Question 1

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. C

Question 2

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 0.8 x per y.

Accepted Answer

At this exchange rate,an investor can make an arbitrage profit by selling $100 to the central bank of Y (receiving 500 y),then selling this 500 y to the foreign exchange market for 500 y/(0.8 x per y)= 400 x,then buying $133.33 U.S.dollars from the central bank of X with this 400 x.Thus the foreign exchange market will bid the x-y exchange rate down to 0.6.

Question 3

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. B

Question 4

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

@#IMG-DLM& A rise in output from @#IMG-DLM& to @#IMG-DLM& wi

Question 5

A balance of payments crisis is best described as

Accepted Answer

A) a sharp change in interest rates sparked by a change in expectations about the level of imports. 
B) a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate. 
C) a sharp change in interest rates sparked by a change in expectations about the level of exports. 
D) a sharp change in foreign reserves sparked by a change in expectations about the level of imports. 
E) a sharp change in foreign reserves sparked by a change in expectations about domestic production. 
A) a sharp change in interest rates sparked by a change in expectations about the level of imports. 
B) a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate. 
C) a sharp change in interest rates sparked by a change in expectations about the level of exports. 
D) a sharp change in foreign reserves sparked by a change in expectations about the level of imports. 
E) a sharp change in foreign reserves sparked by a change in expectations about domestic production.

Question 6

Currency crises may result from

Accepted Answer

A) central bank balance sheets with higher liabilities than assets. 
B) political upheaval leading to lowering exports. 
C) a reconfiguration of central bank balance sheets. 
D) speculative attacks on the currency or central banks purchasing excessive amounts of government bonds. 
E) depreciation of foreign reserves. 
A) central bank balance sheets with higher liabilities than assets. 
B) political upheaval leading to lowering exports. 
C) a reconfiguration of central bank balance sheets. 
D) speculative attacks on the currency or central banks purchasing excessive amounts of government bonds. 
E) depreciation of foreign reserves.

Question 7

From the figure below,please provide an explanation for the large decline in the growth rate of international reserves held by developing countries in the 2008-2009 period.

Accepted Answer

The growth of global capital markets has

Question 8

Describe the mechanism which would take place if the Bank of England decides to increase its money supply by purchasing domestic assets under the gold standard.

Accepted Answer

The increase in Britain's money supply w

Question 9

What is the expected dollar rate of return on dollar deposits if today's exchange rate is $1.10 per euro,next year's expected exchange rate is $1.165 per euro,the dollar interest rate is 10%,and the euro interest rate is 5%?

Accepted Answer

A) 10% 
B) 11% 
C) -1% 
D) 0% 
E) 5% 
A) 10% 
B) 11% 
C) -1% 
D) 0% 
E) 5%

Question 10

The global financial crisis of 2007-2008 resulted in a(n)________ of the Swiss franc.In 2011,the Swiss central bank intervened in order to cause a(n)________ of the franc.

Accepted Answer

A) appreciation;appreciation 
B) depreciation;depreciation 
C) appreciation;revaluation 
D) depreciation;appreciation 
E) appreciation;depreciation 
A) appreciation;appreciation 
B) depreciation;depreciation 
C) appreciation;revaluation 
D) depreciation;appreciation 
E) appreciation;depreciation

Question 11

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 12

Please define and give an example of sterilized foreign exchange intervention.

Accepted Answer

Sterilized foreign exchange intervention

Question 13

Please use a figure to discuss whether or not a devaluation under a fixed exchange rate has the same long-run effect as a proportional increase in the money supply under a floating rate.

Accepted Answer

@#IMG-DLM& A currency devaluation shifts the AA sc

Question 14

Please briefly describe what is meant by a gold exchange standard.

Accepted Answer

Under a gold exchange standard,central b

Question 15

Use a figure to show the effect of a sterilized central bank purchase of foreign assets under the imperfect asset substitutability assumption.

Accepted Answer

@#IMG-DLM& The interest parity condition is given

Question 16

When a country's currency is devalued

Accepted Answer

A) output decreases. 
B) output increases and the money supply decreases. 
C) the money supply decreases. 
D) output decreases and the money supply increases. 
E) both the output and the money supply increases. 
A) output decreases. 
B) output increases and the money supply decreases. 
C) the money supply decreases. 
D) output decreases and the money supply increases. 
E) both the output and the money supply increases.

Question 17

In the interest rate parity condition with imperfect substitutes and a risk premium of ρ

Accepted Answer

A) an increased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds. 
B) a decreased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds. 
C) an increased stock of domestic government debt will reduce the difference between the expected returns on domestic and foreign currency bonds. 
D) an increased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds. 
E) a decreased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds. 
A) an increased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds. 
B) a decreased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds. 
C) an increased stock of domestic government debt will reduce the difference between the expected returns on domestic and foreign currency bonds. 
D) an increased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds. 
E) a decreased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds.

Question 18

Which of the following is an example of a regional currency arrangement?

Accepted Answer

A) most-favored nation status 
B) free-trade zones 
C) exchange rate union 
D) currency cartel associations 
E) agreement on commercial trade 
A) most-favored nation status 
B) free-trade zones 
C) exchange rate union 
D) currency cartel associations 
E) agreement on commercial trade

Question 19

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 20

The main reason(s)why governments sometimes choose to devalue their currencies is (are)

Accepted Answer

A) devaluation makes domestic goods more expensive in relation to foreign goods. 
B) devaluation makes domestic services more expensive in relation to foreign services. 
C) devaluation increases foreign reserves held by the central bank. 
D) devaluation improves the current account and increases foreign reserves held by the central bank. 
E) devaluation hurts foreign currencies. 
A) devaluation makes domestic goods more expensive in relation to foreign goods. 
B) devaluation makes domestic services more expensive in relation to foreign services. 
C) devaluation increases foreign reserves held by the central bank. 
D) devaluation improves the current account and increases foreign reserves held by the central bank. 
E) devaluation hurts foreign currencies.

Exam 18: Fixed Exchange Rates and Foreign Exchange Intervention

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

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.

A balance of payments crisis is best described as

Currency crises may result from

From the figure below,please provide an explanation for the large decline in the growth rate of international reserves held by developing countries in the 2008-2009 period.

Describe the mechanism which would take place if the Bank of England decides to increase its money supply by purchasing domestic assets under the gold standard.

What is the expected dollar rate of return on dollar deposits if today's exchange rate is $1.10 per euro,next year's expected exchange rate is $1.165 per euro,the dollar interest rate is 10%,and the euro interest rate is 5%?

The global financial crisis of 2007-2008 resulted in a(n)________ of the Swiss franc.In 2011,the Swiss central bank intervened in order to cause a(n)________ of the franc.

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?

Please define and give an example of sterilized foreign exchange intervention.

Please use a figure to discuss whether or not a devaluation under a fixed exchange rate has the same long-run effect as a proportional increase in the money supply under a floating rate.

Please briefly describe what is meant by a gold exchange standard.

Use a figure to show the effect of a sterilized central bank purchase of foreign assets under the imperfect asset substitutability assumption.

When a country's currency is devalued

In the interest rate parity condition with imperfect substitutes and a risk premium of ρ

Which of the following is an example of a regional currency arrangement?

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

The main reason(s)why governments sometimes choose to devalue their currencies is (are)

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

The global financial crisis of 2007-2008 resulted in a(n) of the Swiss franc.In 2011,the Swiss central bank intervened in order to cause a(n) of the franc.