Question 1

There are limits to the ability of monetary authorities to use sterilized intervention in the case of a deficit because:

Accepted Answer

A) the central bank may be unwilling to increase its holdings of foreign currency beyond a certain limit. 
B) the pressure from foreign countries to allow the domestic currency to appreciate will lead to large losses. 
C) the central bank's ability to constantly obtain foreign currency for the sterilized intervention is constrained. 
D) the export level is fixed and it cannot be allowed to drop. 
A) the central bank may be unwilling to increase its holdings of foreign currency beyond a certain limit. 
B) the pressure from foreign countries to allow the domestic currency to appreciate will lead to large losses. 
C) the central bank's ability to constantly obtain foreign currency for the sterilized intervention is constrained. 
D) the export level is fixed and it cannot be allowed to drop. C

Question 2

International trade shocks:

Accepted Answer

A) have no impact on the countries under fixed exchange rate regimes. 
B) are of equal concern to large industrialized countries and to developing countries that rely on exporting a few primary commodities. 
C) include changes in a country's total exports that result from changes in foreign consumer tastes. 
D) are magnified by the use of tariffs and non-tariff barriers. 
A) have no impact on the countries under fixed exchange rate regimes. 
B) are of equal concern to large industrialized countries and to developing countries that rely on exporting a few primary commodities. 
C) include changes in a country's total exports that result from changes in foreign consumer tastes. 
D) are magnified by the use of tariffs and non-tariff barriers. C

Question 3

The key to the assignment rule is that one powerful government policy tool can be used to achieve both external balance and internal balance.

Accepted Answer

A) True 
 B)False  False

Question 4

The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy is at point A, a triple intersection. Here, the FE curve is steeper than the LM curve.   If monetary authorities are unable to sterilize, output will end up:

Accepted Answer

A) at Y1. 
B) to the left of Y1. 
C) To the right of Y1. 
D) at Y0. 
A) at Y1. 
B) to the left of Y1. 
C) To the right of Y1. 
D) at Y0.

Question 5

As long as the FE curve is vertical, internal and external balance can be achieved by using the appropriate mix of monetary and fiscal policy.

Accepted Answer

A) True 
 B)False

Question 6

There are limits to the ability of monetary authorities to use sterilized intervention in the case of a surplus because:

Accepted Answer

A) the central bank may be unwilling to increase its holdings of foreign currency. 
B) the pressure from foreign countries to allow the domestic currency to depreciate will lead to large losses. 
C) the central bank's ability to constantly obtain foreign currency for the sterilized intervention is constrained. 
D) the export level is fixed and it cannot be allowed to drop. 
A) the central bank may be unwilling to increase its holdings of foreign currency. 
B) the pressure from foreign countries to allow the domestic currency to depreciate will lead to large losses. 
C) the central bank's ability to constantly obtain foreign currency for the sterilized intervention is constrained. 
D) the export level is fixed and it cannot be allowed to drop.

Question 7

According to the assignment rule, which of the following policy mixes is appropriate for a country with high inflation, a balance of payments surplus, and fixed exchange rates?

Accepted Answer

A) Contractionary fiscal policy and contractionary monetary policy 
B) Contractionary fiscal policy and expansionary monetary policy 
C) Expansionary fiscal policy and expansionary monetary policy 
D) Expansionary fiscal policy and contractionary monetary policy 
A) Contractionary fiscal policy and contractionary monetary policy 
B) Contractionary fiscal policy and expansionary monetary policy 
C) Expansionary fiscal policy and expansionary monetary policy 
D) Expansionary fiscal policy and contractionary monetary policy

Question 8

International capital-flow shocks to an economy with fixed exchange rates necessitates:

Accepted Answer

A) an offsetting fiscal policy. 
B) devaluation or revaluation of the domestic currency. 
C) international borrowing by the domestic government. 
D) intervention in the foreign exchange market by the domestic monetary authorities. 
A) an offsetting fiscal policy. 
B) devaluation or revaluation of the domestic currency. 
C) international borrowing by the domestic government. 
D) intervention in the foreign exchange market by the domestic monetary authorities.

