Convertible Currency

### What is a convertible currency? - [x] A currency that can be freely exchanged for other currencies without restrictions. - [ ] A currency that cannot be exchanged for goods and services. - [ ] A currency that only exists in digital form. - [ ] A currency used only for domestic transactions. > **Explanation:** A convertible currency is one that can be freely exchanged for other currencies in the foreign exchange market without any limitations. ### Which of the following is an example of a convertible currency? - [x] US Dollar (USD) - [ ] Venezuelan Bolívar (VES) - [ ] North Korean Won (KPW) - [ ] Iraqi Dinar (IQD) > **Explanation:** The US Dollar (USD) is an example of a convertible currency that is widely accepted in the foreign exchange market. ### Why is currency convertibility important for international trade? - [x] It facilitates smoother and more predictable transactions. - [ ] It makes tariffs irrelevant. - [ ] It increases the need for multiple currency accounts. - [ ] It ensures stable economic growth in all countries. > **Explanation:** Currency convertibility is important as it allows for easier and more predictable transactions in international trade by reducing barriers and uncertainties associated with currency exchange. ### Convertible currency allows businesses to... - [x] Hedge against forex risks more efficiently. - [ ] Eliminate all financial risks entirely. - [ ] Avoid paying any taxes. - [ ] Control the monetary policy of other countries. > **Explanation:** Convertible currency facilitates the strategy of hedging against forex risks, making business operations involving multiple currencies more efficient. ### True or False: All currencies in the world are convertible. - [ ] True - [x] False > **Explanation:** Not all currencies are convertible; some countries impose restrictions to control capital flows and protect the national economy. ### Who manages the exchange rates for convertible currencies? - [ ] Importers - [ ] Exporters - [ ] Individual investors - [x] Central Banks and Forex Market Dynamics > **Explanation:** Central banks and market dynamics manage exchange rates through monetary policy and forex trading activities, influencing how convertible currencies perform. ### How does a currency being less convertible affect its trading? - [x] It limits the ease of international transactions and may lead to higher transaction costs. - [ ] It enhances the frequency of its use globally. - [ ] It eliminates the fluctuation in its value. - [ ] It ensures constant exchange rates. > **Explanation:** A less convertible currency imposes restrictions, making international transactions more cumbersome and costly due to higher fees and less favorable exchange rates. ### What is the role of the foreign exchange market in relation to convertible currencies? - [x] It provides a platform for exchanging convertible currencies without restrictions. - [ ] It regulates interest rates. - [ ] It sets fiscal policies. - [ ] It manages social welfare programs. > **Explanation:** The foreign exchange market enables the free trading of convertible currencies, ensuring liquidity and efficient currency exchange internationally. ### Convertible currencies are often associated with which of the following? - [x] Economic stability and large international markets. - [ ] Limited use and high volatility. - [ ] Isolationist economic policies. - [ ] Underdeveloped financial systems. > **Explanation:** Convertible currencies are typically associated with economically stable countries that have large international markets, encouraging global trade and investments. ### In general, which of the following statements is true regarding hard currency? - [x] It is widely accepted globally for trade and investment. - [ ] It cannot be converted back to any other form of currency. - [ ] It is unstable and not often used. - [ ] It is only used for specific types of transactions. > **Explanation:** Hard currency is widely accepted around the world for international trade and investment, typically being a form of highly convertible currency.