. If currencies around the world are based on the gold standard, and Japan raises the amount of gold for which
the yen will trade, then holding all else constant,
A. the yen will depreciate against the dollar.
B. the yen will appreciate against the dollar.
C. the value of the yen relative to the dollar will stay constant.
D. the value of U.S. exports to Japan in terms of the yen will increase.
Answer: B
Diff: 1

11. Under the Bretton Woods exchange rate system, set up in 1944, which of the following was true?
A. Americans could sell their dollars to the American government in exchange for gold.
B. Americans could sell their dollars to the American government in exchange for silver.
C. Americans could sell their dollars to foreign central banks in exchange for gold.
D. Foreign central banks could sell their dollars to the American government in exchange for gold.
Answer: D
Diff: 2

12. The United States abandoned the Bretton Woods system of exchange rates in
A. the 1920s.
B. the 1940s.
C. the 1970s.
D. the 1990s.
Answer: C
Diff: 1

13. Why did the United States abandon the gold standard in the 1930s?
A. The government wanted to rapidly expand the money supply in response to the Great Depression.
B. The government wanted to move away from a floating exchange rate system to a fixed exchange rate
system.
C. The Treasury Department in the United States found it was cheaper to print paper money instead of
gold coins.
D. New sources of gold were discovered, so the price of gold plummeted, dramatically reducing the value
of the dollar.
Answer: A
Diff: 2

14. The current exchange rate system in the United States is best described as a
A. silver standard.
B. managed float exchange rate system.
C. fixed exchange rate system.
D. gold standard.
Answer: B
Diff: 1

15. In what year was the Bretton Woods system of currency exchange set up?
A. 1912
B. 1924
C. 1944
D. 1969
 Answer: C
Diff: 1

16. Under which exchange rate system was a dollar redeemable for gold only if the dollar was presented by a
foreign central bank?
A. the gold standard
B. a managed float exchange rate system
C. the Bretton Woods System
D. a fiat system
Answer: C
Diff: 1

17. In the United States today, how much gold will the Federal Reserve give you in exchange for $1?
A. none
B. $1 worth of gold (based on the market price of an ounce of gold at the time you redeem the gold)
C. 1 ounce of gold
D. 1/35th of an ounce of gold
Answer: A
Diff: 1

18. The exchange rate system agreed to in 1944 in which the U.S. government agreed to buy or sell gold at a fixed
price of $35 per ounce is referred to as
A. the gold standard.
B. the Bretton Woods System.
C. a floating currency standard.
D. a flexible exchange rate system.
Answer: B
Diff: 1

19. Under the gold standard, to increase the money supply in the country, the government must
A. simply print more currency.
B. have enough gold to back up the increase in the money supply.
C. buy foreign currencies with dollars to increase foreign currency reserves.
D. increase the value of the country's currency on foreign exchange markets.
Answer: B
Diff: 1

20. The gold in Fort Knox backs all U.S. currency.

Answer: True False
Diff: 1

21. If two countries adhere to a gold standard, the exchange rate for their currencies is fixed.
Answer: True False
Diff: 1

22. Managed float exchange systems were abandoned with the implementation of the gold standard.
 Answer: True False
Diff: 1

23. Expanding, contracting, and managing the money supply is easier for a central bank under the gold standard.
Answer: True False
Diff: 1

24. What are the three main exchange rate systems, and how do they operate?
Answer: The three main exchange rate systems are the floating exchange rate, the fixed exchange rate, and the
managed float. The floating exchange rate is determined solely by equilibrium of demand and supply
in the foreign exchange market. The fixed exchange rate exists when the government maintains one
fixed rate at which currency can be exchanged. Under a managed float, the exchange rate is mostly
determined by demand and supply in the market for foreign exchange, with occasional government
intervention.
Diff: 1

25. How were exchange rates determined under the gold standard? How did the Bretton Woods system differ
from the gold standard?
Answer: Under the gold standard, exchange rates were determined by the relative amounts of gold in each
country's currency. Both the gold standard and Bretton Woods systems were fixed exchange rate
systems, but people were able to redeem paper currency for gold domestically only under the gold
standard.
Diff: 2

26. The currency adopted by most countries in Western Europe is referred to as the
A. euro.
B. Eurodollar.
C. yen.
D. pound.
Answer: A
Diff: 1

27. The current exchange rate system has which of the following characteristics?
A. The United States allows the dollar to float against other major currencies.
B. All developing countries allow their currencies to float against the dollar and other major currencies.
C. The countries of the European Union have adopted the gold standard.
D. Several developing countries in Asia have adopted the Bretton Woods system.
E. The current global foreign exchange system is a fixed system.
Answer: A
Diff: 1

28. From the beginning of 1973 until the end of 2008, the value of the dollar has ________ relative to the Canadian
dollar and ________ relative to the Japanese yen.
A. appreciated; appreciated
B. appreciated; depreciated
C. depreciated; appreciated
D. depreciated; depreciated
 Answer: B
Diff: 2

29. If one U.S. dollar could be exchanged for one Canadian dollar in 1970, and one U.S. dollar can now be
exchanged for 1.13 Canadian dollars, which of the following is true?
A. The U.S. dollar lost value against the Canadian dollar.
B. The Canadian dollar lost value against the U.S. dollar.
C. The Canadian dollar gained value against the U.S. dollar.
D. Both A and C are true.
Answer: B
Diff: 2

30. Between 2004 and 2005, ticket sales to Toronto Blue Jays games increased by nearly 33 percent as many more
Canadian citizens traveled to the United States to see the Blue Jays play. Which of the following would not be
a possible explanation for this?
A. The value of the Canadian dollar relative to the U.S. dollar increased during this time.
B. The U.S. dollar depreciated during this time.
C. The Canadian dollar appreciated during this time.
D. The U.S. dollar appreciated relative to the Canadian dollar during this time.
Answer: D
Diff: 2

