Question 1

Which one of the following statements is most correct?

Accepted Answer

A)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
B)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money demand. 
C)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
D)  If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
E)  If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies an increased domestic money supply. 
A)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
B)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money demand. 
C)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
D)  If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
E)  If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies an increased domestic money supply.

Question 2

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will ________ the risk premium and ________ the amount of domestic currency bonds held by the central bank.

Accepted Answer

A)  increase; leave unchanged 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; decrease 
E)  leave unchanged; decrease 
A)  increase; leave unchanged 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; decrease 
E)  leave unchanged; decrease

Question 3

Briefly describe two systems for fixing the exchange rates of all currencies against each other and the time periods in which they were used.

Accepted Answer

The first is to single cut one country's

Question 4

Under fixed exchange rates, which one of the following statements is the MOST accurate?

Accepted Answer

A)  Devaluation causes a rise in output. 
B)  Devaluation causes a decrease in output. 
C)  Devaluation has no effect on output. 
D)  Devaluation causes a rise in output and a decrease in official reserves. 
E)  Devaluation causes a decrease in output and in official reserves. 
A)  Devaluation causes a rise in output. 
B)  Devaluation causes a decrease in output. 
C)  Devaluation has no effect on output. 
D)  Devaluation causes a rise in output and a decrease in official reserves. 
E)  Devaluation causes a decrease in output and in official reserves.

Question 5

The interest parity condition can be written as

Accepted Answer

A)  R = R - (Eᵉ -
E) /E. 
B)  R = R + (Eᵉ -
E) /E. 
C)  R = R² - (Eᵉ -
E) /E. 
D)  R = R/(Eᵉ -
E) . 
E)  R = R + (Eᵉ +
E) /E. 
A)  R = R - (Eᵉ -
E) /E. 
B)  R = R + (Eᵉ -
E) /E. 
C)  R = R² - (Eᵉ -
E) /E. 
D)  R = R/(Eᵉ -
E) . 
E)  R = R + (Eᵉ +
E) /E.

Question 6

Explain how a country whose currency is the reserve currency can use monetary policy for macroeconomic stabilization. In particular, explain the result if that country doubled its domestic money supply.

Accepted Answer

The immediate result of the doubling of

Question 7

A balance sheet for the central bank of Pecunia is shown below:
Central Bank Balance Sheet
AssetsLiabilities
Foreign assets $1,000Deposits held by private banks $500
Domestic assets $1,500Currency in circulation $2,000
Please write the new balance sheet if the bank sells $100 worth of foreign bonds for domestic currency.

Accepted Answer

Central Bank Balance Sheet
Ass

Question 8

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 9

When domestic and foreign currency bonds are imperfect substitutes, the domestic interest rate (R) can be written as

Accepted Answer

A)  R = R - (Eᵉ -
E) /E + ρ. 
B)  R = R - (Eᵉ -
E) /E. 
C)  R = R + (Eᵉ -
E) /E + ρ. 
D)  R = R - (Eᵉ +
E) /E + ρ. 
E)  R = R - (Eᵉ -
E) ρ. 
A)  R = R - (Eᵉ -
E) /E + ρ. 
B)  R = R - (Eᵉ -
E) /E. 
C)  R = R + (Eᵉ -
E) /E + ρ. 
D)  R = R - (Eᵉ +
E) /E + ρ. 
E)  R = R - (Eᵉ -
E) ρ.

Question 10

Capital flight

Accepted Answer

A)  increases reserves. 
B)  is never associated with the expectation of devaluation. 
C)  may undo expected devaluation. 
D)  reduces losses during a devaluation scare. 
E)  decreases reserves and may induce devaluation. 
A)  increases reserves. 
B)  is never associated with the expectation of devaluation. 
C)  may undo expected devaluation. 
D)  reduces losses during a devaluation scare. 
E)  decreases reserves and may induce devaluation.

Question 11

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 12

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 13

The global financial crisis of 2007-2008 resulted in a(n) ________ of the Swiss franc as foreign currency flowed ________ the country. As a result, Swiss products became ________ competitive in world markets.

Accepted Answer

A)  depreciation; out of; more 
B)  depreciation; into; more 
C)  appreciation; out of; less 
D)  depreciation; out of; less 
E)  appreciation; into; less 
A)  depreciation; out of; more 
B)  depreciation; into; more 
C)  appreciation; out of; less 
D)  depreciation; out of; less 
E)  appreciation; into; less

Question 14

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

Accepted Answer

Sterilized foreign exchange intervention

Question 15

Use a figure to illustrate the ineffectiveness of monetary policy to spur on an economy under a fixed exchange rate.

Accepted Answer

The answer of Use a figure to illustrate the ineffectiveness...

