Exchange Rates: Understanding the Forces of Supply and Demand

Question 1

Which of the following is NOT a determinant of exchange rates, as studied in the unit on 'The Determination of Exchange Rates'?

Accepted Answer

The relative size of the economies

Answer

Interest rates

Answer

Inflation rates

Answer

Government policies

Question 2

An increase in the demand for a country's currency will lead to a(n):

Accepted Answer

Appreciation of the currency

Answer

Depreciation of the currency

Answer

No change in the exchange rate

Answer

Appreciation of other currencies

Question 3

Which of the following is a potential benefit of a floating exchange rate regime, as discussed in the unit?

Accepted Answer

It allows countries to adjust to external shocks

Answer

It reduces the risk of currency speculation

Answer

It ensures a stable exchange rate

Answer

It promotes economic growth

Question 4

According to the purchasing power parity theory, the exchange rate between two currencies should be equal to:

Accepted Answer

The ratio of the price levels of the two countries

Answer

The difference in the inflation rates of the two countries

Answer

The relative size of the two economies

Answer

The interest rate differential between the two countries

Question 5

The foreign exchange market is a:

Accepted Answer

Decentralized market where currencies are traded

Answer

Centralized market where currencies are traded

Answer

Government-controlled market where currencies are traded

Answer

Private market where currencies are traded

Question 6

Which factor does NOT directly influence exchange rates?

Accepted Answer

Weather conditions

Answer

Economic growth

Answer

Political stability

Answer

Interest rates

Question 7

What factors can cause a shift in the demand for a currency in the foreign exchange market?

Accepted Answer

Changes in interest rates

Accepted Answer

Political stability of a country

Accepted Answer

Government intervention in the foreign exchange market

Question 8

Which of the following is NOT a major factor that affects exchange rates?

Accepted Answer

Weather conditions

Answer

Interest rates

Answer

Inflation rates

Answer

Political stability

Question 9

Which of the following is a characteristic of a floating exchange rate system?

Accepted Answer

Exchange rates are determined by market forces of supply and demand

Answer

Governments control the exchange rates

Answer

Exchange rates are fixed against a reference currency

Answer

Exchange rates are subject to quotas

Question 10

What impact does a depreciation in the domestic currency generally have on exports?

Accepted Answer

Exports become cheaper for foreign buyers

Answer

Exports become more expensive for foreign buyers

Answer

Exports remain unaffected

Question 11

What is the term for the exchange rate at which the supply of a currency equals the demand?

Accepted Answer

Equilibrium exchange rate

Answer

Floating exchange rate

Answer

Purchasing power parity

Answer

Fixed exchange rate

Question 12

What is the primary difference between a strong currency and a weak currency?

Accepted Answer

A strong currency is more expensive to buy compared to a weak currency

Answer

A strong currency is always more stable than a weak currency

Answer

A weak currency always has a lower purchasing power than a strong currency

Question 13

Which of the following is **not** a potential benefit of floating exchange rates?

Accepted Answer

They allow governments to control the economy more effectively

Answer

They promote economic growth by encouraging exports

Answer

They reduce the risk of currency crises

Question 14

What is the term used to describe a situation where the exchange rate is set by the government?

Accepted Answer

Fixed exchange rate

Answer

Equilibrium exchange rate

Answer

Floating exchange rate

Answer

Managed exchange rate

Question 15

Which of the following factors primarily influences the exchange rate between two currencies?

Accepted Answer

Interest rate differential

Answer

Inflation rate

Answer

Taxation

Answer

Business investment

Question 16

In a floating exchange rate regime, the exchange rate is primarily determined by:

Accepted Answer

The interaction of supply and demand in the foreign exchange market

Answer

Government regulations

Answer

Central bank intervention

Question 17

When a currency has depreciated, it means that its value has:

Accepted Answer

Decreased in relation to another currency

Answer

Remained unchanged in relation to another currency

Answer

Doubled in relation to another currency

Answer

Increased in relation to another currency

Question 18

How would an increase in demand for a country's exports affect its exchange rate against other currencies?

