Exchange Rates: Determinants, Fixed vs. Floating Systems - Macroeconomics

Question 1

What is a potential drawback of a fixed exchange rate system?

Accepted Answer

Flexibility

Answer

Predictability

Answer

Stability

Answer

Low foreign exchange reserves

Question 2

What is a potential advantage of a fall in the value of the British pound?

Accepted Answer

Increased exports

Answer

Reduced inflation

Answer

Lower interest rates

Answer

Increased government revenue

Question 3

Which of the following is an **advantage** of a fixed exchange rate system?

Accepted Answer

Stability and predictability

Answer

Reduced inflation

Answer

Increased foreign investment

Answer

Flexibility and adaptability

Question 4

A country with a high level of inflation is likely to have a:

Accepted Answer

Depreciating currency

Answer

Appreciating currency

Answer

Stable currency

Question 5

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

Accepted Answer

Currency instability

Answer

Reduced unemployment

Answer

Increased exports

Answer

Lower inflation

Question 6

A country experiencing a **trade surplus** is likely to have a:

Accepted Answer

Appreciating currency

Answer

Overvalued currency

Answer

Depreciating currency

Answer

Stable currency

Question 7

What is most likely to cause a country's currency to appreciate in value?

Accepted Answer

Increased demand for the country's currency.

Answer

Lower domestic interest rates.

Answer

Higher domestic inflation.

Answer

Reduced demand for domestic goods and services.

Question 8

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

Accepted Answer

Exchange rate flexibility

Answer

Reduced risk

Answer

Price stability

Question 9

The theory of purchasing power parity (PPP) suggests that:

Accepted Answer

Exchange rates should adjust to equalize the purchasing power of currencies across countries.

Answer

Exchange rates should always be determined by market forces.

Answer

Fixed exchange rate systems are always superior to floating exchange rate systems.

Question 10

A country's trade surplus is:

Accepted Answer

The difference between the value of exports and imports.

Answer

The total value of exports.

Answer

The total value of imports.

Question 11

The foreign exchange market is:

Accepted Answer

A global, decentralized market where currencies are traded.

Answer

A government agency that regulates exchange rates.

Answer

A physical location where currencies are exchanged.

Question 12

Which of the following factors is NOT likely to lead to an appreciation of the euro?

Accepted Answer

A decrease in interest rates in the eurozone.

Answer

An increase in the demand for eurozone goods.

Answer

A decrease in the supply of eurozone goods.

Answer

An increase in interest rates in the eurozone.

Question 13

The exchange rate between the Japanese yen and the US dollar is quoted as 110. This means that:

Accepted Answer

1 US dollar is equal to 110 Japanese yen.

Answer

1 Japanese yen is equal to 0.009 US dollars.

Answer

1 US dollar is equal to 0.009 Japanese yen.

Answer

1 Japanese yen is equal to 110 US dollars.

Question 14

What is a key advantage of a fixed exchange rate system?

Accepted Answer

Stability and predictability

Answer

Greater economic growth

Answer

Increased trade

Answer

Lower inflation

Question 15

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

Accepted Answer

Increased volatility

Answer

Less economic growth

Answer

Higher inflation

Answer

Reduced trade

Question 16

What is the term used to describe the price of one currency in terms of another?

Accepted Answer

Exchange rate

Answer

Cross rate

Answer

Spot rate

Question 17

Which of the following is considered a speculative transaction?

Accepted Answer

Buying a currency based on the expectation of future appreciation

Answer

Exchanging currency for business purposes

Answer

Investing in a foreign bond

Question 18

What is the primary reason for central bank intervention in the foreign exchange market?

Accepted Answer

To influence the exchange rate

Answer

To stabilize the economy

Answer

To increase trade

Answer

To reduce inflation

Question 19

What is the main difference between the spot rate and the forward rate for a currency?

Accepted Answer

The forward rate reflects the expected future spot rate

Answer

The spot rate is always higher than the forward rate

Answer

The forward rate is always higher than the spot rate

Question 20

Which of the following factors is most likely to cause the domestic currency to depreciate in value?

