Exam 9: Foreign Exchange Rate Determination and Intervention

If a central bank wishes to "defend its currency," it might follow an expansive monetary policy, which would drive real rates of interest up.

Argentina's economic performance in the 1990s while their peso was pegged to the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.

The fall in the value of the domestic currency will sharply reduce the purchasing power of foreign tourists in the country whose currency values are falling.

Technical analysts, traditionally referred to as chartists, focus on fundamental data to determine past trends that are expected to continue into the future.

The more efficient the foreign exchange market is, the more likely it is that exchange rate movements are random walks.

Examples of a business motivation for long-run exchange rate forecasts include all but which of the following?

In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a one-to-one basis.

The "tequila effect" is a slang term used to describe a form of financial panic called:

A major U.S. multinational firm has forecast the euro/dollar rate to be €1.10/$ one year hence, and an exchange rate of $1.40 for the British pound (£) in the same time period. What does this imply the company's expected rate for the euro per pound to be in one year?

Most theories of technical analysis differentiate fair value from market value.

The principle focus of the IMF bailout efforts during the Asian financial crisis was:

Critics of the balance of payments approach to exchange rate determination point to the emphasis on ________ of currency and capital rather than ________ of money or financial assets.

The ________ is the Argentine currency unit.

The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets

It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate, i.e., they are linked AND mutually determined.

The single most important element of technical analysis is that future exchange rates are based on the current exchange rate.

________, traditionally referred to as chartists, focus on price and volume data to determine past trends that are expected to continue into the future.

The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.

The longer the time horizon of the technical analyst the more accurate the prediction of foreign exchange rates is likely to be.

Explain how a central bank would engage in direct intervention to decrease the value of its domestic currency. Since the 1970s, it has been difficult for central banks alone to engage in direct intervention to alter the value of their domestic currency. Identify and explain at least two other activities in which a central bank could engage to alter the value of their domestic currency.