31. You are a ball player for the Toronto Blue Jays and you receive your salary in U.S. dollars but live in Toronto,
Canada. The increase in the value of the Canadian dollar relative to the U.S. dollar should
A. help you as each U.S. dollar of your salary is now worth more Canadian dollars.
B. hurt you as each U.S. dollar of your salary is now worth less Canadian dollars.
C. hurt you as it is now more expensive to live in Canada since the Canadian dollar appreciation.
D. help you as it is now less expensive to live in Canada since the Canadian dollar appreciation.
Answer: B
Diff: 2

32. The Toronto Blue Jays are a Canadian-owned baseball team, but they play most of their games in the United
States and pay most of their bills in U.S. dollars (including player salaries). An increase in the value of the
dollar will
A. reduce Canadian demand for Blue Jays tickets purchased in Canada for games played in Canada.
B. reduce the cost of Blue Jays expenses incurred in Canadian dollars.
C. reduce the cost of Blue Jays expenses in U.S. dollars.
D. increase the cost of Blue Jays spring training in Florida.
Answer: D
Diff: 2

33. What factors are not important in determining exchange rate fluctuations in the long run?
A. relative price levels across countries
B. relative rates of productivity growth across countries
C. preferences for domestic and foreign goods across countries
D. speculating in currency markets
Answer: D
Diff: 2
34. Which of the following is most important in explaining exchange rate fluctuations in the short run?
A. relative price levels across countries
B. preferences for domestic and foreign goods
C. interest rates
D. relative rates of productivity growth across countries
Answer: C
Diff: 2

35. Purchasing power parity is the theory that, in the long run, exchange rates should be at a level such that
equivalent amounts of any country's currency
A. will equalize nominal interest rates across countries.
B. are valued inversely relative to the size of its GDP.
C. should earn the same real rate of return.
D. allow one to buy the same amount of goods and services.
Answer: D
Diff: 2

36. If the exchange rate between the U.S. dollar and the Indian rupee (rupees per dollar) is greater than the
relative purchasing power between the two countries, which of the following would be true?
A. There are opportunities for profit by purchasing goods in India and then selling them in the United
States.
B. Purchasing power parity predicts that the value of the dollar will rise as traders take advantage of
arbitrage opportunities.
C. Purchasing power parity predicts that the dollar is undervalued as traders take advantage of arbitrage
opportunities.
D. There are no arbitrage opportunities for which traders can take advantage.
Answer: A
Diff: 2

37. If the purchasing power of a dollar is greater than the purchasing power of the yen, purchasing power parity
would predict that
A. in the short run, exchange rates will move to equalize the purchasing power of the dollar and the yen.
B. in the long run, exchange rates will move to equalize the purchasing power of the dollar and the yen.
C. in the long run, interest rates will move to equalize the purchasing power of the dollar and the yen.
D. in the short run, interest rates will move to equalize the purchasing power of the dollar and the yen.
Answer: B
Diff: 2

38. A Big Mac costs $3.60 in the United States and 8.00 reals in Brazil. If the exchange rate is 2 reals per dollar,
what is the dollar cost of a Big Mac in Brazil?
A. $1.80
B. $2.22
C. $4.00
D. $7.20
Answer: C
Diff: 2
39. A Big Mac costs $3.60 in the United States and 8.00 reals in Brazil. If the exchange rate is 2 reals per dollar,
purchasing power parity predicts that
A. the dollar will appreciate as the demand for dollars falls in the long run.
B. the dollar will appreciate as the supply of dollars falls in the long run.
C. the dollar will depreciate as the demand for dollars falls in the long run.
D. the dollar will depreciate as the supply of dollars rises in the long run.
Answer: B
Diff: 2

40. A Big Mac costs $3.60 in the United States and 8.00 reals in Brazil. If the exchange rate is 2 reals per dollar,
purchasing power parity predicts that
A. the dollar is undervalued.
B. the dollar is overvalued.
C. the real is undervalued.
D. both B and C are correct.
Answer: A
Diff: 2

41. If the implied exchange rate between Big Mac prices in the United States and Poland is 2.13 zlotys per dollar,
but the actual exchange rate between the United States and Poland is 3.16 zlotys per dollar, which of the
following would you expect to see?
A. an appreciation of the dollar
B. an increase in the demand for zlotys
C. an increase in the demand for dollars
D. Both A and C are correct.
Answer: B
Diff: 2

42. If relative purchasing power between the United States and Argentina is 3.22 pesos per dollar, under which
circumstances would we say that the dollar is "overvalued"?
A. if the actual exchange rate between the dollar and the Argentinean peso is 3.22 pesos per dollar
B. if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar
C. if the actual exchange rate between the dollar and the Argentinean peso is 0.22 pesos per dollar
D. if the actual exchange rate between the dollar and the Argentinean peso is 3 pesos per dollar
Answer: B
Diff: 2

43. Which of the following explains why purchasing power parity does not completely explain long-run
fluctuations in exchange rates?
A. Some goods and services produced in any country are not traded internationally.
B. Consumer preferences for goods and services across countries are very similar.
C. Most countries do not impose barriers to trade.
D. Most countries have free markets with little, if any, government regulation.
Answer: A
Diff: 2

44. If the GDP deflator in the United States is 114, and the GDP deflator in Ukraine is 142, which of the following
exchange would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the
rates hryvnia.)
A. 0.80 hryvnias per dollar
B. 1.25 hryvnias per dollar
C. 2.80 hryvnias per dollar
D. 28 hryvnias per dollar
Answer: B
Diff: 2

45. If the GDP deflator in the United States is 114, and the GDP deflator in Ukraine is 142, which of the following
changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)
A. The demand for the dollar will rise since the dollar is undervalued.
B. The demand for the dollar will fall since the dollar is overvalued.
C. The supply of the dollar will fall since the dollar is undervalued.
D. No prediction regarding changes in the demand or supply of the dollar can be made without
information on the exchange rate between the United States and Ukraine.
Answer: D
Diff: 2

