Fixed Exchange Rate: Understanding Currency Stability

Question 1

Which of the following is **not** an advantage of a fixed exchange rate?

Accepted Answer

Promotes sustained economic growth

Answer

Facilitates international trade

Answer

Provides a stable exchange rate environment

Answer

Reduces exchange rate risk

Question 2

A characteristic of a fixed exchange rate system is that the country's central bank has:

Accepted Answer

Limited monetary policy independence

Answer

Autonomous exchange rate movements

Answer

Complete control over exchange rates

Answer

Unlimited fiscal policy independence

Question 3

Which of the following is a potential consequence of maintaining a fixed exchange rate in the face of an external shock?

Accepted Answer

Currency crisis

Answer

Export-led growth

Answer

Stable inflation

Answer

Sustained economic growth

Question 4

The primary mechanism used by central banks to maintain a fixed exchange rate is:

Accepted Answer

Intervention in the foreign exchange market

Answer

Adjustments to interest rates

Answer

Fiscal policy measures

Answer

Currency devaluation

Question 5

In a fixed exchange rate system, a group of currencies pegged to a single currency is known as a:

Accepted Answer

Currency basket

Answer

Managed float

Answer

Currency peg

Answer

Floating exchange rate

Question 6

One of the main criticisms of fixed exchange rate systems is that they:

Accepted Answer

Can lead to disequilibrium in the balance of payments

Answer

Always promote economic stability

Answer

Are easy to maintain in the long run

Question 7

The primary reason a country might abandon a fixed exchange rate system is to:

Accepted Answer

Regain monetary policy independence

Answer

Promote economic growth

Answer

Reduce inflation

Answer

Increase exports

Question 8

The Bretton Woods system was an example of a:

Accepted Answer

Fixed exchange rate system

Answer

Managed floating exchange rate system

Answer

Floating exchange rate system

Question 9

Which of the following countries currently operates a fixed exchange rate system?

Accepted Answer

Hong Kong

Answer

United Kingdom

Answer

United States

Answer

Japan

Question 10

What is the primary purpose of a currency board?

Accepted Answer

To maintain a fixed exchange rate with another currency

Answer

To control the money supply

Answer

To stabilize the value of a currency

Question 11

Which of the following is NOT a potential benefit of a floating exchange rate system?

Accepted Answer

Exchange rate stability

Answer

Reduced inflation

Answer

Automatic adjustment to economic shocks

Answer

Improved international competitiveness

Question 12

In a floating exchange rate system, the value of a currency is primarily driven by:

Accepted Answer

Market forces

Answer

International trade patterns

Answer

Fixed pegs

Answer

Government intervention

Question 13

Which of the following is a potential risk associated with a fixed exchange rate system?

Accepted Answer

Loss of monetary policy independence

Answer

Increased foreign investment

Answer

Lower export competitiveness

Answer

Stable economic growth

Question 14

What is the term for a situation where a country's currency is deliberately undervalued against other currencies?

Accepted Answer

Currency manipulation

Answer

Currency appreciation

Answer

Currency revaluation

Answer

Currency devaluation

Question 15

Which of the following is a necessary condition for a successful fixed exchange rate system?

Accepted Answer

Low levels of government borrowing, as high borrowing can put pressure on the exchange rate

Answer

Inadequate foreign exchange reserves, as these reserves are used to defend the exchange rate in times of pressure

Answer

Unstable economic growth, as economic fluctuations can make it difficult to maintain the fixed exchange rate

Answer

High inflation rates, as inflation can erode the value of the domestic currency and make it difficult to maintain the fixed exchange rate

Question 16

What is the term for a situation where the value of a currency is artificially held above its market equilibrium value?

Accepted Answer

Overvaluation

Answer

Devaluation

Answer

Revaluation

Answer

Undervaluation

Question 17

Which of the following is an example of a country that currently operates a fixed exchange rate regime?

Accepted Answer

Hong Kong

Answer

Canada

Answer

United States

Answer

Japan

Question 18

What is the key feature of a currency board?

Accepted Answer

It is a monetary system where the domestic currency is pegged to a foreign currency and backed by foreign reserves

Answer

It is a system where the exchange rate is allowed to float freely

Question 19

What is the difference between a crawling peg and a crawling band?

Accepted Answer

A crawling peg adjusts the exchange rate by a small amount at regular intervals, while a crawling band allows the exchange rate to fluctuate within a defined range

Answer

A crawling peg is a more flexible exchange rate mechanism than a crawling band

Question 20

How can a fixed exchange rate impact the demand for domestic goods and services?

Accepted Answer

It can lead to a decline in demand for domestic goods if the domestic currency is overvalued, making them more expensive in foreign markets

Answer

It always leads to an increase in demand for domestic goods, as consumers prefer to buy goods that are cheaper

Question 21

Which of the following is a potential benefit of a fixed exchange rate?

Accepted Answer

Enhanced stability for trade and investment

Answer

Higher interest rates

Answer

Reduced inflation in the short-term

Answer

Increased economic growth

Question 22

What is the primary objective of a crawling peg?

Accepted Answer

To gradually adjust the value of the currency in line with inflation differentials or other economic indicators

Answer

To allow the currency to fluctuate freely in the market

Answer

To maintain a strictly fixed exchange rate despite economic fluctuations

Question 23

What is the central bank's primary role in managing a fixed exchange rate?