Question 9

The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy is at point A, a triple intersection. Here, the FE curve is steeper than the LM curve.   In order to maintain the fixed exchange rate, at point B monetary authorities must:

Accepted Answer

A) buy domestic government bonds. 
B) sell domestic currency. 
C) buy domestic currency. 
D) sell domestic government bonds. 
A) buy domestic government bonds. 
B) sell domestic currency. 
C) buy domestic currency. 
D) sell domestic government bonds.

Question 10

Internal shocks to an economy with a fixed exchange rate will:

Accepted Answer

A) have the same types of impacts as monetary and fiscal policy changes. 
B) have no impact on the domestic economy but will lead to external imbalances. 
C) have no impact on both the country's internal balance and the country's balance of payments. 
D) have no impact on the country's internal balance but will change the country's balance of payments. 
A) have the same types of impacts as monetary and fiscal policy changes. 
B) have no impact on the domestic economy but will lead to external imbalances. 
C) have no impact on both the country's internal balance and the country's balance of payments. 
D) have no impact on the country's internal balance but will change the country's balance of payments.

Question 11

The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy was at point A, a triple intersection. Here, the FE curve is flatter than the LM curve.   If monetary authorities are unable to sterilize, the interest rate will end up:

Accepted Answer

A) at i1. 
B) above i1. 
C) between i1 and i0. 
D) at i0. 
A) at i1. 
B) above i1. 
C) between i1 and i0. 
D) at i0.

Question 12

Which of the following statements is accurate?

Accepted Answer

A) Fiscal policy is not effective with fixed exchange rates in an environment of highly responsive international capital flows. 
B) Fiscal policy is highly effective with fixed exchange rates and unresponsive international capital flows. 
C) Fixed exchange rates greatly constrain a country's ability to pursue an independent monetary policy. 
D) Contractionary monetary policy is effective under a fixed exchange rate regime. 
A) Fiscal policy is not effective with fixed exchange rates in an environment of highly responsive international capital flows. 
B) Fiscal policy is highly effective with fixed exchange rates and unresponsive international capital flows. 
C) Fixed exchange rates greatly constrain a country's ability to pursue an independent monetary policy. 
D) Contractionary monetary policy is effective under a fixed exchange rate regime.

Question 13

Under perfect capital mobility and fixed exchange rates, expansionary _____ is a futile attempt because the _____.

Accepted Answer

A) fiscal policy; LM curve effectively is vertical. 
B) monetary policy; LM curve effectively is the same as the FE curve. 
C) fiscal policy; interest rate does not change. 
D) monetary policy; IS curve will shift to the left. 
A) fiscal policy; LM curve effectively is vertical. 
B) monetary policy; LM curve effectively is the same as the FE curve. 
C) fiscal policy; interest rate does not change. 
D) monetary policy; IS curve will shift to the left.

Question 14

With perfect capital mobility, the LM and FE curves are both horizontal.

Accepted Answer

A) True 
 B)False

Question 15

Most countries are able to use sterilized interventions to run deficits and surpluses indefinitely.

Accepted Answer

A) True 
 B)False

Question 16

For a country with a fixed exchange rate and no sterilization: When the FE curve is steeper than the LM curve, a negative domestic spending shock to the IS curve creates a balance of payments surplus, which then causes the LM curve to shift to the right.

Accepted Answer

A) True 
 B)False

Question 17

According to the assignment rule, which of the following policy mixes is appropriate for a country with high unemployment, a balance of payments surplus, and fixed exchange rates?

Accepted Answer

A) Expansionary fiscal policy and expansionary monetary policy 
B) Expansionary fiscal policy and contractionary monetary policy 
C) Contractionary fiscal policy and expansionary monetary policy 
D) Contractionary fiscal policy and contractionary monetary policy 
A) Expansionary fiscal policy and expansionary monetary policy 
B) Expansionary fiscal policy and contractionary monetary policy 
C) Contractionary fiscal policy and expansionary monetary policy 
D) Contractionary fiscal policy and contractionary monetary policy

Question 18

For a country with a fixed exchange rate and no sterilization: When the FE curve is flatter than the LM curve, a negative domestic spending shock to the IS curve creates a balance of payments deficit, which then causes the LM curve to shift to the left.

