Review Questions for
Lesson 3
-International Monetary
Systems

Question 1


1. A Japanese yen (¥) is worth $0.008, and a Fijian dollar (F$) is worth $0.59. What is the value of yen in Fijian dollars (i.e. how many Fijian dollars do you need in order to buy one yen?)
A) 0.014
B) 1.69
C) 73.75
D) 125

Question 1

Question 2


2. “A country is always worse off when its currency is weak (falls in value)”. True, False or uncertain? Explain your answer.

4

Question 2


Effects of weak currency:
◦

Negative:
More expensive to purchase foreign products or travel aboard. More cost for importing.

◦

Positive:
Increase the demand for domestic products and services. Increase domestic employment.
Good for exporting.



The statement of ‘A weak currency is always worse off’ is FALSE.

Question 3


3. If the dollar (₤/$) bid and ask prices are
₤0.6623 and ₤0.6667, respectively, then the corresponding pound ($/ ₤) bid and ask prices are:
A) $1.5 and $1.51
B) $0.6667 and $0.6623
C) $1.51 and $1.50
D) Undetermined

Question 3
Bid Price
£/$ = 0.6623
(The bank buys $1 for
£0.6623 ）
$/£ = 1.4999≈1.50
（ The bank buys £1 for
$1.15)

Ask Price
£/$ = 0.6667
(The bank sells $1 for
£0.6667 ）
$/ £= 1.5099≈1.51
(The bank sells £1 for $1.51)

* Please always remember:
The bank would like to BUY LOW and SELL
HIGH.

Question 4


4. Which of the following correctly identifies exchange rate regime from less fixed to more fixed? A) Independent floating, currency board arrangement, crawling pegs
B) Independent floating, currency board arrangement, managed float
C) Independent floating, crawling pegs, exchange arrangements with no separate legal tender
D) Exchange arrangements with no separate legal tender, currency board arrangement, crawling pegs.

Question 4


The exchange rate regimes classification: 1) Exchange arrangements with no separate legal tender
2) Currency board arrangement
3) Other conventional fixed peg arrangement
4) Pegged exchange rates within horizontal bands 5) Crawling pegs
6) Exchange rates within crawling pegs
7) Managed floating with no preannounced path for the exchange rate
8) Independent floating

Fixed

Floating

Question 4




Four basic categories:
Hard pegs
(1)Exchange

arrangements with no separate legal tender
(2)Currency board arrangement


Soft pegs
(1)Other

conventional fixed peg arrangement
(2)Pegged exchange rates within horizontal bands
(3)Crawling pegs
◦ Exchange rates within crawling pegs


Floating arrangements
(1)Managed

floating with no preannounced path for the exchange rate
(2)Independent floating


Residual

Question 4


4. Which of the following correctly identifies exchange rate regime from less fixed to more fixed? C

A) Independent floating, currency board arrangement, crawling pegs
B) Independent floating, currency board arrangement, managed float
C) Independent floating, crawling pegs, exchange arrangements with no separate legal tender
D) Exchange arrangements with no separate legal tender, currency board arrangement, crawling pegs.

Question 5


5. Under the fixed rate regime, government is officially responsible for
A) Intervention in the foreign exchange markets using reserves and gold
B) Setting the fixed/parity exchange rate
C) Maintaining the fixed/parity exchange rate
D) All of the above

Question 5


Fixed exchange rates
◦
◦
◦
◦
◦

provide stability in international prices for trade. follow restrictive monetary and fiscal policies . are inconsistent with economic fundamentals be changed by government. require a government to hold large scale reserves of foreign currency to maintain the fixed rate .

Question 6


6. Explain the currency regime choices such as dollarization and currency board faced by emerging market countries.

Question 6
Dollarization







basic concept benefits objections why using USD instead of using own currency references

Currency Board





basic concept benefits objections references what is the difference between two policies?