#1
What does the term 'exchange rate' refer to?
The rate at which one currency can be exchanged for another
ExplanationExchange rate signifies currency conversion ratio.
#2
Which factor primarily influences exchange rates in a floating exchange rate system?
Supply and demand dynamics
ExplanationFloating exchange rates fluctuate based on market forces.
#3
What is the concept behind purchasing power parity (PPP)?
It suggests that a unit of currency should have the same purchasing power across different countries
ExplanationPPP aims for equal buying power of currencies globally.
#4
Which of the following is NOT a factor affecting purchasing power parity?
Trade barriers
ExplanationTrade barriers don't directly influence PPP.
#5
In a fixed exchange rate system, how does a central bank maintain the value of its currency?
By buying and selling foreign currencies
ExplanationCentral bank interventions stabilize currency value.
#6
What is the significance of a trade surplus in relation to a country's currency value?
It tends to appreciate the country's currency
ExplanationTrade surplus boosts currency value.
#7
What effect does political instability typically have on a country's exchange rate?
It tends to weaken the country's currency
ExplanationPolitical instability undermines currency strength.
#8
What is a currency peg?
A system where a currency's value is tied to the value of another currency or a basket of currencies
ExplanationCurrency peg fixes the exchange rate.
#9
What is the difference between nominal exchange rate and real exchange rate?
Real exchange rate accounts for inflation, while nominal exchange rate does not.
ExplanationReal exchange rate adjusts for inflation effects.
#10
What is the role of speculation in the foreign exchange market?
Speculation increases exchange rate volatility
ExplanationSpeculation amplifies market fluctuations.
#11
What is a speculative attack on a currency?
An attempt by investors to force a currency devaluation through massive selling
ExplanationSpeculative attacks aim to devalue a currency.
#12
What is a currency carry trade?
A trade where investors borrow money in a currency with low interest rates to invest in a currency with high interest rates
ExplanationCarry trade exploits interest rate differentials.
#13
What is the significance of the Bretton Woods Agreement in the context of exchange rates?
It created the International Monetary Fund (IMF) and established a system of fixed exchange rates
ExplanationBretton Woods set up IMF and fixed exchange rates.