Question 1

Show how intervention can automatically correct a balance of payments deficit with no further actions by the central bank.

Accepted Answer

Intervention can automatically correct a balance of payments deficit without further actions by the central bank through the process of market forces. When a country experiences a balance of payments deficit, it means that it is importing more goods and services than it is exporting, leading to a net outflow of currency.

In response to this deficit, the country's currency will weaken in the foreign exchange market. A weaker currency makes the country's exports cheaper for foreign buyers and imports more expensive for domestic consumers. As a result, the demand for the country's exports will increase, while the demand for imports will decrease. This shift in demand will eventually lead to a reduction in the balance of payments deficit.

Additionally, a weaker currency can also attract foreign investment as assets become relatively cheaper for foreign investors. This inflow of foreign investment can help finance the deficit and improve the balance of payments.

Therefore, through the natural adjustments in the foreign exchange market, intervention can automatically correct a balance of payments deficit without the need for further actions by the central bank.

Question 2

With fixed exchange rates, expansionary fiscal policy will increase output and income.

Accepted Answer

A) True 
 B)False  True

Question 3

Countries with exchange controls never have to ration foreign exchange.

Accepted Answer

A) True 
 B)False  False

Question 4

The relationship between EU members and the countries using the Euro as their national currency is that:

Accepted Answer

A)  all 15 countries in the EU use the Euro as their national currency. 
B)  none of the EU countries use the Euro as their national currency. 
C)  only 6 of the EU countries use the Euro as their national currency. 
D)  12 of the EU countries use the Euro as their national currency. 
E)  18 of the EU countries use the Euro as their national currency. 
A)  all 15 countries in the EU use the Euro as their national currency. 
B)  none of the EU countries use the Euro as their national currency. 
C)  only 6 of the EU countries use the Euro as their national currency. 
D)  12 of the EU countries use the Euro as their national currency. 
E)  18 of the EU countries use the Euro as their national currency.

Question 5

One method of balancing the supply and demand for foreign exchange by a government when the exchange rate is freely floating is to ration the available supply among competing uses.

Accepted Answer

A) True 
 B)False

Question 6

One of the ways governments control capital inflows and outflows is by:

Accepted Answer

A)  regulating imports. 
B)  regulating exports. 
C)  regulating FDI. 
D)  regulating domestic businesses. 
E)  not having exchange controls. 
A)  regulating imports. 
B)  regulating exports. 
C)  regulating FDI. 
D)  regulating domestic businesses. 
E)  not having exchange controls.

Question 7

Sterilization can be defined as a crawling exchange rate peg.

Accepted Answer

A) True 
 B)False

Question 8

Under a fixed exchange rate system, a contractionary fiscal policy causes the central bank to intervene in the foreign exchange market and sell foreign exchange.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is one of the difficulties associated with exchange controls?

Accepted Answer

A)  The ease of dealing with an efficient government agency 
B)  The difficulty of keeping the nominal and the real exchange rates aligned 
C)  Maintaining purchasing power parity 
D)  The relative simplicity of balancing inflows and outflows of foreign exchange 
E)  The stability of the real exchange rate. 
A)  The ease of dealing with an efficient government agency 
B)  The difficulty of keeping the nominal and the real exchange rates aligned 
C)  Maintaining purchasing power parity 
D)  The relative simplicity of balancing inflows and outflows of foreign exchange 
E)  The stability of the real exchange rate.

Question 10

Intervention in the foreign exchange market by buying foreign exchange causes:

Accepted Answer

A)  the money supply to rise. 
B)  the money supply to fall. 
C)  no effect on the money supply. 
D)  a capital outflow. 
E)  FDI to increase. 
A)  the money supply to rise. 
B)  the money supply to fall. 
C)  no effect on the money supply. 
D)  a capital outflow. 
E)  FDI to increase.

Question 11

Suppose that the U.S. and Canada were considering forming a currency union. Discuss the potential monetary efficiency gains and the economic stability losses for both countries.

Accepted Answer

A currency union between the U.S. and Ca

Question 12

List and explain the difficulties associated with exchange controls.

Accepted Answer

Exchange controls refer to the regulatio

Question 13

Under a fixed exchange rate the government must constantly balance the total demand and total supply of foreign exchange.

Accepted Answer

A) True 
 B)False

Question 14

Under a fixed exchange-rate system, as a government adopts an expansionary fiscal policy:

Accepted Answer

A)  the demand for loanable funds increases causing interest rates to rise. 
B)  the demand for loanable funds decreases causing interest rates to fall. 
C)  the supply of loanable funds increases causing interest rates to rise. 
D)  the supply of loanable funds decreases causing interest rates to fall. 
E)  the demand for loanable funds does not change and interest rates fall. 
A)  the demand for loanable funds increases causing interest rates to rise. 
B)  the demand for loanable funds decreases causing interest rates to fall. 
C)  the supply of loanable funds increases causing interest rates to rise. 
D)  the supply of loanable funds decreases causing interest rates to fall. 
E)  the demand for loanable funds does not change and interest rates fall.

Question 15

There are very few countries in the world that peg the value of their currency to that of another country.

Accepted Answer

A) True 
 B)False

Question 16

Under fixed exchange rates, when is monetary policy consistent with both internal and external balance?

Accepted Answer

A)  When the economy has unemployment and a current account deficit 
B)  When the economy has unemployment and a current account surplus 
C)  When the economy has inflation and a current account surplus 
D)  When the economy has both inflation and high unemployment 
E)  When the economy has both low inflation and negative real GDP growth. 
A)  When the economy has unemployment and a current account deficit 
B)  When the economy has unemployment and a current account surplus 
C)  When the economy has inflation and a current account surplus 
D)  When the economy has both inflation and high unemployment 
E)  When the economy has both low inflation and negative real GDP growth.

