Exchange Rate Regimes MCQs

Exchange Rate Regimes MCQs

1. What is a fixed exchange rate regime?
A) A system where the exchange rate is determined by supply and demand
B) A system where the government or central bank sets the currency’s value
C) A system where the currency’s value fluctuates freely
D) A system where exchange rates do not exist
Answer: B) A system where the government or central bank sets the currency’s value

2. Which of the following is an example of a flexible exchange rate regime?
A) The U.S. dollar under a gold standard
B) The Euro’s exchange rate
C) The U.S. dollar to British pound exchange rate
D) A currency pegged to the Euro
Answer: C) The U.S. dollar to British pound exchange rate

3. In a floating exchange rate system, how is the exchange rate determined?
A) By the government
B) By the central bank
C) By market forces of supply and demand
D) By international agreements
Answer: C) By market forces of supply and demand

4. What is a pegged exchange rate?
A) A currency that is allowed to fluctuate freely
B) A currency that is fixed to another currency or a basket of currencies
C) A currency that is based on commodity prices
D) A currency that has no relation to any other currency
Answer: B) A currency that is fixed to another currency or a basket of currencies

5. Which exchange rate regime provides the most stability in international trade?
A) Floating exchange rate
B) Fixed exchange rate
C) Flexible exchange rate
D) Managed float exchange rate
Answer: B) Fixed exchange rate

6. Which of the following countries is known for having a managed floating exchange rate system?
A) United States
B) China
C) United Kingdom
D) Japan
Answer: B) China

7. What is a major disadvantage of a fixed exchange rate system?
A) It allows for too much flexibility
B) It can create trade imbalances if the fixed rate is not aligned with market values
C) It encourages excessive inflation
D) It is too volatile for global trade
Answer: B) It can create trade imbalances if the fixed rate is not aligned with market values

8. In a currency board arrangement, how does the country maintain its exchange rate?
A) By letting the currency fluctuate freely
B) By printing more money
C) By holding large reserves of the foreign currency it is pegged to
D) By controlling inflation rates
Answer: C) By holding large reserves of the foreign currency it is pegged to

9. What is the main characteristic of a floating exchange rate system?
A) The exchange rate is constantly fixed to a foreign currency
B) The exchange rate is managed by the central bank
C) The exchange rate changes according to market forces
D) The exchange rate is determined by inflation
Answer: C) The exchange rate changes according to market forces

10. Which of the following is an example of a hybrid exchange rate regime?
A) A country that has no exchange rate
B) A country that allows its currency to float but intervenes when necessary
C) A country that adopts another country’s currency
D) A country that fixes its currency permanently
Answer: B) A country that allows its currency to float but intervenes when necessary

11. What is one benefit of a floating exchange rate regime?
A) Stability and predictability in trade
B) Flexibility to adjust to economic changes
C) It eliminates the need for a central bank
D) It creates inflation
Answer: B) Flexibility to adjust to economic changes

12. Which of the following exchange rate regimes often results in currency speculation?
A) Fixed exchange rate
B) Floating exchange rate
C) Pegged exchange rate
D) No exchange rate regime
Answer: B) Floating exchange rate

13. Why might a country choose a fixed exchange rate system?
A) To allow the currency to fluctuate based on market demand
B) To stabilize its currency and make trade more predictable
C) To avoid holding foreign reserves
D) To encourage currency speculation
Answer: B) To stabilize its currency and make trade more predictable

14. What is a “dirty float” or “managed float” exchange rate regime?
A) A system where the exchange rate is strictly controlled
B) A system where the exchange rate is allowed to float but with some central bank intervention
C) A system where the exchange rate is always pegged to gold
D) A system with no government or central bank involvement
Answer: B) A system where the exchange rate is allowed to float but with some central bank intervention

15. What role do central banks play in a fixed exchange rate regime?
A) They have no role
B) They intervene to keep the exchange rate stable by buying and selling foreign currencies
C) They allow the currency to move according to market forces
D) They focus only on interest rates
Answer: B) They intervene to keep the exchange rate stable by buying and selling foreign currencies

16. How does a fixed exchange rate system affect inflation?
A) It eliminates inflation
B) It keeps inflation under control if properly managed
C) It increases inflation automatically
D) It has no impact on inflation
Answer: B) It keeps inflation under control if properly managed

17. What is the primary advantage of a floating exchange rate regime for a country?
A) It guarantees stability in international trade
B) It allows the country to conduct its own monetary policy freely
C) It prevents currency depreciation
D) It is easier to maintain than a fixed rate
Answer: B) It allows the country to conduct its own monetary policy freely

18. In which exchange rate regime is a currency more likely to be exposed to market speculation?
A) Fixed exchange rate
B) Pegged exchange rate
C) Floating exchange rate
D) Currency board
Answer: C) Floating exchange rate

19. What is the main challenge of maintaining a fixed exchange rate system?
A) The need to constantly monitor and adjust interest rates
B) The requirement of maintaining large reserves of foreign currency
C) The inability to trade with other countries
D) The frequent changes in currency value
Answer: B) The requirement of maintaining large reserves of foreign currency

20. What can cause a currency peg to fail?
A) Too much market speculation
B) A country having excessive foreign reserves
C) Central bank intervention
D) Market forces aligning perfectly with the pegged value
Answer: A) Too much market speculation