Reference no: EM132246933

Question 1: Other things equal, as perceived risk falls for a country, 

1. a. the domestic interest rate rises and the domestic currency gets stronger
2. b. the domestic interest rate rises and the domestic currency gets weaker
3. c. the domestic interest rate falls and the domestic currency gets stronger
4. d. the domestic interest rate falls and the domestic currency gets weaker

Question 2: Suppose investors and currency speculators expect that a currency will depreciate in about six months. This will cause the currency to begin depreciating now. 

1. True
2. False

Question 3: Which of the following tends to cause markets to expect a currency to have a higher value in the near future?

1. a. the expectation that the country will have lower interest rates in the near future (and with other things equal)
2. b. the expectation that the country will have a stronger economy in the near future (and with other things equal)
3. c. both A and B
4. d. neither A nor B

Question 4: Suppose a country maintains a fixed exchange rate below the market exchange rate.

1. a. It would need to supply the domestic currency to foreign exchange markets to prevent a shortage of the domestic currency.
2. b. It would need to demand the domestic currency in foreign exchange markets to prevent a surplus of the domestic currency.
3. c. It would have a narrow balance of payments deficit.
4. d. both A and C
5. e. both B and C

Question 5: Suppose a country borrows somewhat more internationally than in the past. Keeping other things equal (like inflation and risk), this country's currency tends to weaken.

1. True
2. False

Question 6: Suppose a country wants a fixed exchange rate for its currency above the market exchange rate. It will,

1. a. run a narrow balance of payments surplus
2. b. use up some of its foreign currency reserves to do so
3. c. both A and B
4. d. neither A nor B

Question 7: Suppose a country maintains a fixed exchange rate for its currency below the market exchange rate. It will,

1. a. run a narrow balance of payments surplus
2. b. build up its foreign currency reserves
3. c. both A and B
4. d. neither A nor B

Question 8: Suppose a country wants to have both full control over its domestic monetary policy (has "independence") and the free movement of capital into and out of the country. This country will have to forgo having a floating exchange rate for its currency. 

1. True
2. False

Question 9: If a country wants to have both a fixed exchange rate and full control over its domestic monetary policy (has "independence"), it will have to limit the flow of capital into and out of the country.

1. True
2. False

Question 10: Assume currency speculators take actions in currency markets to capture currency appreciation gains.

Suppose Currency Speculator Smith changes her thoughts about the beliefs of other currency speculators. Previously she thought that other currency speculators believed that Currency C would neither appreciate nor depreciate in the near future. Now Smith thinks that other currency speculators believe that Currency C will appreciate in the near future.

In this case, Smith thinks that other currency speculators will begin buying Currency C now to capture currency appreciation gains. Because Smith has changed her thoughts about other speculator's beliefs, she would buy Currency C now.  

1. True
2. False