Exam 21: Exchange Rate Regimes

Assume a country is in a fixed exchange rate regime. Explain what factors might cause individuals to expect that a country will revalue its currency.

In a fixed exchange rate regime, which of the following policies could be implemented to increase a trade deficit and leave aggregate demand constant?

Assume that the interest parity condition holds, the future expected exchange rate is constant, the current nominal exchange rate is 2.2, the one- year foreign interest rate is 7% and the one- year domestic interest rate is 4%. One could conclude that:

Suppose country A pegs its nominal exchange rate to country B, and that country A has a higher inflation rate than country B. In this situation, country A will experience:

Explain the cases for and against flexible and fixed exchange rate regimes.

Explain why exchange rates are more volatile than is suggested by the relatively simply interest parity condition presented earlier in the course.

Suppose that policy makers decide to revalue the currency, such an action generally represents:

When we no longer assume that the future expected exchange rate in one year is constant, explain what variables affect the current exchange rate in a flexible exchange rate regime. Include in your answer an explanation of how changes in these variables affect the current exchange rate.

Explain what factors cause shifts of the aggregate demand curve in the open economy model.

Suppose a country that is perceived to have an undervalued real exchange rate does not revalue. Which of the following would we expect to occur over time?

Assume that policy makers are pursuing a fixed exchange rate regime and that the economy is initially operating at the natural level. Which of the following will occur as a result of a devaluation?

Use the following information to answer the question(s) below: The exchange rate between the Australian dollar and the British pound is 0.65 (i.e., 0.65 pounds per Australian dollar). In the U.K., the price level is 1.0 and the interest rate is 15%. In Australia, the price level is 0.5 and the interest rate is 10%. The inflation rate in both countries is zero. -Refer to the information above. The price of Australian goods measured in pounds is:

Assume that policy makers are pursuing a fixed exchange rate regime. Assume that the economy is initially operating at the natural level of output. Now suppose that households as a result of an increase in consumer confidence increase consumption. Given this information, we know that:

Under the Gold Standard:

Suppose foreign exchange markets anticipate a revaluation for country A. Further assume that policy makers in country A will continue to fix its nominal exchange rate. In order to peg the currency at its original level, which of the following must occur?

Suppose output is above the natural level of output. In a fixed exchange rate regime, explain the two ways the economy can return to the natural level of output.

Assume that policy makers are pursuing a fixed exchange rate regime. Assume that the economy is initially operating at the natural level of output. Suppose that government spending decreases. Given this information, we know that this fiscal contraction will cause:

Assume a country is in a fixed exchange rate regime. Now suppose that individuals expect that policy makers will revalue its currency. Explain the various actions that policy makers can choose in response to this expected revaluation.

European currencies were taken out of circulation and replaced with the Euro in:

First, briefly explain why the AD curve is downward sloping in a closed economy. Second, briefly explain why the AD curve is downward sloping in an open economy under fixed exchange rates. And finally, briefly compare the size of the slopes of the two AD curves.