Accepted Answer

A) True 
 B)False

Question 19

The J curve shows that:

Accepted Answer

A) devaluation is more likely to improve the trade balance in the short-run than in the long-run. 
B) devaluation is more likely to improve the trade balance after a longer span of time has elapsed. 
C) devaluation is likely to be unstable. 
D) devaluation is unlikely to improve the trade balance in either the short-run or the long-run. 
A) devaluation is more likely to improve the trade balance in the short-run than in the long-run. 
B) devaluation is more likely to improve the trade balance after a longer span of time has elapsed. 
C) devaluation is likely to be unstable. 
D) devaluation is unlikely to improve the trade balance in either the short-run or the long-run.

Question 20

Describe the different types of internal shocks to an economy.

Accepted Answer

One type of internal shock arises in the

Exam 23: Internal and External Balance With Fixed Exchange Rates

There are limits to the ability of monetary authorities to use sterilized intervention in the case of a deficit because:

International trade shocks:

The key to the assignment rule is that one powerful government policy tool can be used to achieve both external balance and internal balance.

The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy is at point A, a triple intersection. Here, the FE curve is steeper than the LM curve. If monetary authorities are unable to sterilize, output will end up:

As long as the FE curve is vertical, internal and external balance can be achieved by using the appropriate mix of monetary and fiscal policy.

There are limits to the ability of monetary authorities to use sterilized intervention in the case of a surplus because:

According to the assignment rule, which of the following policy mixes is appropriate for a country with high inflation, a balance of payments surplus, and fixed exchange rates?

International capital-flow shocks to an economy with fixed exchange rates necessitates:

The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy is at point A, a triple intersection. Here, the FE curve is steeper than the LM curve. In order to maintain the fixed exchange rate, at point B monetary authorities must:

Internal shocks to an economy with a fixed exchange rate will:

The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy was at point A, a triple intersection. Here, the FE curve is flatter than the LM curve. If monetary authorities are unable to sterilize, the interest rate will end up:

Which of the following statements is accurate?

Under perfect capital mobility and fixed exchange rates, expansionary _____ is a futile attempt because the _____.

With perfect capital mobility, the LM and FE curves are both horizontal.

Most countries are able to use sterilized interventions to run deficits and surpluses indefinitely.

For a country with a fixed exchange rate and no sterilization: When the FE curve is steeper than the LM curve, a negative domestic spending shock to the IS curve creates a balance of payments surplus, which then causes the LM curve to shift to the right.

According to the assignment rule, which of the following policy mixes is appropriate for a country with high unemployment, a balance of payments surplus, and fixed exchange rates?

For a country with a fixed exchange rate and no sterilization: When the FE curve is flatter than the LM curve, a negative domestic spending shock to the IS curve creates a balance of payments deficit, which then causes the LM curve to shift to the left.

The J curve shows that:

Describe the different types of internal shocks to an economy.

International Economics Is Different

The Basic Theory Using Demand and Supply

Why Everybody Trades: Comparative Advantage

Trade: Factor Availability and Factor Proportions Are Key

Who Gains and Who Loses From Trade

Scale Economies, Imperfect Competition, and Trade

Growth and Trade Part II: Trade Policy

Analysis of a Tariff

Nontariff Barriers to Imports

Arguments for and Against Protection

Pushing Exports

Trade Blocs and Trade Blocks

Trade and the Environment

Trade Policies for Developing Countries

Multinationals and Migration: International Factor Movements

Payments Among Nations

The Foreign Exchange Market

Forward Exchange and International Financial Investment

What Determines Exchange Rates

Government Policies Toward the Foreign Exchange Market

International Lending and Financial Crises

How Does the Open Macroeconomy Work

Floating Exchange Rates and Internal Balance

National and Global Choices: Floating Rates and the Alternatives

Filters

Under perfect capital mobility and fixed exchange rates, expansionary _ is a futile attempt because the _.