46. Suppose the GDP deflator in the United States is 125 and the GDP deflator in Japan is 100. Also assume the
United States has trade barriers on Japanese goods in the form of quotas. What does this imply about the
exchange rate of yen per dollar under the theory of purchasing power parity in the long run?
A. The exchange rate of yen per dollar will be equal to 1.25.
B. The exchange rate of yen per dollar will be greater than 0.8.
C. The exchange rate of yen per dollar will be equal to 0.8.
D. The exchange rate of yen per dollar will be less than 0.8.
Answer: D
Diff: 3

47. If the purchasing power of the dollar is greater than the purchasing power of the euro, purchasing power
parity predicts that the exchange rate will
A. increase if the exchange rate is greater than 1 euro per dollar.
B. decrease if the exchange rate is less than 1 euro per dollar.
C. be equal to the relative purchasing power across the currencies in the long run.
D. not fluctuate and stay constant in the long run.
Answer: C
Diff: 3

48. Countries that use the euro as their currency face similar concerns as countries did during the years of the
gold standard in that each are (were)
A. unable to conduct monetary policy.
B. unable to conduct fiscal policy.
C. using currency which is backed by gold.
D. using a floating currency.
Answer: A
Diff: 2

49. Because the value of the euro is determined by factors that affect the entire euro zone, during the recession of
2007-200 9, individual countries using the euro
A. were unable to have their exchange rates depreciate.
B. were more insulated from unemployment increases than most countries.
C. experienced a greater increase in exports than did most countries.
D. were able to use expansionary monetary policy to lessen the impact of the recession.
Answer: A
Diff: 2

50. The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory. In July
2009, The Economist reported that the average price of a Big Mac in the U.S. was $3.57. In Mexico, the average
price of a Big Mac at that time was 33 pesos. What is the "implied exchange rate" between the peso and the
dollar?
A. 0.108 pesos per dollar
B. 8.25 pesos per dollar
C. 9.24 pesos per dollar
D. 11.78 pesos per dollar
Answer: C
Diff: 2

51. If, at the current exchange rate between the dollar and the Norwegian kroner of 5.78 kroner per dollar, the
dollar is "overvalued," how do you expect demand and supply in the foreign exchange markets to respond?
A. The demand for the dollar will rise, while the supply of the kroner will fall.
B. The demand for the dollar will fall, while the supply of the kroner will rise.
C. The supply of the dollar will rise, while the demand for the kroner will fall.
D. The supply of the dollar will rise, while the demand for the kroner will rise.
Answer: D
Diff: 2

Figure 18-1

52. Refer to Figure 18-1. Which of the following would cause the change depicted in the figure above?
A. U.S. productivity rises relative to European productivity.
B. Europeans decrease their preferences for U.S. goods relative to European goods.
C. The European Union increases its quotas on French wine.
D. an increase in the price level of U.S. goods relative to European goods
Answer: A
Diff: 2

Figure 18-2
53. Refer to Figure 18-2. Which of the following would cause the change depicted in the figure above?
A. Lack of investment in infrastructure causes U.S. productivity to fall relative to Chinese productivity.
B. Tainted cat food from China causes U.S. consumers to decrease their preferences for Chinese goods
relative to U.S. goods.
C. A new trade agreement with China results in the United States removing all tariffs on clothing imported
from China.
D. An expansionary monetary policy causes an increase in the price level of U.S. goods relative to Chinese
goods.
Answer: B
Diff: 2

54. If the average productivity of American firms is rising more quickly than the average productivity of Indian
firms, which of the following would you expect to see? (India's currency is the rupee.)
A. an increase in the value of the rupee relative to the dollar
B. a decrease in the prices of Indian products
C. a decrease in the quantity demanded of Indian products relative to American products
D. an increase in the quantity demanded of Indian products relative to American products
Answer: C
Diff: 2

55. How will the exchange rate (foreign currency per dollar) respond to an increase in the relative rate of
productivity growth in the United States in the long run?
A. Exchange rates will rise.
B. Exchange rates will fall.
C. Exchange rates will be unaffected by changes in the relative rate of productivity growth in the United
States, both in the short run and in the long run.
D. The exchange rate will be affected in the short run, but not in the long run.
Answer: A
Diff: 2

56. If inflation in Russia is higher than it is in the United States,

A. the purchasing power of the ruble in buying Russian goods will rise relative to the dollar.
B. the value of the dollar will rise in the long run.
C. the value of the ruble will rise in the long run.
D. Both A and C are correct.
Answer: B
Diff: 2
57. Which of the following would increase the value of the dollar in the long run?
A. an increase in inflation in the United States relative to other countries
B. an increase in the demand for American goods relative to goods from other countries
C. a decrease in U.S. tariffs on foreign goods
D. an increase in the supply of dollars on the foreign exchange market
Answer: B
Diff: 2

58. What explains the appreciation of the Japanese yen relative to the U.S. dollar from 1970 to the early 1990s?
A. Japanese productivity rose faster than U.S. productivity.
B. Japanese inflation rose faster than U.S. inflation.
C. U.S. consumers reduced their preferences for Japanese goods.
D. High tariffs and restrictive quotas in the United States caused the value of the dollar to decline.
Answer: A
Diff: 2

59. The central bank of the European Union is called the

A. Bundesbank.
B. Banco Europe.
C. Federal Reserve.
D. European Central Bank.
Answer: D
Diff: 1

60. By 2009, how many European countries were members of the European Union?
A. 12
B. 15
C. 27
D. 57
Answer: C
Diff: 1

61. Members of the European Union decided to adopt a single currency by what year?
A. 2008
B. 2005
C. 1999
D. 1992
Answer: C
Diff: 1

62. Which of the following is a drawback to having a common currency across countries, as in the European
Union?
A. A common currency increases barriers to trade across countries, reducing opportunities for economic
growth.
B. With a common currency, individual countries are no longer able to run independent monetary policies.
C. Having a common currency implies that the prices of goods across countries must always be the same,
regardless of consumer preferences for goods across countries.
 D. None of the above is a drawback to a common currency.
Answer: B
Diff: 2