Accepted Answer

To intervene in the currency market by buying or selling foreign currencies

Answer

To set interest rates to influence the demand for the currency

Answer

To impose capital controls to restrict the flow of foreign currency

Question 24

What is the fundamental difference between a fixed exchange rate and a floating exchange rate?

Accepted Answer

In a fixed exchange rate, the currency's value is pegged to another currency or a basket of currencies, while in a floating exchange rate, the value is determined by market forces

Answer

Fixed exchange rates require central bank intervention, while floating exchange rates do not

Question 25

Which of the following can be a consequence of maintaining a fixed exchange rate during an economic crisis?

Accepted Answer

Increased currency speculation and potential pressure leading to devaluation

Answer

Increased economic growth

Answer

Reduced foreign direct investment

Answer

Lower unemployment

Question 26

What is the term for the point at which a central bank decides to abandon a fixed exchange rate and allow the currency to float freely?

Accepted Answer

Currency devaluation

Answer

Currency revaluation

Answer

Currency appreciation

Answer

Currency depreciation

Question 27

Which of the following is a crucial factor to consider when evaluating the effectiveness of a fixed exchange rate regime?

Accepted Answer

The level of inflation in the economy relative to other countries

Answer

The political stability in neighboring countries

Answer

The strength of the global economy

Answer

The size of the country's trade surplus

Question 28

Which of the following is NOT a benefit of a fixed exchange rate system?

Accepted Answer

Increased uncertainty for businesses due to potential devaluation.

Answer

Lower transaction costs for international trade.

Answer

Reduced currency volatility.

Question 29

A country with a fixed exchange rate system is experiencing a large trade deficit. To maintain the fixed exchange rate, the central bank would likely:

Accepted Answer

Sell domestic currency and buy foreign currency.

Answer

Increase interest rates.

Answer

Increase government spending.

Answer

Lower taxes.

Question 30

A country maintains a fixed exchange rate against the US dollar. Under which of these scenarios would the central bank need to intervene in the foreign exchange market?

Accepted Answer

The domestic currency appreciates against the US dollar.

Answer

Interest rates in the US increase.

Answer

The country experiences a rise in inflation.

Question 31

Which of the following is a major disadvantage of a fixed exchange rate system for a small, open economy?

Accepted Answer

Loss of monetary policy independence.

Answer

Higher inflation.

Answer

Increased speculation in the foreign exchange market.

Question 32

A country decides to move from a fixed exchange rate system to a floating exchange rate. What is the most likely immediate outcome?

Accepted Answer

Increased exchange rate volatility.

Answer

Lower interest rates.

Answer

Reduced inflation.

Answer

Increased trade deficit.

Question 33

Which of the following best describes a currency board?

Accepted Answer

A fixed exchange rate system where the central bank's reserves are fully backed by foreign currency.

Answer

A system where the government directly controls the exchange rate.

Answer

A system where the exchange rate fluctuates freely.

Question 34

What is the key difference between a fixed exchange rate system and a managed float?

Accepted Answer

In a managed float, the central bank intervenes in the foreign exchange market to influence the exchange rate, while in a fixed system, the central bank maintains a fixed rate.

Answer

Managed floats are more volatile than fixed exchange rate systems.

Question 35

A country with a fixed exchange rate is experiencing high inflation. Which of the following policies is likely to be the LEAST effective in controlling inflation?

Accepted Answer

Lowering interest rates.

Answer

Tightening fiscal policy.

Answer

Devaluation of the currency.

Answer

Implementing price controls.

Question 36

Which of the following is NOT an advantage of a fixed exchange rate?

Accepted Answer

Economic volatility

Answer

Improved trade stability

Answer

Increased foreign investment

Answer

Reduced inflation

Question 37

Which of the following is a key disadvantage of a fixed exchange rate?

Accepted Answer

Loss of monetary policy independence

Answer

Boosted exports

Answer

Reduced uncertainty

Question 38

Under a fixed exchange rate system, the central bank:

Accepted Answer

Sets interest rates to maintain the value of currency

Answer

Freely adjusts exchange rates to manage inflation

Answer

Prints currency to stimulate economic growth

Question 39

Which of the following countries is known for its successful implementation of a fixed exchange rate?

Accepted Answer

Hong Kong

Answer

Australia

Answer

United States

Answer

Japan

Question 40

If a country's currency is overvalued in a fixed exchange rate system, what is the likely impact?

Accepted Answer

Trade deficit and capital outflow

Answer

Reduced economic growth

Answer

No significant impact

Answer

Trade surplus and capital inflow

Question 41

Which of the following is NOT a reason for a country to adopt a fixed exchange rate?

Accepted Answer

To boost tourism

Answer

To reduce currency volatility

Answer

To stabilize trade

Answer

To control inflation

Question 42

In a fixed exchange rate system, what is the primary tool used by the government to balance the balance of payments?

Accepted Answer

Fiscal policy

Answer

Monetary policy

Answer

Exchange rate intervention

Question 43

Which of the following is a characteristic of a currency board system?

Accepted Answer

No independent monetary policy

Answer

High level of foreign reserves

Answer

Flexible exchange rate

Answer

Controlled inflation

Question 44

What is a potential risk associated with maintaining a fixed exchange rate in the long run?

Accepted Answer

Loss of competitiveness and economic growth

Answer

Reduced foreign investment

Answer

Increased inflation

Answer

Destabilization of the currency

Question 45

Which of the following policy measures can help a country maintain a fixed exchange rate?

Accepted Answer

Capital controls

Answer

Quantitative easing

Answer

Free floating exchange rate

Answer

Devaluation