Exam 28: Exchange Rates and the Open Economy

An alternative to maintaining an undervalued currency is to ________ the fundamental value of the exchange rate by ________ monetary policy.

Suppose the government of New Country has fixed the value of its currency, the New Peso, at $1 per New Peso, but the market equilibrium value of the New Peso is $2 per New Peso. In order to maintain the official value of the New Peso the Central Bank of New Country must either ________ domestic interest rates, or ________ the supply of New Pesos by purchasing or increasing their holding of international reserves.

A currency appreciation is a(n):

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ________ exchange rate.

Flexible exchange rates ________ of monetary policy to stabilize the economy and fixed exchange rates ________ of monetary policy to stabilize the economy.

Holding all else constant, a decrease in the real interest rate on Mexican assets will ________ the supply of dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

For a given domestic and foreign price level, an increase in the nominal exchange rate ________ the real exchange rate.

Suppose the government of South Island has fixed the value of its currency, the Islandia, at $0.50 per Islandia, but the market equilibrium value of the Islandia is $0.25 per Islandia. In order to maintain the official value of the Islandia the Central Bank of South Island must either ________ domestic interest rates or purchase Islandia, which causes the supply of international reserves to ________.

Easy monetary policy ________ interest rates which ________ the demand for a currency and ________ the market equilibrium value of the exchange rate.

The net decline in a country's stock of international reserves over a year is called a(n):

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 3 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

Based on this figure, if the official fixed value of krone is fixed at $0.15 per krone, then the Norwegian krone is ________ and the international reserves of Norway will ________ krone per period.

Holding all else constant, an increase in the preferences of Americans for Mexican goods will ________ the supply of dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

A speculative attack is:

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

Suppose the government of South Island fixes the exchange rate of its currency, the Islandia, in terms of the U.S. dollar. Initially the exchange rate is set at $1 per Islandia. In a crisis, the government changes the exchange rate to $0.50 per Islandia. This is an example of a(n):

Under a flexible exchange rate system an increase in the value of a currency relative to other currencies is a called a(n)________ and under a fixed exchange rate system an increase in the official value of a currency is called a(n)________.