Article Summary

The global financial crisis of 2008 has motivated some European countries that chose not use the euro to reconsider
adopting it as their currency. The values of the currencies of Poland and Iceland have declined sharply against the euro
since the onset of the financial crisis, resulting in a large negative impact on citizens in those countries who had taken
out euro-denominated loans. In Iceland, the krona fell nearly 80 percent against the euro which led to massive bank
failures throughout the country. Economic damage from the financial crisis also has Sweden and Hungary looking
again at switching to the euro, but the most surprising news is that Denmark is also leaning toward adopting the euro
after twice rejecting it in the past. Denmark, which the article describes as "a nearly picture-perfect model of economic
management", has seen investors shift money out of the country and into euro-denominated investments following the
financial downturn, a "flight to quality" into what are perceived as the safest possible assets. Denmark's largest
trading partner is the 15-nation euro zone, and in an effort to stabilize trade, the Danish central bank already keeps its
currency, the krone, fluctuating very closely to the euro by adjusting interest rates in coordination with the European
Central Bank.

Source: Carter Dougherty, "Some Nations That Spurned the Euro Reconsider," New York Times, December 1, 2008.

63. Refer to the Article Summary. The currencies of Poland and Iceland (the zloty and the krona, respectively)
declined in value relative to the euro following the financial crisis of 2008. This means that the
A. zloty and krona appreciated in value against the euro.
B. euro depreciated in value against the zloty and the krona.
C. zloty and krona depreciated in value against the euro.
D. zloty depreciated in value against the krona.
E. Both A and B are correct.
Answer: C
Diff: 2

64. Refer to the Article Summary. Should they choose to adopt the euro as their currency, countries such as
Poland and Denmark risk giving up the ability to use ________ to stabilize their economies in the event of a
recession.
A. expansionary fiscal policy
B. contractionary fiscal policy
C. expansionary monetary policy
D. contractionary monetary policy
Answer: C
Diff: 2

65. Pegging a country's exchange rate to the dollar can be advantageous if

A. the country does not trade much with the United States.
B. investors believe the dollar to be more stable than the domestic country's currency.
C. a country wishes to conduct independent monetary policy.
D. imports are not a significant fraction of the goods the country's consumers buy.
Answer: B
Diff: 2
66. Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major
currency, rather than choosing a floating exchange rate?
A. Pegging allows the country more flexibility in conducting monetary policy.
B. Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with
significant levels of imports.
C. Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of
the currency.
D. Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business
planning.
Answer: A
Diff: 2

67. You are made better off in which of the following situations?
A. you borrow 10,000 pesos, you earn income in dollars, the dollar depreciates against the peso, you must
pay back the loan in pesos
B. you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay
back the loan in dollars
C. you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay
back the loan in dollars
D. you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must
pay back the loan in pesos
Answer: B
Diff: 2

68. If a country's currency is "pegged" to the dollar, its exchange rate is

A. floating.
B. flexible.
C. fixed.
D. undervalued.
Answer: C
Diff: 1

69. A currency pegged at a value below the market equilibrium exchange rate is
A. overvalued.
B. undervalued.
C. achieving purchasing power parity.
D. None of the above are correct.
Answer: B
Diff: 2

Figure 18-3
70. Refer to Figure 18-3. At what level should the Thai government peg its currency to the dollar to make Thai
exports cheaper to the United States?
A. greater than $.03/baht
B. less than $.03/baht
C. equal to $.03/baht
D. $1/baht
Answer: B
Diff: 2

71. Refer to Figure 18-3. Which of the following is not true?

A. U.S imports are cheaper at exchange rates greater than $.03/baht than at the equilibrium exchange rate.
B. The baht is overvalued at exchange rates greater than $.03/baht.
C. To achieve an exchange rate greater than $.03/baht, the Bank of Thailand must buy surplus dollars with
bahts.
D. Thai exports to the United States are more expensive at exchange rates greater than $.03/baht than at the
equilibrium exchange rate.
Answer: C
Diff: 2

72. Refer to Figure 18-3. If the Thai government pegs its currency to the dollar at a value above $.03/baht, we
would say the currency is
A. undervalued.
B. overvalued.
C. parity valued.
D. equilibrium valued.
Answer: B
Diff: 2

Figure 18-4
73. Refer to Figure 18-4. The equilibrium exchange rate is at A, $3/pound. Suppose the British government pegs
its currency at $4/pound. At the pegged exchange rate,
A. there is a shortage of pounds equal to 600 million.
B. there is a surplus of pounds equal to 400 million.
C. there is a shortage of pounds equal to 400 million.
D. there is a surplus of pounds equal to 600 million.
E. there is a shortage of pounds equal to 200 million.
Answer: B
Diff: 2

74. Refer to Figure 18-4. The equilibrium exchange rate is at A, $3/pound. Suppose the British government pegs its
currency at $4/pound. Speculators expect that the value of the pound will drop and this shifts the demand
curve for pounds to D2. After the shift,
A. there is a shortage of pounds equal to 600 million.
B. there is a surplus of pounds equal to 400 million.
C. there is a shortage of pounds equal to 400 million.
D. there is a surplus of pounds equal to 600 million.
E. there is a shortage of pounds equal to 200 million.
Answer: D
Diff: 2

75. Refer to Figure 18-4. The equilibrium exchange rate is originally at A, $3/pound. Suppose the British
government pegs its currency at $4/pound. Speculators expect that the value of the pound will drop and this
shifts the demand curve for pounds to D2. If the government abandons the peg, the equilibrium exchange rate
would be
A. $4/pound.
B. $3/pound.
C. $2/pound.
D. less than $2/pound.
Answer: C
Diff: 2

