Question 1

Under fixed exchange rates, which one of the following statements is the MOST accurate?

Accepted Answer

A)  Devaluation causes a decrease in output, a decrease in official reserves, and a contraction of the money supply. 
B)  Devaluation causes a rise in output, a rise in official reserves, and an expansion of the money supply. 
C)  Devaluation causes a rise in output and a rise in official reserves. 
D)  Devaluation causes a rise in output and an expansion of the money supply. 
E)  Devaluation causes a rise in official reserves, and an expansion of the money supply. 
A)  Devaluation causes a decrease in output, a decrease in official reserves, and a contraction of the money supply. 
B)  Devaluation causes a rise in output, a rise in official reserves, and an expansion of the money supply. 
C)  Devaluation causes a rise in output and a rise in official reserves. 
D)  Devaluation causes a rise in output and an expansion of the money supply. 
E)  Devaluation causes a rise in official reserves, and an expansion of the money supply. B

Question 2

Please draw a figure illustrating the actions the central bank must take to maintain a fixed exchange rate following an increase in output.

Accepted Answer

A rise in output from   to   will increase the real money demand, so the central bank must purchase foreign assets and raise the money supply from   to   , in order to maintain a fixed exchange rate   .

Question 3

What are the factors affecting the demand for foreign currency?

Accepted Answer

Three factors affect the demand for foreign currency. They are expected return, risk, and liquidity.

Question 4

The signaling effect of foreign exchange intervention

Accepted Answer

A)  never has any effect on exchange rates. 
B)  can alter the market's view of exchange rates independent from the stance of monetary and fiscal policies. 
C)  cannot cause an immediate exchange rate change when bonds denominated in different currencies are perfect substitutes. 
D)  never leads to actual changes in monetary or fiscal policy. 
E)  can alter the market's view of future monetary policies and cause an immediate exchange rate change. 
A)  never has any effect on exchange rates. 
B)  can alter the market's view of exchange rates independent from the stance of monetary and fiscal policies. 
C)  cannot cause an immediate exchange rate change when bonds denominated in different currencies are perfect substitutes. 
D)  never leads to actual changes in monetary or fiscal policy. 
E)  can alter the market's view of future monetary policies and cause an immediate exchange rate change.

Question 5

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  A devaluation occurs when the central bank lowers the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank raises E. 
B)  A devaluation occurs when the central bank raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank lowers E. 
C)  Devaluation occurs when the domestic currency price of foreign currency, E, raises and a revaluation occurs when E is lowered. 
D)  A devaluation occurs when the central bank of the foreign country raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank of the foreign country lowers E. 
E)  A devaluation occurs when the central bank raises the foreign currency price of domestic currency, E, and a revaluation occurs when the central bank lowers E. 
A)  A devaluation occurs when the central bank lowers the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank raises E. 
B)  A devaluation occurs when the central bank raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank lowers E. 
C)  Devaluation occurs when the domestic currency price of foreign currency, E, raises and a revaluation occurs when E is lowered. 
D)  A devaluation occurs when the central bank of the foreign country raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank of the foreign country lowers E. 
E)  A devaluation occurs when the central bank raises the foreign currency price of domestic currency, E, and a revaluation occurs when the central bank lowers E.

Question 6

A system of managed floating exchange rates is

Accepted Answer

A)  a system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
B)  a system in which governments use flexible exchange rates. 
C)  a system in which governments are forbidden from attempts to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
D)  a system in which governments need to reach a prior agreement among them before they may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
E)  a system in which governments use extensive fiscal policy to discourage exchange rate movements. 
A)  a system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
B)  a system in which governments use flexible exchange rates. 
C)  a system in which governments are forbidden from attempts to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
D)  a system in which governments need to reach a prior agreement among them before they may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
E)  a system in which governments use extensive fiscal policy to discourage exchange rate movements.

Question 7

If assets are imperfect substitutes, then a decrease in the amount of domestic currency bonds held by the public will ________ the risk premium and ________ the amount of domestic currency bonds held by the central bank.

