What is a fixed exchange rate system?
A) A system where currency values fluctuate freely based on market forces
B) A system where government or central bank sets the exchange rate
C) A system with fluctuating rates based on inflation
D) A system where currencies are pegged to gold
Which of the following is a feature of a floating exchange rate system?
A) The government directly controls currency values
B) Exchange rates are determined by the market forces of supply and demand
C) There is a fixed exchange rate between two countries
D) The central bank buys or sells currencies to maintain a specific rate
In a pegged exchange rate system, the value of a currency is:
A) Determined by supply and demand in the market
B) Fixed against another currency or basket of currencies
C) Based on the country’s interest rates
D) Volatile and changes frequently
Which of the following is a disadvantage of a fixed exchange rate system?
A) Currency values can fluctuate widely
B) The government must maintain large reserves of foreign currency
C) It leads to higher inflation rates
D) It encourages trade deficit
Under a floating exchange rate system, which factor influences the exchange rate?
A) The central bank’s policy alone
B) The demand for a country’s goods and services
C) The number of government regulations in place
D) The price of oil
In a managed float system, the exchange rate is:
A) Completely controlled by the government
B) Left to fluctuate freely without intervention
C) Allowed to fluctuate within a narrow band set by the government
D) Fixed at one rate forever
Which of the following is NOT a characteristic of a floating exchange rate system?
A) Currency values are influenced by market conditions
B) The government sets the exchange rate
C) Exchange rates can change frequently
D) It allows for automatic adjustment to economic conditions
A country with a strong currency typically experiences:
A) Increased import costs
B) Increased export demand
C) Reduced tourism
D) Increased competitiveness in foreign markets
Which exchange rate system is most commonly used today?
A) Fixed exchange rate
B) Pegged exchange rate
C) Floating exchange rate
D) Dual exchange rate
What is the main advantage of a fixed exchange rate system?
A) It allows for exchange rate flexibility
B) It reduces exchange rate uncertainty for international trade
C) It encourages speculative attacks on currencies
D) It promotes inflationary policies
In a floating exchange rate system, a government may intervene if:
A) Inflation is under control
B) There is excessive speculation against the currency
C) The country has high trade surpluses
D) Currency exchange is not profitable
Which of the following exchange rate systems does NOT require the central bank to hold large reserves of foreign currency?
A) Fixed exchange rate
B) Pegged exchange rate
C) Floating exchange rate
D) Dual exchange rate
In a fixed exchange rate system, which event can lead to a currency crisis?
A) A large decline in a country’s foreign reserves
B) A country’s exchange rate changes frequently
C) High demand for foreign currency
D) The central bank raises interest rates
A currency’s value in a floating exchange rate system is determined by:
A) The political stability of the country
B) Interest rates and inflation
C) The supply and demand for that currency in the market
D) The size of the country’s foreign reserves
What is a common impact of exchange rate fluctuations on businesses?
A) It eliminates trade deficits
B) It causes the cost of imports to rise and fall unpredictably
C) It results in fixed export prices
D) It increases government control over the market
A country that uses a fixed exchange rate system needs to:
A) Let the currency fluctuate with market conditions
B) Regularly adjust the exchange rate based on inflation
C) Buy or sell foreign currency to maintain the fixed rate
D) Only allow transactions in foreign currency
Which of the following is a possible impact of a depreciating currency in a floating exchange rate system?
A) Decreased exports
B) Increased tourism
C) Lower cost of imports
D) Increased inflation
What does a government do in a managed float exchange rate system to stabilize the currency?
A) Let the currency fluctuate without intervention
B) Fix the currency to a gold standard
C) Intervene in the foreign exchange market occasionally
D) Increase interest rates to attract foreign capital
A country with a devalued currency will likely experience:
A) Higher import costs
B) A decrease in exports
C) An increase in imports
D) Increased demand for its goods in foreign markets
A key disadvantage of a floating exchange rate system is:
A) It leads to higher inflation
B) Exchange rate volatility can create uncertainty for international businesses
C) The government controls all foreign exchange transactions
D) It leads to permanent trade surpluses
What is the role of central banks in a pegged exchange rate system?
A) To let the currency float freely
B) To maintain the fixed exchange rate by buying or selling foreign currency
C) To set interest rates in international markets
D) To issue international bonds
Which exchange rate system allows for the most currency flexibility?
A) Fixed exchange rate
B) Pegged exchange rate
C) Floating exchange rate
D) Dual exchange rate
Which of the following is an example of a country with a pegged exchange rate system?
A) United States
B) Switzerland
C) Hong Kong
D) Japan
How does a fixed exchange rate system impact inflation?
A) It reduces inflation by controlling currency supply
B) It makes inflation more volatile
C) It can reduce inflationary pressures if the fixed rate is maintained
D) It has no effect on inflation
A country’s currency in a fixed exchange rate system may be overvalued or undervalued if:
A) The central bank lacks sufficient reserves
B) The market forces are left uncontrolled
C) The government does not intervene in the currency market
D) The interest rates are too low
What is the impact of a strong currency on a country’s exports?
A) It makes exports cheaper and more competitive
B) It makes exports more expensive and less competitive
C) It has no effect on exports
D) It encourages more foreign investment
Which exchange rate system is most stable in terms of currency value?
A) Floating exchange rate
B) Managed float
C) Fixed exchange rate
D) Dual exchange rate