Figure 18-5

76. Refer to Figure 18-5. The Chinese government pegs the yuan to the dollar, at one of the specified exchange
rates on the graph, such that it undervalues its currency. Using the figure above, this would generate a
 A. a shortage of yuan equal to 400 million.
B. a shortage of yuan equal to 200 million.
C. a surplus of yuan equal to 200 million.
D. a surplus of yuan equal to 400 million.
E. a surplus of yuan equal to 300 million.
Answer: A
Diff: 2

77. Refer to Figure 18-5. Suppose the Chinese government decides to abandon pegging the yuan to the dollar at a
rate which undervalues the yuan. Using the figure above, the equilibrium exchange rate would be ________
and Chinese exports to the United States would ________ in price.
A. $0.11/yuan; decrease
B. $0.11/yuan; increase
C. $0.14/yuan; increase
D. $0.13/yuan; increase
E. $0.13/yuan; decrease
Answer: D
Diff: 3

78. Refer to Figure 18-5. Suppose the pegged exchange rate is $0.11/yuan. Because of safety concerns and
numerous product recalls, U.S. consumers lower their demand for Chinese products. Using the figure above,
this would
A. increase the surplus of Chinese yuan.
B. decrease the surplus of Chinese yuan.
C. decrease the shortage of Chinese yuan.
D. increase the shortage of Chinese yuan.
Answer: C
Diff: 3

79. If a country sets a pegged exchange rate that is above the equilibrium exchange rate, how can the country
maintain the peg?
A. by purchasing surplus domestic currency at the pegged rate
B. by selling surplus domestic currency at the pegged rate
C. by purchasing surplus domestic currency at the equilibrium exchange rate
D. by increasing the pegged exchange rate
Answer: A
Diff: 2

80. During the Chinese experience with pegging the yuan to the dollar, the yuan was undervalued. As a result,
A. there was a surplus of yuan on the market that the Chinese government had to purchase to maintain the
peg, depleting China's reserves of dollars.
B. there was a surplus of dollars on the market that the Chinese government had to purchase to maintain
the peg.
C. the prices of Chinese exports were higher than they would have been without the peg.
D. the equilibrium value of the yuan was below the pegged value of the yuan.
Answer: B
Diff: 2
81. When foreign investors in Thailand began to realize that Thailand could not maintain its peg to the dollar
indefinitely, they began to sell off their investments in Thailand and exchange the baht they received for
dollars. This reduction in investment by foreigners is termed
A. foreign direct investment.
B. capital flight.
C. capital inflow.
D. stabilizing capitalization.
Answer: B
Diff: 1

82. Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?
A. borrowing dollars from the International Monetary Fund in exchange for baht
B. buying baht on the foreign exchange market to support higher demand for the baht
C. increasing domestic interest rates to attract more foreign investors
D. foreigners selling off of new investments in Thailand
Answer: D
Diff: 2

83. Firms in Thailand that had borrowed dollars while the baht was pegged to the dollar faced interest payments
that were ________ than they had planned while the Thai government continued trying to defend the peg,
because the baht had been pegged ________ the equilibrium exchange rate for the baht.
A. higher; above
B. higher; below
C. lower; above
D. lower; below
Answer: A
Diff: 2

84. Destabilizing speculation refers to

A. actions taken by the International Monetary Fund that increase lending to countries who have pegged
their currencies against the dollar.
B. actions taken by currency traders to sell a currency that is undervalued.
C. actions taken by investors who sell a country's currency in anticipation of buying it back later at a lower
price.
D. any depreciation of a country's currency as a result of long-run adjustments to purchasing power parity.
Answer: C
Diff: 2

85. As foreign investors began to sell off investments they had made in Thailand, they traded in their baht for
dollars. The result of this was
A. pressure for the value of the baht to decline.
B. pressure for the value of the baht to rise.
C. an increase in the equilibrium value of the baht.
D. a decrease in the supply of the baht in foreign exchange markets.
Answer: A
Diff: 2

86. China began pegging its currency, the yuan, to the dollar in 1994. Because the yuan has been ________ at the
pegged rate, the Chinese government ________ its reserves of dollars as the government purchased more ________ to
exchange maintain the pegged exchange rate.
A. undervalued; increased; dollars
B. undervalued; decreased; yuan
C. overvalued; decreased; yuan
D. overvalued; increased; yuan
Answer: A
Diff: 3

87. Although the pegged exchange rate between the yuan and the dollar has undervalued the yuan, China has
been reluctant to abandon the peg for fear that abandoning the peg would
A. increase exports and increase the current account deficit.
B. reduce capital inflows.
C. reduce exports and reduce economic growth.
D. increase Chinese holdings of dollars.
Answer: C
Diff: 2

88. South Korea suffered a destabilizing speculation in the late 1990s. This had the effect of ________ for the won.
South Korean government tried to counteract this by raising interest rates which should have ________ the
won.
A. decreasing demand; increased demand for
B. decreasing the supply; increased supply of
C. increasing demand; decreased demand for
D. decreasing the supply; increased demand for
Answer: A
Diff: 2

89. Under pressure from Japan, the United States and Europe, China announced it switched from pegging the
yuan against the dollar to linking the value of the yuan to a 'basket' of currencies. The result of this change
was
A. the value of the yuan increased slightly relative to the dollar.
B. the value of the yuan has become very responsive to changes in demand and supply in the foreign
currency market.
C. the value of the yuan has increased dramatically and is beginning to remove the trade imbalance
between the United States and China.
D. the value of the yuan has decreased dramatically and has further spurred Chinese exports.
Answer: A
Diff: 2

90. South Korea recovered from the exchange rate crisis much more quickly than Thailand and Indonesia. Which
of the following is not a reason why South Korea recovered quickly?
A. The Korean banking system recovered quickly and was able to loan money for investment.
B. South Korea was able to borrow billions from the IMF and this stabilized the won.
C. South Korean firms were able to obtain funds for investment by issuing stocks and bonds.
D. South Korean wages fell, offsetting large corporate losses.
Answer: A
Diff: 1
91. Thailand's experience with pegging the baht to the dollar failed because the baht was ________ relative to the
dollar, and China's experience with pegging the yuan to the dollar has run into difficulties because the yuan
has been ________ relative to the dollar.
A. overvalued; overvalued
B. undervalued; overvalued
C. undervalued; undervalued
D. overvalued; undervalued
Answer: D
Diff: 2

