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Although the pegged exchange rate between the yuan and the dollar has undervalued the yuan,

Question : Although the pegged exchange rate between the yuan and the dollar has undervalued the yuan, : 2158621

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

61) 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) reduce capital inflows.

B) increase Chinese holdings of dollars.

C) reduce exports and reduce economic growth.

D) increase exports and increase the current account deficit.

62) 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) decreasing the supply; increased demand for

D) increasing demand; decreased demand for

63) Under pressure from Japan, the U.S. 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 has increased dramatically and is beginning to remove the trade imbalance between the U.S. and China.

B) the value of the yuan increased slightly relative to the dollar.

C) the value of the yuan has decreased dramatically and has further spurred Chinese exports.

D) the value of the yuan has become very responsive to changes in demand and supply in the foreign currency market.

64) 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) South Korean wages fell, offsetting large corporate losses.

B) The Korean banking system recovered quickly and was able to loan money for investment.

C) South Korean firms were able to obtain funds for investment by issuing stocks and bonds.

D) South Korea was able to borrow billions from the IMF and this stabilized the won.

Figure 30-6

65) Refer to Figure 30-6. The flow of capital out of the U.S. would have what impact on the foreign exchange market (Assume all else remains constant.)? A movement from

A) B to A.

B) A to B.

C) C to B.

D) D to A.

E) B to C.

66) Refer to Figure 30-6. If the Fed raises interest rates to combat inflation, what impact will this have on the foreign exchange market? (Assume all else remains constant.) A movement from

A) B to A.

B) D to A.

C) B to C.

D) C to B.

E) A to B.

67) 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; undervalued

B) undervalued; undervalued

C) overvalued; overvalued

D) undervalued; overvalued

68) If the Fed wanted to increase the value of the dollar, it would

A) increase interest rates.

B) increase the money supply.

C) reduce interest rates.

D) reduce the required reserve ratio.

69) How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar?

A) Competitors feared that the declining value of the dollar would continue to make Chinese goods more expensive.

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) 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.

D) 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 were allowed to float freely.

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

70) An easy way to determine if a currency is undervalued at a point in time is to use the model of purchasing power parity.

71) One reason purchasing power parity does not exactly hold is that many goods are not traded internationally.

72) 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.

73) A depreciation of a country's currency always lowers the domestic firm's profits.

74) Both countries involved in a pegging of currency must agree to the terms of the pegging.

75) 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 exactly constant: Many goods are not traded internationally.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

76) Why would a strong euro present a problem for some firms in the EU, and how might European firms deal with this problem?

77) What three real-world complications keep purchasing power parity from being a complete explanation of exchange rate fluctuations in the long run? Explain.

78) The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory. In December 2004, The Economist reported that the average price of a Big Mac in the U.S. was $3.00. In Mexico, the average price of a Big Mac at that time was 24 pesos. If the exchange rate between the dollar and the peso was 10.56 pesos per dollar, how would purchasing power parity predict the exchange rate will change in the long run? Support your answer graphically.

79) The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory. In December 2004, The Economist reported that the average price of a Big Mac in the U.S. was $3.00. In Mexico, the average price of a Big Mac at that time was 24 pesos. If the exchange rate between the dollar and the peso was 10.56 pesos per dollar, explain how it would be profitable to buy Big Macs in Mexico instead of in the U.S.

80) Why is it that fluctuations in the Canadian dollar between 1991 and 2001 led the Canadian owners of the Montreal Canadiens hockey team to sell the team while the Canadian owners of the Toronto Blue Jays found that between 2001 and 2005, their financial situation improved as a result of exchange rate fluctuations?

81) What do reports that the dollar is "overvalued" mean? How will foreign exchange markets respond to this information? Support your answer graphically.

82) Will the creation of the euro help increase economic growth in countries in the European Union? Explain.

83) 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.

84) 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 U.S. 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?

85) 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.

86) How does a falling value of the dollar affect inflation and interest rates?

87) Why might a country raise interest rates in the face of an exchange rate crisis?

88) Why might a developing country choose to peg the value of its currency to the dollar?

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