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Exam 9: Foreign Exchange Rate Determination

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Question 1

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As economic conditions continued to deteriorate in Argentina by the end of 2001,banks suffered increasing runs.The government,fearing that the increasing financial drain on banks would cause their collapse,closed the banks for weeks.

A) True
B) False

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Question 2

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If the goal were to decrease the value of a country's currency - to fight an appreciation of the domestic currency in exchange for foreign currency - the central bank would:

A) buy its own currency in exchange for foreign currency.
B) follow a restrictive monetary policy.
C) drive real rates of interest up.
D) sell its own currency in exchange for foreign currency.

E) B) and C)
F) B) and D)

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Question 3

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The large and liquid capital and currency markets follow many of the principles outlined by the different schools of thought on exchange rate determination (parity conditions,balance of payments approach,and asset approach)relatively well in the medium to long term.

________ is defined as the spread of a crisis in one country to its neighboring countries and other countries with similar characteristics.

The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.

Which of the following was NOT an international currency crisis in the 1990s and early 2000s?

Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.

The authors refer to the practice of many Asian firms being largely controlled by families of groups related to the governing body of the country as:

The more efficient the foreign exchange market is,the more likely it is that exchange rate movements are random walks.

The ________ is the Argentine currency unit.

The smaller and less liquid markets and currency markets frequently demonstrate behaviors that follow the principles outlined by the different schools of thought on exchange rate determination (parity conditions,balance of payments approach,and asset approach)relatively well in the medium to long term.

Which of the following is NOT a motivation for a government or central bank to manipulate domestic currency valuation?

The balance of payments approach of exchange rate theory is largely dismissed by the academic community today,while the practitioner public still rely on different variations of the theory for their decision making.

The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.

By 2001,crisis conditions had revealed three very important underlying problems Argentina's economy EXCEPT:

In 1991 the Argentine peso was fixed to the value of the U.S.dollar on a one-to-one basis.

In 1991,Argentina adopted a currency board (the Argentine peso had been pegged to the U.S.dollar at a one-to-one rate of exchange)to fight hyperinflation.This currency board lasted for a decade until the economic crisis of 2001.Discuss : 1)the pros and cons of a currency board policy,2)the crisis condition of the Argentina's economy by 2001,and 3)the lessons to be drawn from the the Argentina story.

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?

Most theories of technical analysis differentiate fair value from market value.

The "tequila effect" is a slang term used to describe a form of financial panic called: