Question Details

What must currently be happening with regard to the exchange rate 



1. “Cheng said that China should shift part of its $US 1.4 trillion in foreign exchange reserves out of U.S. dollars and into other, stronger currencies. But Gilmore replied that this would cause a run on the dollar and China will not drive a run on the dollar, not now and not ever.” What is the reasoning behind the view that China will never drive a run on the dollar? 
a)	China likes the U.S. and would never do anything to harm it 
b)	there would be no run on the dollar here because other countries would be buying these dollars 
c)	if the value of the dollar fell, China would suffer a huge loss in the value of its $US foreign exchange reserves 
d)	if the value of the dollar fell, so would the value of the Chinese currency, making China- exports more expensive 

2. “The U.S. bond market sold off in overnight trading on a report of Chinese selling of treasuries. The China Business News reported that China has started reducing its massive holdings of U.S. treasuries because the dollar- decline is causing them to lose value.” If China did this then 
a)	the interest rate would increase and the dollar- decline would moderate 
b)	the interest rate would increase and the dollar- decline would accelerate 
c)	the interest rate would decrease and the dollar- decline would moderate 
d)	the interest rate would decrease and the dollar- decline would accelerate 

3. “Many countries peg their own currencies to the greenback; these countries import U.S. inflation when the Fed makes a mistake.” Why would these countries “import” inflation. 
a)	this is incorrect because countries only import goods or services 
b)	this is incorrect because inflation is determined by your country- own money growth rate 
c)	this is correct because a fixed exchange rate means that your country must experience the inflation of the country to which your exchange rate is fixed 
d)	this is correct because higher inflation in the U.S. will increase your imports and decrease your exports, creating a balance of payments deficit and so inflation 

4. “The fund also said Russia should focus on cutting inflation by allowing a more flexible exchange ruble rate.” What must currently be happening with regard to the exchange rate ? 
a)	there is a balance of payments surplus and the exchange rate is trying to rise 
b)	there is a balance of payments surplus and the exchange rate is trying to fall 
c)	there is a balance of payments deficit and the exchange rate is trying to rise 
d)	there is a balance of payments deficit and the exchange rate is trying to fall 




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