92. How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to
the dollar?
A. Because the yuan was undervalued at the pegged exchange rate, the level of Chinese exports remained
higher than they would have been if the exchange rate was allowed to float freely.
B. Because the yuan was overvalued at the pegged exchange rate, competing firms from other countries
feared that abandoning the peg would lead to an increase in Chinese exports.
C. Competitors feared that the declining value of the dollar would continue to make Chinese goods more
expensive.
D. Because China's population is so large relative to other countries, the pegged exchange rate made the
goods of foreign competing firms much less expensive than domestic Chinese goods.
Answer: A
Diff: 2

93. An easy way to determine if a currency is undervalued at a point in time is to use the model of purchasing
power parity.
Answer: True False
Diff: 2

94. One reason purchasing power parity does not exactly hold is that many goods are not traded internationally.
Answer: True False
Diff: 2

95. If purchasing power parity tells us that if the exchange rate is a pound for a dollar, then price of a haircut in
London should cost the same as a haircut in New York.
Answer: True False
Diff: 3

96. A depreciation of a country's currency always lowers the domestic firm's profits.
Answer: True False
Diff: 2

97. Both countries involved in a pegging of currency must agree to the terms of the pegging.
Answer: True False
Diff: 2
 98. The fact that the prices for McDonald's Big Mac sandwich are not the same around the world illustrates one
reason why purchasing power does not hold: Many goods are not traded internationally.
Answer: True False
Diff: 2

99. What three real-world complications keep purchasing power parity from being a complete explanation of
exchange rate fluctuations in the long run? Explain.
Answer: First, not all products are traded internationally. As a result, there is no way to take advantage of profit
opportunities to buy in one country and sell in another country, so exchange rates will not reflect
exactly the relative purchasing powers of currencies. Secondly, products and consumer preferences for
products vary across countries. As a result, consumers in one country might be willing to pay different
prices for products than consumers in another country, and exchange rates might not adjust for that
difference in the long run. Finally, countries sometimes impose barriers to trade. If there are barriers to
trade, it may not be possible to take advantage of profit opportunities to buy in one country and sell in
another country, so, again, exchange rates will not reflect exactly the relative purchasing powers of
currencies.
Diff: 2

100. The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory. In July 2009,
The Economist reported that the average price of a Big Mac in the United States was $3.57. In Mexico, the
average price of a Big Mac at that time was 33 pesos. If the exchange rate between the dollar and the peso was
13.80 pesos per dollar, how would purchasing power parity predict the exchange rate will change in the long
run? Support your answer graphically.
Answer: The dollar in this example is "overvalued" while the peso is "undervalued". The relative price ratio of
33 pesos per Big Mac to $3.57 per Big Mac (9.24 pesos per dollar) is less than the current exchange rate
of 13.80 pesos per dollar. In other words, the dollar cost of a Big Mac in Mexico is only $2.39 (33/13.80).
This implies that the supply of dollars will rise as more Americans trade their dollars in for pesos to
buy Big Macs in Mexico. This increase in the supply of dollars (as shown below) will reduce the
exchange rate (lower the value of the dollar), as shown below. (Similarly, the demand for the peso is
rising, indicating an increase in the value of the peso.) Adjustments will continue until the exchange
rate is equal to 9.24 pesos per dollar.

Diff: 3

101. The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory. In July
2009, The Economist reported that the average price of a Big Mac in the United States was $3.57. In Mexico,
the average price of a Big Mac at that time was 33 pesos. If the exchange rate between the dollar and the peso
was 13.80 pesos per dollar, explain how it would be profitable to buy Big Macs in Mexico instead of in the
United States.
Answer: If a Big Mac costs $3.57 in the United States, an American could trade in that $3.57 for 49.23 pesos ($3.57
x 13.80 Mexico. Those 1.49 Big Macs could then be sold in the United States for $3.57 each, generating 1.49 Big
pesos/dollar) and Macs × $3.57 per Big Mac = $5.32. This implies that an American could profit by trading in dollars for
buy 49.23/33 = 1.49 pesos, buying Big Macs in Mexico, and reselling those Big Macs in the United States.
Big Macs in
Diff: 2

102. What do reports that the dollar is "overvalued" mean? How will foreign exchange markets respond to this
information? Support your answer graphically.
Answer: If the dollar is "overvalued", that means that the current exchange rate (foreign currency per dollar) is
greater than the relative purchasing power of the dollar. This implies that currency traders will reduce
their holdings of dollars (the supply curve for dollars will shift to the right) and increase their holdings
of other currencies against which the dollar is "overvalued". As the supply of dollars increases, the
exchange rate will fall. The exchange rate will continue to fall until the dollar's value accurately reflects
its relative purchasing power.

Diff: 2

103. Will the use of the euro help increase economic growth in countries in the European Union? WIll it help
individual countries using the euro in times of recession? Explain.
Answer: While a common currency makes it easier for buyers and sellers to exchange goods and services across
borders, a fixed exchange rate across countries in the European Union prohibits those countries from
conducting independent monetary policies. If one country experiences recession, for example, fixed
exchange rates will keep that country's currency value from falling, thereby exacerbating the recession.
As a result, whether the euro will help to expand opportunities for economic growth will depend on
which of these two effects is more significant.
Diff: 2