Accepted Answer

A)  decrease; leave unchanged 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; decrease 
E)  leave unchanged; decrease 
A)  decrease; leave unchanged 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; decrease 
E)  leave unchanged; decrease

Question 8

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  Depreciation is a rise in E when the exchange rate is fixed while devaluation is a rise in E when the exchange rate floats. 
B)  Depreciation is a decrease in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed. 
C)  Depreciation is a rise in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed. 
D)  Depreciation is a rise in E when the exchange rate floats while devaluation is a decrease in E when the exchange rate is fixed. 
E)  Depreciation is a fall in E when the exchange rate is fixed while devaluation is a fall in E when the exchange rate floats. 
A)  Depreciation is a rise in E when the exchange rate is fixed while devaluation is a rise in E when the exchange rate floats. 
B)  Depreciation is a decrease in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed. 
C)  Depreciation is a rise in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed. 
D)  Depreciation is a rise in E when the exchange rate floats while devaluation is a decrease in E when the exchange rate is fixed. 
E)  Depreciation is a fall in E when the exchange rate is fixed while devaluation is a fall in E when the exchange rate floats.

Question 9

Under fixed rates, which one of the following statements is the MOST accurate?

Accepted Answer

A)  Fiscal policy can affect output, employment and international reserves at the same time. 
B)  Fiscal policy can affect only employment. 
C)  Fiscal policy can affect only international reserves. 
D)  Fiscal policy can affect only output and employment. 
E)  Fiscal employment can affect only output and international reserves. 
A)  Fiscal policy can affect output, employment and international reserves at the same time. 
B)  Fiscal policy can affect only employment. 
C)  Fiscal policy can affect only international reserves. 
D)  Fiscal policy can affect only output and employment. 
E)  Fiscal employment can affect only output and international reserves.

Question 10

The expectation of future devaluation causes a balance of payments crisis marked by

Accepted Answer

A)  a sharp rise in reserves and a fall in the home interest rate below the world interest rate. 
B)  a sharp fall in reserves and an even bigger fall in the home interest rate below the world interest rate. 
C)  a sharp fall in reserves and a rise in the home interest rate above the world interest rate. 
D)  a sharp rise in reserves and an even greater rise in the home interest rate above the world interest. 
E)  a sharp rise in reserves and a rise in the home interest rate to the level of the world interest. 
A)  a sharp rise in reserves and a fall in the home interest rate below the world interest rate. 
B)  a sharp fall in reserves and an even bigger fall in the home interest rate below the world interest rate. 
C)  a sharp fall in reserves and a rise in the home interest rate above the world interest rate. 
D)  a sharp rise in reserves and an even greater rise in the home interest rate above the world interest. 
E)  a sharp rise in reserves and a rise in the home interest rate to the level of the world interest.

Question 11

If the central bank does not purchase foreign assets when output increases but instead holds the money stock constant, can it still keep the exchange rate fixed at   ? Please explain.

Accepted Answer

No, the rise in output leads to an exces

Question 12

Under the gold standard, if the dollar price of gold is pegged at $35 per ounce and the dollar/euro exchange rate is set at $2.40 per euro, what must the euro price of gold be pegged at?

Accepted Answer

The euro price of gold is cons

Question 13

List the drawbacks of the gold standard.

Accepted Answer

1. Undesirable constraints on the use of

Question 14

This question concerns the mechanism of a reserve currency standard.
Two countries, X and Y, have two currencies, x and y, fixed to the reserve currency, the U.S. dollar. Suppose the exchange rate between x and the U.S. dollar is 3x per dollar. Suppose the exchange rate between y and the U.S. dollar is 5y per dollar. Explain (using numbers) the mechanism if the x-y exchange rate was 0.5 x per y.

Accepted Answer

At this exchange rate, an investor can m

Question 15

Industrialized countries typically ________ their floating exchange rates. Developing countries often ________ their floating exchange rates.

Accepted Answer

A)  fix; allow markets to determine 
B)  manage; peg 
C)  allow markets to determine; fix 
D)  fix; manage 
E)  peg; manage 
A)  fix; allow markets to determine 
B)  manage; peg 
C)  allow markets to determine; fix 
D)  fix; manage 
E)  peg; manage

Question 16

Which one of the following statements is the most correct?