Question 17

Explain how it is possible for the nominal exchange rate to remain fixed and the real exchange rate to depreciate in a country with exchange controls and a nontrivial amount of inflation.

Accepted Answer

In a country with exchange controls and

Question 18

Intervention in the foreign exchange market means the government rations the available supply of foreign among competing uses.

Accepted Answer

A) True 
 B)False

Question 19

One of the reasons that we study fixed exchange rates is that before the 1970s most of the world's economies used a fixed exchange-rate system.

Accepted Answer

A) True 
 B)False

Question 20

If a country has an external deficit, intervention in the foreign exchange market by the central bank will create a new equilibrium if the central bank buys foreign exchange.

Accepted Answer

A) True 
 B)False

Show how intervention can automatically correct a balance of payments deficit with no further actions by the central bank.

With fixed exchange rates, expansionary fiscal policy will increase output and income.

Countries with exchange controls never have to ration foreign exchange.

The relationship between EU members and the countries using the Euro as their national currency is that:

One method of balancing the supply and demand for foreign exchange by a government when the exchange rate is freely floating is to ration the available supply among competing uses.

One of the ways governments control capital inflows and outflows is by:

Sterilization can be defined as a crawling exchange rate peg.

Under a fixed exchange rate system, a contractionary fiscal policy causes the central bank to intervene in the foreign exchange market and sell foreign exchange.

Which of the following is one of the difficulties associated with exchange controls?

Intervention in the foreign exchange market by buying foreign exchange causes:

Suppose that the U.S. and Canada were considering forming a currency union. Discuss the potential monetary efficiency gains and the economic stability losses for both countries.

List and explain the difficulties associated with exchange controls.

Under a fixed exchange rate the government must constantly balance the total demand and total supply of foreign exchange.

Under a fixed exchange-rate system, as a government adopts an expansionary fiscal policy:

There are very few countries in the world that peg the value of their currency to that of another country.

Under fixed exchange rates, when is monetary policy consistent with both internal and external balance?

Explain how it is possible for the nominal exchange rate to remain fixed and the real exchange rate to depreciate in a country with exchange controls and a nontrivial amount of inflation.

Intervention in the foreign exchange market means the government rations the available supply of foreign among competing uses.

One of the reasons that we study fixed exchange rates is that before the 1970s most of the world's economies used a fixed exchange-rate system.

If a country has an external deficit, intervention in the foreign exchange market by the central bank will create a new equilibrium if the central bank buys foreign exchange.

Introduction: An Overview of the World Economy

Why Countries Trade

Comparative Advantage and the Production Possibilities Frontier

Factor Endowments and the Commodity Composition of Trade

Intra-Industry Trade

The Firm in the World Economy

International Factor Movements

Tariffs

Nontariff Distortions to Trade

International Trade Policy

Regional Economic Arrangements

International Trade and Economic Growth

National Income Accounting and the Balance of Payments

Exchange Rates and Their Determination: A Basic Model

Money, Interest Rates, and the Exchange Rate

Open Economy Macroeconomics

Macroeconomic Policy and Floating Exchange Rates

International Monetary Arrangements

Capital Flows and the Developing Countries

Filters

Exam 18: Fixed Exchange Rates and Currency Unions

Show how intervention can automatically correct a balance of payments deficit with no further actions by the central bank.

With fixed exchange rates, expansionary fiscal policy will increase output and income.

Countries with exchange controls never have to ration foreign exchange.

The relationship between EU members and the countries using the Euro as their national currency is that:

One method of balancing the supply and demand for foreign exchange by a government when the exchange rate is freely floating is to ration the available supply among competing uses.

One of the ways governments control capital inflows and outflows is by:

Sterilization can be defined as a crawling exchange rate peg.

Under a fixed exchange rate system, a contractionary fiscal policy causes the central bank to intervene in the foreign exchange market and sell foreign exchange.

Which of the following is one of the difficulties associated with exchange controls?

Intervention in the foreign exchange market by buying foreign exchange causes:

Suppose that the U.S. and Canada were considering forming a currency union. Discuss the potential monetary efficiency gains and the economic stability losses for both countries.

List and explain the difficulties associated with exchange controls.

Under a fixed exchange rate the government must constantly balance the total demand and total supply of foreign exchange.

Under a fixed exchange-rate system, as a government adopts an expansionary fiscal policy:

There are very few countries in the world that peg the value of their currency to that of another country.

Under fixed exchange rates, when is monetary policy consistent with both internal and external balance?

Explain how it is possible for the nominal exchange rate to remain fixed and the real exchange rate to depreciate in a country with exchange controls and a nontrivial amount of inflation.

Intervention in the foreign exchange market means the government rations the available supply of foreign among competing uses.

One of the reasons that we study fixed exchange rates is that before the 1970s most of the world's economies used a fixed exchange-rate system.

If a country has an external deficit, intervention in the foreign exchange market by the central bank will create a new equilibrium if the central bank buys foreign exchange.

Introduction: An Overview of the World Economy

Why Countries Trade

Comparative Advantage and the Production Possibilities Frontier

Factor Endowments and the Commodity Composition of Trade

Intra-Industry Trade

The Firm in the World Economy

International Factor Movements

Tariffs

Nontariff Distortions to Trade

International Trade Policy

Regional Economic Arrangements

International Trade and Economic Growth

National Income Accounting and the Balance of Payments

Exchange Rates and Their Determination: A Basic Model

Money, Interest Rates, and the Exchange Rate

Open Economy Macroeconomics

Macroeconomic Policy and Floating Exchange Rates

International Monetary Arrangements

Capital Flows and the Developing Countries

Filters