104. South Korea, Indonesia, Malaysia, and Thailand all pegged their currencies to the dollar at one point in time.
Because some of these currencies were overvalued at the pegged rate, speculators anticipated these countries
would abandon the peg and speculators began selling those currencies. Explain how this speculation would
affect the ability of a country to maintain a pegged exchange rate.
Answer: As speculators began selling currencies that were pegged to the dollar, this increased the supply of
those currencies and increased the demand for the dollar. The result was downward pressure on the
prices of currencies pegged to the dollar. However, because these currencies were pegged, the central
banks of these countries had to purchase the surplus currency being sold in the foreign exchange
markets. To continue purchasing the surplus currency, these countries needed foreign currency
(mostly dollars). As reserves of dollars began to fall, it became more difficult for these countries to
maintain the peg.
Diff: 2
105. In 1991, Argentina decided to peg its currency (the Argentinean peso) to the U.S. dollar. Most of Argentina's
trading, however, was with Brazil and Europe, not the United States. What result would pegging the
Argentinean peso to the U.S. dollar have on the cost of imports from and exports to Brazil and Europe?
Answer: If Argentina pegs its currency to the dollar, the prices of the goods it purchases and the prices of the
goods it sells to foreign countries will be determined by the value of the dollar. If the value of the dollar
is rising relative to the euro and the Brazilian real, then Argentinean goods are also rising in price. The
result will be a decrease in Argentinean exports to foreign countries (and an increasing current account
deficit, as Argentina discovered).
Diff: 2

106. In 1991, Argentina decided to peg its currency (the Argentinean peso) to the U.S. dollar. To maintain the peg,
Argentina had to purchase surplus pesos on the foreign exchange market, depleting its reserves of dollars to
such an extent that it eventually had to abandon the peg. Show graphically what this implies about the peg
relative to the equilibrium exchange rate in the market for the Argentinean peso.
Answer: If Argentina had to purchase surplus pesos on the foreign exchange market, that implies that the
pegged exchange rate was above the market equilibrium exchange rate, as shown below.

Diff: 2

107. Why might a country raise interest rates in the face of an exchange rate crisis?
Answer: If the value of a country's currency is depreciating rapidly, the country's government can purchase the
country's currency in foreign exchange markets in an attempt to boost the value of the currency.
However, continuing to purchase currency requires reserves of other currencies (like the dollar), and
those reserves are not inexhaustible. The result is that a country has to rely on other sources of increase
in value for the currency. By raising interest rates, the country makes investment more attractive to
foreigners, increasing the demand for currency, and increasing the equilibrium exchange rate.
Diff: 2

108. Why might a developing country choose to peg the value of its currency to the dollar?
Answer: The dollar is a relatively stable currency, so by pegging the value of a country's currency to the dollar,
the country provides reassurance that debts will be paid in a currency whose value doesn't fluctuate
dramatically. This reduces the risk foreigners face in collecting returns on investments in that country.
In addition, if imports are a significant fraction of the goods consumers buy, a decrease in the value of
the country's currency can result in higher inflation. By pegging the country's currency, these
fluctuations in the exchange rate don't occur, so inflation may be lower.
Diff: 2

109. In 2008, foreign purchases of U.S. corporate stocks and bonds

 A. doubled.
B. fell.
C. grew at a faster pace than foreign investment in U.S. government bonds.
D. grew at a faster pace than foreign investment in U.S. corporate bonds.
Answer: B
Diff: 1

110. Shares of stock and long-term debt, including corporate and government bonds and bank loans, are bought
and sold on
A. the stock market.
B. capital markets.
C. foreign exchange markets.
D. commodity markets.
Answer: B
Diff: 1

111. What two countries each accounted for more than 25% of all foreign purchases of U.S. stocks and bonds in
2008?
A. Japan and Mexico
B. China and the United Kingdom
C. Japan and India
D. Mexico and Canada
Answer: B
Diff: 1

112. If interest rates in the United States rise,

A. the value of the dollar will fall as foreign investors sell their U.S. investments.
B. the value of the dollar will rise as the foreign investors increase their holdings of U.S. investments.
C. the value of the dollar will fall as foreign investors increase their holdings of U.S. investments.
D. the value of the dollar will rise as foreign investors sell their U.S. investments.
Answer: B
Diff: 2

113. The three most important international financial centers today are
A. New York, Los Angeles, and London.
B. London, Tokyo, and Beijing.
C. San Francisco, Paris, and Mexico City.
D. Tokyo, London, and New York.
Answer: D
Diff: 1

114. If the U.S. government places tariffs on imports from countries that have been accused of deliberately
undervaluing their currencies, the price of these imports will ________ and the demand for the undervalued
currency will ________.
A. rise; rise
B. rise; fall
C. fall; rise
D. fall; fall
 Answer: B
Diff: 2

115. China has been accused of deliberately undervaluing its currency, the yuan, in order to
A. increase its exports.
B. increase its imports.
C. prevent deflation.
D. maintain purchasing power parity.
Answer: A
Diff: 2

116. Among countries that purchased U.S. stocks and bonds in 2008, China was the biggest customer, accounting
for over 50 percent of all purchases.
Answer: True False
Diff: 1

117. Foreign portfolio investment in the United States has continually declined since 1995.
Answer: True False
Diff: 1

118. Before 1980, U.S. investors rarely invested in foreign capital markets.
Answer: True False
Diff: 1

119. Explain why international capital markets have expanded since the 1980s.
Answer: Many governments have removed restrictions on foreign investments in financial markets since the
1980s, advances in communications and computer technology have made financial exchanges simpler
and allowed investors access to information for making investment decisions, and worldwide
economic growth has increased the level of saving available for investment.
Diff: 2

120. Why are foreign investors more likely to invest in U.S. government bonds than in U.S. corporate stocks and
bonds?
Answer: Foreign investors are more likely to buy government bonds than corporate bonds or stocks because it is
widely believed that U.S. government securities are largely free from default risk. That is, most
investors believe it is unlikely that the U.S. government will fail to make the interest payments due on
the bonds. In addition, some foreign investors may consider it less likely to cause political problems if
they buy securities issued by the U.S. government rather than securities issued by U.S. corporations.
Diff: 2