Accepted Answer

Appreciation

Answer

Depreciation

Answer

Devaluation

Answer

No change

Question 19

The primary purpose of the balance of payments is to record:

Accepted Answer

The value of all international transactions involving a country

Answer

The amount of money in circulation within a country

Answer

The level of government borrowing

Question 20

A primary function of the foreign exchange market is to:

Accepted Answer

Facilitate international trade and investment

Answer

Print纸币

Answer

Set interest rates

Answer

Regulate the money supply

Question 21

According to the Law of One Price, under certain conditions:

Accepted Answer

Identical goods should be sold for the same price in different markets, when adjusted for exchange rates

Answer

The value of a currency should remain constant over time

Answer

Exchange rates should fluctuate randomly

Question 22

The purchasing power parity (PPP) theory suggests that:

Accepted Answer

Exchange rates should adjust to equalize the cost of a comparable basket of goods in different countries

Answer

Exchange rates should be determined solely by the supply and demand of currencies

Answer

Exchange rates should fluctuate according to political events

Question 23

The central bank of a country can use its foreign exchange reserves to:

Accepted Answer

Influence the value of its currency in the foreign exchange market

Answer

Control inflation

Answer

Increase the domestic money supply

Question 24

According to the Law of One Price, if a product is cheaper in one country than another, what will happen?

Accepted Answer

Increased demand for the product in the cheaper country

Answer

Decreased demand for the product in the cheaper country

Answer

Increased supply of the product in the cheaper country

Question 25

Which of the following best describes a floating exchange rate system?

Accepted Answer

Exchange rates fluctuate freely based on supply and demand.

Answer

Exchange rates are fixed by government intervention.

Answer

Exchange rates can only adjust within a pre-determined band.

Question 26

If the supply of a currency increases, what is the likely impact on its exchange rate against other currencies?

Accepted Answer

Depreciation

Answer

No change

Answer

Revaluation

Answer

Appreciation

Question 27

According to the theory of purchasing power parity (PPP), exchange rates should:

Accepted Answer

Equalize the purchasing power of currencies across countries.

Answer

Be determined solely by inflation rates.

Answer

Change frequently in response to economic news.

Question 28

Which of the following could lead to a depreciation of the Euro against the US Dollar?

Accepted Answer

Increased confidence in the US economy

Answer

Stable political conditions in the Eurozone

Answer

Improved economic growth in the Eurozone

Answer

Higher interest rates in the Eurozone

Question 29

What is a key role of the central bank in the foreign exchange market?

Accepted Answer

Intervening to influence exchange rates

Answer

Regulating all foreign exchange transactions

Answer

Setting fixed exchange rates

Answer

Determining the value of foreign currencies

Question 30

Which of the following is a potential consequence of an overvalued exchange rate?

Accepted Answer

Reduced exports and increased imports

Answer

Balanced trade flows

Answer

Increased exports and reduced imports

Answer

Improved economic efficiency

Question 31

In a system of floating exchange rates, the equilibrium exchange rate is determined by:

Accepted Answer

The point where the supply and demand for a currency balance

Answer

The decision of the central bank

Answer

The level that minimizes exchange rate volatility

Question 32

Which of the following is NOT a key determinant of exchange rates?

Accepted Answer

Government policies on education

Answer

Interest rate differentials

Answer

Inflation rates

Answer

Political stability

Question 33

Which exchange rate regime involves fixing the exchange rate against a specific currency?

Accepted Answer

Fixed exchange rate

Answer

Crawling peg

Answer

Managed float

Answer

Floating exchange rate

Question 34

The equilibrium exchange rate is the exchange rate that:

Accepted Answer

Balances the supply and demand for a currency

Answer

Minimizes inflation

Answer

Is set by government intervention

Question 35

The main objective of a managed float exchange rate regime is to:

Accepted Answer

Allow for some exchange rate flexibility while maintaining a degree of stability

Answer

Let the exchange rate fluctuate freely

Answer

Fix the exchange rate against a specific currency

Question 36

A defining feature of a floating exchange rate regime is that exchange rates:

Accepted Answer

Are determined by the market forces of supply and demand

Answer

Are gradually adjusted over time

Answer

Are fixed by government intervention

Question 37

A potential advantage of a fixed exchange rate regime is:

Accepted Answer

Reduced exchange rate volatility

Answer

Increased exports

Answer

Lower unemployment

Answer

Higher inflation

Question 38

What is the connection between exchange rates and international trade?

