1. Chapter 33: Exchange Rates and the Balance of Payments

2. The balance of payments is
the value of goods and services bought and sold in the world market.
a summary record of a country's economic transactions with foreign residents and governments.
a summary record of a country's purchases and sales of goods and services in the world market.
the value of merchandise goods bought and sold in the world market.
Answer: B

3. the difference between exports and imports of goods and services.
The balance of trade is
the difference between exports and imports of goods and services.
the difference between exports and imports of services.
the summary record of a country's economic transactions with foreigners in a year.
none of the above.
Answer: D

4. in the foreign exchange market. at the Federal Reserve.
Exchanging dollars for euros to pay a computer manufacturer in Belgium would occur
in the foreign exchange market.
at the Federal Reserve.
at the European Central Bank.
in the letter of credit market.
Answer: A

5. If the foreign exchange rate for 1 Hungarian forint is 0.5 cent, then
a dinner priced at 400 forints will cost $20.
a wine that sells for 600 forints will cost $3,000.
a Big Mac hamburger priced at 50 forints will cost $1.
a hotel room renting for 40,000 forints will cost $200.
Answer: D

6. exchange rates were essentially fixed.
Under the gold standard, because all currencies had values fixed in units of gold,
exchange rates were essentially fixed.
exchange rates were essentially floating.
exchange rates were set to a crawling peg.
None of the above is true.
Answer: A

7. The International Monetary Fund was created
in 1945 by the Bretton Woods Agreement.
to collect money from member countries that were running balance of payments deficits.
in 1971 when President Richard Nixon signed the Bretton Woods Agreement.
in the aftermath of World War II to help nations move off of the gold standard.
Answer: A

8. The gold standard is a type of
fixed exchange rate system.
flexible exchange rate system.
floating exchange rate system.
managed exchange rate system.
Answer: A

9. it involved too much government intervention in the economy.
A problem with the operation of the gold standard in the world economy was that
it involved too much government intervention in the economy.
the world economy was subject to too much inflation.
a country did not have control of its domestic monetary policy.
it caused the Great Depression.
Answer: C

10. changes in interest rates. negotiations among central banks.
The international financial market moved towards equilibrium under the gold standard due to
shifts in exchange rates caused by changes in supply and demand for foreign exchange.
changes in interest rates.
negotiations among central banks.
flows of gold among countries.
Answer: D

11. A key objective of the gold standard was to
create a flexible exchange rate system between countries.
create a fixed exchange rate system between countries.
allow nations to maintain their gold reserves.
allow nations to tax its citizens in gold.
Answer: B

12. Which agreement was signed in 1944 with the purpose of creating a new international payment system?
Philadelphia Accord
Bretton Woods
Camp David
Lake Geneva
Answer: B

13. One problem associated with the gold standard was that
nations gave up control of their money supply.
there was an incentive for individuals to hold gold at all interest rates.
there was no fluctuation in exchange rates.
nations could not determine their current account balances.
Answer: A

14. buy foreign currency in exchange for the domestic currency.
Suppose a central bank tries to keep exchange rates fixed. When there is an increase in the demand for foreign goods, the central bank will most likely
buy foreign currency in exchange for the domestic currency.
do nothing.
sell the domestic currency in exchange for foreign reserves.
use foreign reserves to buy the domestic currency.
Answer: D

15. buy U.S. dollars in the foreign exchange market.
To prevent the dollar from depreciating, the U.S. central bank that tries to fix the currency value of the dollar can
buy U.S. dollars in the foreign exchange market.
sell U.S. dollars in the foreign exchange market.
abandon the U.S. dollar and use another country's currency as its legal currency.
buy foreign currencies in the foreign exchange market.
Answer: A

16. In a fixed exchange rate system,
market forces and the country's stock of gold determine its exchange rate.
a central bank affects the value of a currency by changing its foreign exchange reserves.
market forces play a role in determining the fixed value of a currency.
the International Monetary Fund determines exchange rates.
Answer: B

17. A nation's foreign exchange reserves consist mainly of
excess reserves held by its banks.
government securities of that nation.
the legal currency of that nation.
currencies of other nations.
Answer: D

18. If a country wants to keep the value of its currency fixed, then its central bank should
sell domestic goods when there is an increase in the supply of its domestic currency.
buy domestic goods when there is an increase in the supply of its domestic currency.
sell its domestic currency when there is an increase in the supply of that currency.
buy its domestic currency when there is an increase in the supply of that currency.
Answer: D

19. If a country wants to keep its exchange rate fixed, it must
allow its currency value to vary with market supply and demand in foreign exchange markets.
be a member of the IMF.
vary the amount of its national currency supplied at any given exchange rate in foreign exchange markets when necessary.
eliminate its foreign exchange reserves.
Answer: C

20. Foreign exchange risk is
a financial strategy that reduces the change of suffering losses arising from foreign exchange risk.
an exchange rate arrangement in which a country pegs the value of its currency to the exchange value.
the possibility that changes in the value of a nation's currency will result in variations in the market value of assets.
active management of a floating exchange rate on the part of a country's government.
Answer: C

21. A hedge is
a financial strategy that reduces the change of suffering losses arising from foreign exchange risk.
an exchange rate arrangement in which a country pegs the value of its currency to the exchange value.
the possibility that changes in the value of a nation's currency will result in variations in the market value of assets.
active management of a floating exchange rate on the part of a country's government.
Answer: A