Accepted Answer

Higher inflation

Answer

Positive trade balance

Answer

Lower unemployment

Question 21

What is the term for a situation where the government sets the exchange rate and intervenes to maintain it?

Accepted Answer

Fixed exchange rate

Answer

Crawling peg

Answer

Floating exchange rate

Answer

Managed float

Question 22

Which of the following factors can contribute to an appreciation of the pound's value?

Accepted Answer

An increase in UK interest rates

Answer

A decrease in UK exports

Answer

An increase in UK inflation

Question 23

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

Accepted Answer

Reduced exchange rate fluctuations

Answer

Increased economic growth

Answer

Improved competitiveness of exports

Answer

Greater flexibility for businesses

Question 24

What is the term used to describe the Bank of England's intervention in the foreign exchange market to influence the value of the pound?

Accepted Answer

Foreign exchange intervention

Answer

Fiscal policy

Answer

Quantitative easing

Answer

Monetary policy

Question 25

What theory suggests that exchange rates adjust to equalize the purchasing power of different currencies?

Accepted Answer

Purchasing power parity theory

Answer

Asset market approach

Answer

Monetary theory of exchange rates

Answer

Elasticity approach

Question 26

What is the impact of a depreciation of the pound on UK exports?

Accepted Answer

It makes UK exports more competitive in foreign markets

Answer

It reduces demand for UK exports

Answer

It has no impact on UK exports

Answer

It makes UK exports more expensive in foreign markets

Question 27

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

Accepted Answer

Exchange rate volatility

Answer

Reduced economic growth

Answer

Increased inflation

Answer

Loss of monetary policy independence

Question 28

What is the term used to describe the demand for a currency for investment purposes?

Accepted Answer

Capital flows

Answer

Current account

Answer

Foreign direct investment

Answer

Balance of payments

Question 29

Which of the following is a measure of the difference between the value of a country's exports and imports?

Accepted Answer

Balance of trade

Answer

Balance of payments

Answer

Capital account

Answer

Current account

Question 30

What is the name of the institution responsible for managing the UK's monetary policy and setting interest rates?

Accepted Answer

Bank of England

Answer

European Central Bank

Answer

World Bank

Answer

International Monetary Fund

Question 31

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

Accepted Answer

Religious beliefs

Answer

Economic fundamentals

Answer

Market forces

Answer

Government policies

Question 32

In a fixed exchange rate system, the value of a currency is:

Accepted Answer

Pegged to another currency or a basket of currencies

Answer

Determined by supply and demand in the foreign exchange market

Answer

Allowed to fluctuate freely in the market

Answer

Adjusted periodically by the government

Question 33

Which of the following is an advantage of a floating exchange rate system?

Accepted Answer

Automatic adjustment to market conditions

Answer

Reduced risk of currency crises

Answer

Increased government control over the exchange rate

Answer

Stability and predictability of the exchange rate

Question 34

The purchasing power parity (PPP) theory suggests that:

Accepted Answer

Exchange rates should adjust to equalize the purchasing power of different currencies in different countries

Answer

The value of a currency is inversely proportional to its purchasing power

Answer

Exchange rates are determined solely by interest rate differentials

Question 35

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

Accepted Answer

Reduced exports and increased imports

Answer

Increased investment and economic growth

Answer

Stable prices and low inflation

Question 36

A country with a persistently overvalued exchange rate may experience:

Accepted Answer

A trade deficit

Answer

Increased foreign investment

Answer

Stable economic growth

Answer

A trade surplus

Question 37

Identify a potential benefit of devaluing a currency:

Accepted Answer

Increased exports and reduced imports

Answer

Increased investment and economic growth

Answer

Stable prices and low inflation

Answer

Deteriorating balance of payments

Question 38

Which of the following accurately describes a key role of the International Monetary Fund (IMF)?