121. Suppose Mexico and the United States are on the gold standard. If there is a half an ounce of gold in the
dollar, and one quarter an ounce of gold in the peso, then the exchange rate is
A. $1 = 2 pesos.
B. $1 = 4 pesos.
C. $1 = 1/2 peso.
D. $1 = 1/4 peso.
 E. $0.50 = 1/2 peso.
Answer: A
Diff: 2

122. Suppose the United States decides to go back on the gold standard. This should
A. decrease the Federal Reserve's ability to pursue active monetary policy.
B. increase the effectiveness of contractionary monetary policy.
C. increase the effectiveness of expansionary monetary policy.
D. improve the Federal Reserve's ability to target inflation.
Answer: A
Diff: 2

123. Countries that abandoned the gold standard early in the Great Depression suffered an average decline in
production of 3 percent between 1929 and 1934. Countries that stayed on the gold standard until 1933 or later
suffered an average decline in production of
A. 12 percent.
B. 18 percent.
C. 24 percent.
D. 30 percent.
Answer: D
Diff: 1

124. A decrease in a fixed exchange rate from $1.75 per pound to $1.60 per pound is called a ________ of the
pound.
A. devaluation
B. depreciation
C. appreciation
D. revaluation
Answer: A
Diff: 1

125. A persistent surplus of pounds at a given fixed exchange rate (in dollars per pound) is evidence that the
pound is ________ versus the dollar. This surplus can be reduced or eliminated through a ________ of the
pound.
A. undervalued; devaluation
B. undervalued; revaluation
C. overvalued; revaluation
D. overvalued; devaluation
Answer: D
Diff: 2

126. In order to support an undervalued euro, the European Central Bank must ________ dollars. Over time, this
action will cause the rate of inflation in the EU to ________.
A. buy; decrease
B. buy; increase
C. sell; increase
D. sell; decrease
Answer: B
 Diff: 3

127. The Bretton Woods system confronted severe problems in the 1960s, problems which included
A. some countries with overvalued currencies refused to devalue their currencies.
B. dollars held by foreign central banks exceeded gold reserves held by the United States.
C. the increased demand for gold brought about by lifting the prohibition against U.S. citizens owning
gold.
D. all of the above
Answer: B
Diff: 2

Figure 18-7

128. Refer to Figure 18-7. Under the Bretton Woods System of exchange rates, if the par exchange rate was $4 per
pound in the figure above, then which of the following is true?
A. The Bank of England would have to buy 0.7 million pounds per day with dollars.
B. There is a shortage of pounds equal to 0.7 million.
C. The Bank of England would have to sell 0.7 million pounds per day in exchange for dollars.
D. The par exchange rate is below the equilibrium rate, causing a shortage of domestic currency.
Answer: A
Diff: 2

129. Refer to Figure 18-7. Under the Bretton Woods System of exchange rates, if the par exchange rate was $2 per
pound in the figure above, and equilibrium persisted at $3, then this was evidence of ________ and the IMF
would allow a ________ in the exchange rate?
A. fundamental disequilibrium; revaluation
B. fundamental disequilibrium; devaluation
C. fundamental overvaluation; devaluation
D. fundamental overvaluation; revaluation
Answer: A
Diff: 2

130. Refer to Figure 18-7. Under the Bretton Woods System of exchange rates, if the par exchange rate was $2 per
pound in the figure above, and equilibrium persisted at $3, then a revaluation of the currency would have
A. increased the price of British exports to the United States.
B. increased the price of imports to Britain.
C. led to a current account surplus.
D. led to a balance of trade surplus.
 Answer: A
Diff: 3

Figure 18-8

131. Refer to Figure 18-8. The graph above depicts supply and demand for British pounds during a trading day,
where the quantity is millions of pounds. In order to support a fixed exchange rate of $2.00 per pound, the
U.S. central bank must
A. buy 0.6 million pounds per trading day.
B. sell 0.6 million pounds per trading day.
C. buy 1.2 million pounds per trading day.
D. sell 1.2 million pounds per trading day.
Answer: C
Diff: 2

132. Refer to Figure 18-8. The graph above depicts supply and demand for British pounds during a trading day.
At a fixed exchange rate of $2.00 per pound, the pound is ________ versus the dollar. A ________ of the
pound would correct the fundamental disequilibrium that exists in this market.
A. undervalued; devaluation
B. undervalued; revaluation
C. overvalued; revaluation
D. overvalued; devaluation
Answer: D
Diff: 3

133. The International Monetary Fund was created to facilitate the borrowing and lending of dollar reserves to
central banks of the countries' participating in the Bretton Wood System.
Answer: True False
Diff: 1

134. Under the Bretton Woods system, the World Trade Organization (WTO) provided foreign currency loans to
central banks and approved adjustments to the agreed upon fixed exchange rates.
Answer: True False
Diff: 1

135. In order to reduce or eliminate a chronic shortage in the market for a currency under a fixed exchange rate
system, we must devalue the currency.
Answer: True False
Diff: 2

136. If speculators believe a currency is soon going to be revalued, they will increase their demand for that
currency.
Answer: True False
Diff: 2

137. The German central bank, the Bundesbank, faced the risk of increased inflation caused by its actions to
support an overvalued deutsche mark in the 1960s.
Answer: True False
Diff: 1

138. What is the difference between a devaluation and a revaluation of a currency?

Answer: A devaluation is a reduction in a fixed exchange rate and a revaluation is an increase in a fixed
exchange rate.
Diff: 1

139. What is destabilizing speculation? What role did it play in the collapse of the Bretton Woods system?
Answer: Destabilizing speculation refers to actions by investors that make it more difficult to maintain a fixed
exchange rate. Destabilizing speculation in 1971 against the German mark led to the collapse of the
Bretton Woods System. Investors became convinced in early 1971 that Germany would have to allow a
revaluation of the mark against the dollar. Investors increased their demand for marks, which
increased the shortage of marks. The West German government finally opted out of the fixed
exchange-rate system and allowed the mark to float against the dollar.
Diff: 1