1. A small country whose economic growth is heavily dependent on trade with the United States is considering several exchange rate regimes that would best serve in their economic interest. They are most concerned about the unfavorable impact of exchange rate risk on their trade. They are also concerned about inflation and they would like to adopt a currency regime that is inherently anti-inflationary. Which one of the following regimes would be most suitable for this country provided that this is the only information you have.

A. managed float

B. A peg against Euro

C. freely floating exchange rate

D. A peg against USD

2. Three most important reasons why Chinese currency is not yet ready to become a global reserve currency are restrictions imposed on capital inflows and outflows, underdeveloped nature of Chinese financial markets and frequent interventions by the Chinese government to dictate or manage the value of Chinese Yuan.

True

False