Accepted Answer

A)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign assets implies an increased home money supply. 
B)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign assets implies a decreased home money supply. 
C)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign assets implies an increased home money demand. 
D)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in the home central bank's foreign assets implies an increased home money supply. 
E)  If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in the home central bank's foreign assets implies an increased home money supply. 
A)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign assets implies an increased home money supply. 
B)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign assets implies a decreased home money supply. 
C)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign assets implies an increased home money demand. 
D)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in the home central bank's foreign assets implies an increased home money supply. 
E)  If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in the home central bank's foreign assets implies an increased home money supply.

Question 17

Why is it important to understand fixed exchange rates in the modern global economy?

Accepted Answer

Fixed rates continue to be important for

Question 18

By fixing the exchange rate, the central bank gives up its ability to

Accepted Answer

A)  adjust taxes. 
B)  increase government spending. 
C)  influence the economy through fiscal policy. 
D)  depreciate the domestic currency. 
E)  influence the economy through monetary policy. 
A)  adjust taxes. 
B)  increase government spending. 
C)  influence the economy through fiscal policy. 
D)  depreciate the domestic currency. 
E)  influence the economy through monetary policy.

Question 19

Assuming perfect asset substitutability, can sterilized intervention by the central bank be effective? Please discuss.

Accepted Answer

No, a sterilized foreign exchange interv

Question 20

The liabilities side of a central bank's accounts consists of

Accepted Answer

A)  deposits held by private banks. 
B)  currency in circulation. 
C)  deposits held by private banks and currency in circulation. 
D)  deposits held by foreign banks, domestic assets, and currency in circulation. 
E)  foreign assets and domestic assets. 
A)  deposits held by private banks. 
B)  currency in circulation. 
C)  deposits held by private banks and currency in circulation. 
D)  deposits held by foreign banks, domestic assets, and currency in circulation. 
E)  foreign assets and domestic assets.

Exam 18: Fixed Exchange Rates and Foreign Exchange Intervention

Under fixed exchange rates, which one of the following statements is the MOST accurate?

Please draw a figure illustrating the actions the central bank must take to maintain a fixed exchange rate following an increase in output.

What are the factors affecting the demand for foreign currency?

The signaling effect of foreign exchange intervention

Which one of the following statements is the MOST accurate?

A system of managed floating exchange rates is

If assets are imperfect substitutes, then a decrease in the amount of domestic currency bonds held by the public will ________ the risk premium and ________ the amount of domestic currency bonds held by the central bank.

Which one of the following statements is the MOST accurate?

Under fixed rates, which one of the following statements is the MOST accurate?

The expectation of future devaluation causes a balance of payments crisis marked by

If the central bank does not purchase foreign assets when output increases but instead holds the money stock constant, can it still keep the exchange rate fixed at ? Please explain.

Under the gold standard, if the dollar price of gold is pegged at $35 per ounce and the dollar/euro exchange rate is set at $2.40 per euro, what must the euro price of gold be pegged at?

List the drawbacks of the gold standard.

Industrialized countries typically ________ their floating exchange rates. Developing countries often ________ their floating exchange rates.

Which one of the following statements is the most correct?

Why is it important to understand fixed exchange rates in the modern global economy?

By fixing the exchange rate, the central bank gives up its ability to

Assuming perfect asset substitutability, can sterilized intervention by the central bank be effective? Please discuss.

The liabilities side of a central bank's accounts consists of

Introduction

World Trade: an Overview

Labor Productivity and Comparative Advantage: the Ricardian Model

Specific Factors and Income Distribution

Resources and Trade: the Heckscher-Ohlin Model

The Standard Trade Model

External Economies of Scale and the International Location of Production

Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises

The Instruments of Trade Policy

The Political Economy of Trade Policy

Trade Policy in Developing Countries

Controversies in Trade Policy

National Income Accounting and the Balance of Payments

Exchange Rates and the Foreign Exchange Market: an Asset Approach

Money, Interest Rates, and Exchange Rates

Price Levels and the Exchange Rate in the Long Run

Output and the Exchange Rate in the Short Run

International Monetary Systems: an Historical Overview

Financial Globalization: Opportunity and Crisis

Optimum Currency Areas and the Euro

Developing Countries: Growth, Crisis, and Reform

Filters

If assets are imperfect substitutes, then a decrease in the amount of domestic currency bonds held by the public will the risk premium and the amount of domestic currency bonds held by the central bank.

Industrialized countries typically their floating exchange rates. Developing countries often their floating exchange rates.