Accepted Answer

Monitoring exchange rate policies and providing financial assistance to member countries

Answer

Setting exchange rates for all member countries

Answer

Promoting free trade and reducing trade barriers

Question 39

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

Accepted Answer

Population growth

Answer

Government policies

Answer

Inflation

Answer

Interest rates

Question 40

A country experiencing a higher inflation rate compared to its trading partners will typically witness what impact on its currency?

Accepted Answer

Depreciation

Answer

Fixed exchange rate

Answer

No change in value

Answer

Appreciation

Question 41

Identify an advantage associated with a fixed exchange rate system:

Accepted Answer

Stability in trade and investment

Answer

Reduced government intervention

Answer

Greater flexibility in monetary policy

Answer

Increased economic growth

Question 42

In a floating exchange rate system, what should you expect to observe?

Accepted Answer

Fluctuations in the currency's value

Answer

Increased government intervention

Answer

No change in the currency's value

Answer

Fixed exchange rate

Question 43

Identify a potential disadvantage of a floating exchange rate system:

Accepted Answer

Increased volatility in the financial markets

Answer

Reduced government intervention

Answer

Greater flexibility in monetary policy

Answer

Stable trade and investment

Question 44

What is the intended purpose of a crawling peg exchange rate system?

Accepted Answer

To gradually adjust the exchange rate based on market forces

Answer

To fix the exchange rate at a predetermined level

Answer

To allow the exchange rate to fluctuate freely

Question 45

Which factor can contribute to a currency crisis?

Accepted Answer

Loss of confidence in the currency

Answer

Stable inflation rates

Answer

Government surpluses

Answer

High levels of economic growth

Question 46

What is the primary objective of central bank intervention in the foreign exchange market?

Accepted Answer

To influence the exchange rate

Answer

To control inflation

Answer

To manage government debt

Answer

To promote economic growth

Question 47

If the UK experiences a period of high inflation relative to the Eurozone, what is the most likely effect on the value of the pound sterling against the euro?

Accepted Answer

The pound sterling will depreciate against the euro.

Answer

The pound sterling will appreciate against the euro.

Answer

The exchange rate will remain unchanged.

Question 48

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

Accepted Answer

The number of students enrolled in economics courses.

Answer

Interest rate differentials.

Answer

Government intervention.

Question 49

What is a potential disadvantage of a floating exchange rate system?

Accepted Answer

Increased volatility in exchange rates can create uncertainty for businesses.

Answer

Reduced flexibility in monetary policy.

Answer

Limited ability to control inflation.

Question 50

A British company exporting goods to the United States will benefit from a(n):

Accepted Answer

Depreciation of the pound sterling against the US dollar.

Answer

Appreciation of the pound sterling against the US dollar.

Answer

Stable exchange rate.

Question 51

Which of the following is likely to lead to an appreciation of the pound sterling against other currencies?

Accepted Answer

An increase in demand for British goods and services.

Answer

A decrease in UK interest rates.

Answer

A rise in inflation in the UK.

Question 52

A central bank intervening in the foreign exchange market to weaken its own currency is most likely trying to:

Accepted Answer

Stimulate exports and boost economic growth.

Answer

Reduce government debt.

Answer

Reduce inflation.

Answer

Increase interest rates.

Question 53

Suppose the Bank of England increases interest rates. What is the likely impact on the pound sterling?

Accepted Answer

The pound sterling is likely to appreciate.

Answer

There will be no impact on the pound sterling.

Answer

The pound sterling is likely to depreciate.

Answer

The impact is uncertain and depends on other factors.

Question 54

Which of the following statements about a pegged exchange rate system is TRUE?

Accepted Answer

It requires the central bank to maintain a fixed exchange rate by buying or selling its own currency.

Answer

It allows for greater exchange rate flexibility.

Question 55

What is the primary function of the foreign exchange market?

Accepted Answer

To facilitate the exchange of currencies between buyers and sellers.

Answer

To regulate international trade.

Answer

To control inflation.