Question 16

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  Appreciation is a rise in E when the exchange rate floats while revaluation is a fall in E when the exchange rate is fixed. 
B)  Appreciation is a fall in E when the exchange rate floats while revaluation is a fall in E when the exchange rate is fixed. 
C)  Appreciation is a fall in E when the exchange rate is fixed while revaluation is a fall in E when the exchange rate is flexible. 
D)  Appreciation is a fall in E when the exchange rate floats while revaluation is a rise in E when the exchange rate is fixed. 
E)  Appreciation is a rise in E when the exchange rate floats while revaluation is a rise in E when the exchange rate is fixed. 
A)  Appreciation is a rise in E when the exchange rate floats while revaluation is a fall in E when the exchange rate is fixed. 
B)  Appreciation is a fall in E when the exchange rate floats while revaluation is a fall in E when the exchange rate is fixed. 
C)  Appreciation is a fall in E when the exchange rate is fixed while revaluation is a fall in E when the exchange rate is flexible. 
D)  Appreciation is a fall in E when the exchange rate floats while revaluation is a rise in E when the exchange rate is fixed. 
E)  Appreciation is a rise in E when the exchange rate floats while revaluation is a rise in E when the exchange rate is fixed.

Question 17

Under fixed exchange rate, in general which one of the following statements is the MOST accurate?

Accepted Answer

A)  The following condition should hold for domestic money market equilibrium: Mˢ/P = L(R*, Y). 
B)  The following condition should hold for domestic money market equilibrium: Mᵈ/P = L(R*, Y). 
C)  The following condition should hold for domestic money market equilibrium: Mˢ = L(R*, Y). 
D)  The following condition should hold for domestic money market equilibrium: P = L(R*, Y). 
E)  The following condition should hold for domestic money market equilibrium: R*Mᵈ/P = L(Y). 
A)  The following condition should hold for domestic money market equilibrium: Mˢ/P = L(R*, Y). 
B)  The following condition should hold for domestic money market equilibrium: Mᵈ/P = L(R*, Y). 
C)  The following condition should hold for domestic money market equilibrium: Mˢ = L(R*, Y). 
D)  The following condition should hold for domestic money market equilibrium: P = L(R*, Y). 
E)  The following condition should hold for domestic money market equilibrium: R*Mᵈ/P = L(Y).

Question 18

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  Fiscal policy has the same effect on output under fixed and flexible exchange rate regimes. 
B)  Fiscal policy affects output more under fixed than under flexible exchange rate regimes. 
C)  Fiscal policy affects output less under fixed than under flexible exchange rate regimes. 
D)  Fiscal policy cannot affect output under fixed exchange rate but does affect output under flexible exchange rate regimes. 
E)  Fiscal policy can affect output under fixed exchange rate but does not affect output under flexible exchange rate regimes. 
A)  Fiscal policy has the same effect on output under fixed and flexible exchange rate regimes. 
B)  Fiscal policy affects output more under fixed than under flexible exchange rate regimes. 
C)  Fiscal policy affects output less under fixed than under flexible exchange rate regimes. 
D)  Fiscal policy cannot affect output under fixed exchange rate but does affect output under flexible exchange rate regimes. 
E)  Fiscal policy can affect output under fixed exchange rate but does not affect output under flexible exchange rate regimes.

Question 19

A system of managed floating exchange rates is

Accepted Answer

A)  a system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
B)  a system in which governments use flexible exchange rates. 
C)  a system in which governments are forbidden from attempts to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
D)  a system in which governments need to reach a prior agreement among them before they may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
E)  a system in which governments use extensive fiscal policy to discourage exchange rate movements. 
A)  a system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
B)  a system in which governments use flexible exchange rates. 
C)  a system in which governments are forbidden from attempts to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
D)  a system in which governments need to reach a prior agreement among them before they may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. 
E)  a system in which governments use extensive fiscal policy to discourage exchange rate movements.

Question 20

The expectation of future revaluation 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 fall in reserves and an unchanged home interest rate. 
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 fall in reserves and an unchanged home interest rate.

Exam 18: Fixed Exchange Rates and Foreign Exchange Intervention

Which one of the following statements is most correct?

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will ________ the risk premium and ________ the amount of domestic currency bonds held by the central bank.

Briefly describe two systems for fixing the exchange rates of all currencies against each other and the time periods in which they were used.

Under fixed exchange rates, which one of the following statements is the MOST accurate?

The interest parity condition can be written as

Explain how a country whose currency is the reserve currency can use monetary policy for macroeconomic stabilization. In particular, explain the result if that country doubled its domestic money supply.

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

When domestic and foreign currency bonds are imperfect substitutes, the domestic interest rate (R) can be written as

Capital flight

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.

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.

The global financial crisis of 2007-2008 resulted in a(n) ________ of the Swiss franc as foreign currency flowed ________ the country. As a result, Swiss products became ________ competitive in world markets.

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

Use a figure to illustrate the ineffectiveness of monetary policy to spur on an economy under a fixed exchange rate.

Which one of the following statements is the MOST accurate?

Under fixed exchange rate, in general which one of the following statements is the MOST accurate?

Which one of the following statements is the MOST accurate?

A system of managed floating exchange rates is

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

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

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will the risk premium and the amount of domestic currency bonds held by the central bank.

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.

The global financial crisis of 2007-2008 resulted in a(n) of the Swiss franc as foreign currency flowed the country. As a result, Swiss products became competitive in world markets.