Exam 18: Fixed Exchange Rates and Currency Unions

When a country has an inconvertible currency the government adopts exchange controls and becomes a monopolist with respect to holding all foreign exchange.

Explain why letting the exchange rate float is a convenient way for a country to deal with the potential problems of maintaining internal and external balance.

Which of the following is related to the Trilemma?

The buying and selling of foreign exchange by a central bank is known as exchange control.

A contractionary fiscal policy:

A system of fixed exchange rates is more common in developed countries.

In an open economy with fixed exchange rates, expansionary fiscal policy causes:

An increase in a country's interest rate would necessitate which of the following actions by a central bank that did not want the nominal exchange rate to change?

Under a fixed exchange rate system, when total outflows of foreign exchange exceed total inflows of foreign exchange at the current fixed exchange rate:

Under a fixed exchange rate system, intervention by a central bank automatically:

What is a currency board system? What are the strengths and weaknesses of such a system?

An expansionary monetary policy in an open economy with freely mobile capital and fixed exchange rates is more effective in changing equilibrium output when compared to a closed economy.

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

An inconvertible currency:

Intervention in the foreign exchange market means:

Under a fixed exchange rate system, when total inflows of foreign exchange exceed total outflows of foreign exchange at the current fixed exchange rate:

Suppose that a country has a current account surplus and the central bank intervenes in the foreign exchange market and does nothing else. Which of the following statements is true in this case?

Economists can perfectly predict when an exchange control system will collapse.