Accepted Answer

Exchange rates influence the competitiveness of a nation's exports and imports in the global market.

Answer

Exchange rates do not affect international trade in any way.

Answer

Exchange rates only have an impact on developing nations' trade.

Question 39

In a flexible exchange rate system, the exchange rate is determined by:

Accepted Answer

The forces of demand and supply operating in the foreign exchange market

Answer

Government regulations and policies

Answer

Intervention by the central bank

Question 40

Which of the following scenarios is likely to lead to a depreciation of the domestic currency's value?

Accepted Answer

An increase in demand for foreign goods and services

Answer

A decrease in domestic inflation

Answer

An increase in domestic interest rates

Question 41

Which term describes a situation where the exchange rate is set and maintained by the central bank?

Accepted Answer

Fixed exchange rate system

Answer

Clean float system

Answer

Floating exchange rate system

Answer

Managed exchange rate system

Question 42

Which of the following is a potential advantage of adopting a fixed exchange rate system?

Accepted Answer

Reduced uncertainty and volatility in exchange rates

Answer

Increased exports

Answer

Lower inflation

Question 43

In a fixed exchange rate system, what is the term used to describe the predetermined exchange rate between two currencies?

Accepted Answer

Parity rate

Answer

Floating rate

Answer

Equilibrium rate

Question 44

How do exchange rates impact international trade?

Accepted Answer

Exchange rates influence the relative prices of goods and services across different countries.

Answer

Exchange rates have no impact on international trade whatsoever.

Answer

Exchange rates affect only exports but not imports.

Question 45

Which of the following is a key determinant of exchange rates?

Accepted Answer

Supply and demand in the foreign exchange market

Answer

Global economic growth

Answer

Gold price fluctuations

Answer

Government interventions

Question 46

When the pound sterling appreciates against the euro, what does this imply?

Accepted Answer

The pound becomes more expensive relative to the euro

Answer

The euro becomes cheaper relative to the pound

Answer

The pound becomes cheaper relative to the euro

Answer

The euro becomes more expensive relative to the pound

Question 47

Which of the following is a potential consequence of exchange rate fluctuations?

Accepted Answer

Shifts in international trade patterns

Answer

Reduced volatility in financial markets

Answer

Enhanced global economic growth

Answer

Stability in foreign direct investment

Question 48

According to the Purchasing Power Parity (PPP) theory, exchange rates tend to adjust to:

Accepted Answer

Equalize the prices of a basket of goods and services across countries

Answer

Equalize the interest rates of different countries

Answer

Equalize the gold reserves of different countries

Question 49

Which of the following factors could contribute to a depreciation of the US dollar?

Accepted Answer

Increased demand for goods and services from other countries

Answer

Strong growth in the US stock market

Answer

Positive economic outlook in the US

Answer

Rising US interest rates

Question 50

The foreign exchange market is known for its:

Accepted Answer

High liquidity and global accessibility

Answer

Low trading volume and limited access

Answer

Predictable movements and low volatility

Answer

Significant barriers to entry

Question 51

Which of the following is a primary role of central banks in the foreign exchange market?

Accepted Answer

Managing exchange rate volatility

Answer

Regulating foreign direct investment

Answer

Issuing currency

Answer

Setting interest rates

Question 52

A 'floating exchange rate' system is characterized by:

Accepted Answer

Exchange rate determination by market forces

Answer

Exchange rates adjusted only in extreme imbalances

Answer

Exchange rates fixed to a currency basket

Answer

Government-controlled exchange rate adjustments

Question 53

Which of the following is a potential disadvantage of a fixed exchange rate system?

Accepted Answer

Loss of monetary policy independence

Answer

Reduced international trade

Answer

Lower foreign investment

Answer

Increased exchange rate volatility

Question 54

The exchange rate between two currencies can be expressed as:

Accepted Answer

Units of one currency per unit of another

Answer

Ratio of the two currencies

Answer

Number of days for exchange

Answer

Percentage difference between the two currencies