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Types of Exchange Rate

Description: This quiz is designed to test your understanding of the different types of exchange rates used in international trade.
Number of Questions: 15
Created by:
Tags: exchange rate foreign trade international economics
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What is the exchange rate?

  1. The price of one currency in terms of another currency

  2. The price of one good in terms of another good

  3. The price of one service in terms of another service

  4. The price of one asset in terms of another asset

Show answer
Correct Option: A
Explanation:

The exchange rate is the price of one currency in terms of another currency. It is used to convert the value of one currency into the value of another currency.

What are the three main types of exchange rate regimes?

  1. Fixed exchange rate, floating exchange rate, and managed float

  2. Fixed exchange rate, floating exchange rate, and pegged exchange rate

  3. Fixed exchange rate, floating exchange rate, and crawling peg

  4. Fixed exchange rate, floating exchange rate, and target zone

Show answer
Correct Option: A
Explanation:

The three main types of exchange rate regimes are fixed exchange rate, floating exchange rate, and managed float.

In a fixed exchange rate regime, what is the role of the central bank?

  1. To intervene in the foreign exchange market to maintain the exchange rate at a predetermined level

  2. To set the exchange rate at a predetermined level and allow it to fluctuate within a narrow band

  3. To allow the exchange rate to fluctuate freely without any intervention

  4. To target a specific inflation rate and allow the exchange rate to fluctuate freely

Show answer
Correct Option: A
Explanation:

In a fixed exchange rate regime, the central bank intervenes in the foreign exchange market to maintain the exchange rate at a predetermined level.

In a floating exchange rate regime, what is the role of the central bank?

  1. To intervene in the foreign exchange market to maintain the exchange rate at a predetermined level

  2. To set the exchange rate at a predetermined level and allow it to fluctuate within a narrow band

  3. To allow the exchange rate to fluctuate freely without any intervention

  4. To target a specific inflation rate and allow the exchange rate to fluctuate freely

Show answer
Correct Option: C
Explanation:

In a floating exchange rate regime, the central bank allows the exchange rate to fluctuate freely without any intervention.

In a managed float regime, what is the role of the central bank?

  1. To intervene in the foreign exchange market to maintain the exchange rate at a predetermined level

  2. To set the exchange rate at a predetermined level and allow it to fluctuate within a narrow band

  3. To allow the exchange rate to fluctuate freely without any intervention

  4. To target a specific inflation rate and allow the exchange rate to fluctuate freely

Show answer
Correct Option:
Explanation:

In a managed float regime, the central bank intervenes in the foreign exchange market to influence the exchange rate.

What are the advantages of a fixed exchange rate regime?

  1. Stability in the exchange rate

  2. Reduced uncertainty for businesses and investors

  3. Lower transaction costs

  4. All of the above

Show answer
Correct Option: D
Explanation:

A fixed exchange rate regime offers stability in the exchange rate, reduced uncertainty for businesses and investors, and lower transaction costs.

What are the disadvantages of a fixed exchange rate regime?

  1. Loss of monetary independence

  2. Reduced flexibility to respond to economic shocks

  3. Increased risk of currency crises

  4. All of the above

Show answer
Correct Option: D
Explanation:

A fixed exchange rate regime can lead to loss of monetary independence, reduced flexibility to respond to economic shocks, and increased risk of currency crises.

What are the advantages of a floating exchange rate regime?

  1. Monetary independence

  2. Flexibility to respond to economic shocks

  3. Reduced risk of currency crises

  4. All of the above

Show answer
Correct Option: D
Explanation:

A floating exchange rate regime offers monetary independence, flexibility to respond to economic shocks, and reduced risk of currency crises.

What are the disadvantages of a floating exchange rate regime?

  1. Exchange rate volatility

  2. Increased uncertainty for businesses and investors

  3. Higher transaction costs

  4. All of the above

Show answer
Correct Option: D
Explanation:

A floating exchange rate regime can lead to exchange rate volatility, increased uncertainty for businesses and investors, and higher transaction costs.

What is a crawling peg exchange rate regime?

  1. A system in which the exchange rate is adjusted periodically in small increments

  2. A system in which the exchange rate is adjusted periodically in large increments

  3. A system in which the exchange rate is adjusted continuously

  4. A system in which the exchange rate is adjusted randomly

Show answer
Correct Option: A
Explanation:

A crawling peg exchange rate regime is a system in which the exchange rate is adjusted periodically in small increments.

What is a target zone exchange rate regime?

  1. A system in which the exchange rate is allowed to fluctuate within a predetermined band

  2. A system in which the exchange rate is allowed to fluctuate freely without any intervention

  3. A system in which the exchange rate is fixed at a predetermined level

  4. A system in which the exchange rate is adjusted periodically in small increments

Show answer
Correct Option: A
Explanation:

A target zone exchange rate regime is a system in which the exchange rate is allowed to fluctuate within a predetermined band.

What is the difference between a nominal exchange rate and a real exchange rate?

  1. The nominal exchange rate is the price of one currency in terms of another currency, while the real exchange rate is the price of one good in terms of another good

  2. The nominal exchange rate is the price of one currency in terms of another currency, while the real exchange rate is the price of one service in terms of another service

  3. The nominal exchange rate is the price of one asset in terms of another asset, while the real exchange rate is the price of one good in terms of another good

  4. The nominal exchange rate is the price of one currency in terms of another currency, while the real exchange rate is the price of one asset in terms of another asset

Show answer
Correct Option: A
Explanation:

The nominal exchange rate is the price of one currency in terms of another currency, while the real exchange rate is the price of one good in terms of another good.

How is the real exchange rate calculated?

  1. By dividing the nominal exchange rate by the price level in the home country

  2. By dividing the nominal exchange rate by the price level in the foreign country

  3. By multiplying the nominal exchange rate by the price level in the home country

  4. By multiplying the nominal exchange rate by the price level in the foreign country

Show answer
Correct Option: A
Explanation:

The real exchange rate is calculated by dividing the nominal exchange rate by the price level in the home country.

What is the relationship between the nominal exchange rate and the real exchange rate?

  1. The nominal exchange rate and the real exchange rate move in the same direction

  2. The nominal exchange rate and the real exchange rate move in opposite directions

  3. The nominal exchange rate and the real exchange rate are independent of each other

  4. The relationship between the nominal exchange rate and the real exchange rate is unpredictable

Show answer
Correct Option: B
Explanation:

The nominal exchange rate and the real exchange rate move in opposite directions. When the nominal exchange rate appreciates, the real exchange rate depreciates, and vice versa.

What are the factors that affect the exchange rate?

  1. Interest rates

  2. Inflation

  3. Economic growth

  4. Political stability

  5. All of the above

Show answer
Correct Option: E
Explanation:

The exchange rate is affected by a variety of factors, including interest rates, inflation, economic growth, and political stability.

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