M4.2.1 Determination of exchange rates in fixed and floating systems Quiz: OCR Economics, Unit 9

The 20 questions

1. Which exchange rate system allows currency value to be determined entirely by market forces?

   • Fixed exchange rate
   • Pegged exchange rate
   • Managed exchange rate
   • Floating exchange rate

2. What term describes a fall in the value of a floating currency against another currency?

   • Appreciation
   • Revaluation
   • Devaluation
   • Depreciation

3. What term refers to a deliberate upward adjustment of a fixed currency rate by central authorities?

   • Revaluation
   • Depreciation
   • Appreciation
   • Devaluation

4. What happens to the exchange rate of the pound if foreign demand for UK exports increases?

   • Depreciates
   • Devalues
   • Appreciates
   • Stays unchanged

5. How can a central bank artificially support its fixed currency rate when market value falls?

   • Buy own currency
   • Cut interest rates
   • Print more currency
   • Sell own currency

6. How does a relative fall in UK interest rates affect short-term financial capital flows?

   • Currency appreciation
   • Outflow of capital
   • Inflow of capital
   • Higher export prices

7. What term describes highly mobile short-term capital searching for the highest real interest rate?

   • Foreign direct investment
   • Hot money
   • Portfolio investment
   • Reserve capital

8. If the exchange rate moves from £1 = $1.25 to £1 = $1.50, what has occurred?

   • 25% appreciation
   • 20% depreciation
   • 25% depreciation
   • 20% appreciation

9. What exchange rate system keeps currency within a specific target band around a central rate?

   • Pure floating system
   • Semi-fixed system
   • Absolute fixed system
   • Free floating system

10. Rapidly declining foreign exchange reserves indicate a central bank is struggling to maintain which system?

    • Free market rate
    • Dirty float
    • Floating exchange rate
    • Fixed exchange rate

11. What term describes an official decision by a central bank to lower its fixed exchange rate?

    • Depreciation
    • Devaluation
    • Revaluation
    • Appreciation

12. According to purchasing power parity, higher domestic inflation relative to trading partners causes currency to do what?

    • Stay constant
    • Depreciate
    • Appreciate
    • Revalue

13. Which asset must a central bank hold in large reserves to defend a fixed currency value?

    • Corporate bonds
    • Foreign currencies
    • Commercial bank deposits
    • Domestic treasury bills

14. An import costs €600. If the exchange rate is £1 = €1.20, what is the cost in pounds?

    • £500
    • £480
    • £720
    • £600

15. What is a major drawback of maintaining a fixed exchange rate for domestic monetary policy?

    • Excessive exchange fluctuation
    • High inflation volatility
    • Unpredictable export prices
    • Loss of independence

16. When the pound depreciates, what immediately happens to the price of foreign imports into the UK?

    • Increases
    • Stays constant
    • Falls to zero
    • Decreases

17. What term describes central bank intervention that neutralises the impact of foreign exchange sales on money supply?

    • Liquidity preference
    • Forward guidance
    • Quantitative easing
    • Sterilisation

18. Which concept states that long-run exchange rates adjust so identical goods cost the same across nations?

    • Purchasing power parity
    • Marshall-Lerner condition
    • J-curve effect
    • Interest rate parity

19. Increasing UK interest rates relative to other nations will most likely attract which financial flow?

    • Inward hot money
    • Long-term loans
    • Foreign direct investment
    • Outward hot money

20. What is the main objective of central bank intervention in a managed floating exchange rate system?

    • Fix rate permanently
    • Eliminate foreign trade
    • Reduce volatility
    • Equalise interest rates

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