CB2402 Macroeconomics

Self-study Exercise - Week 12

Chapter 30 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.

2) 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.

3) 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.
4) When the value of a currency is determined ________, the exchange rate system is
defined as managed float.
A) only by supply and demand
B) by its issuing government
C) mostly by supply and demand, but with occasional government intervention
D) by its issuing government, with occasional readjustments in value

5) 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

6) 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.

7) 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.
Figure 30-2

8) Refer to Figure 30-2. 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) The Chinese increase their preferences for goods produced in the United States.

9) 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 to Self-study Exercise – Week 12

MCQ Answer

1 C

2 B

3 D

4 C

5 C

6 A

7 D

8 D

9 D