Exam 28: Exchange Rates and the Open Economy

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 $0.75 per Islandia. In order to maintain the official value of the Islandia the Central Bank of South Island must either ________ domestic interest rates or supply Islandia, which causes the supply of international reserves to ________.

If the nominal exchange rate were to be expressed as the number of units of domestic currency per unit of foreign currency, and that rate decreases, then the domestic currency has:

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. Later the government changes the exchange rate to $2 per Islandia. This is an example of a(n):

Holding all else constant, an increase in the real interest rate on U.S. assets will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

As the dollar exchange rate, e, decreases, the quantity of dollars supplied in the foreign exchange market ________, and the quantity of dollars demanded in the foreign exchange market ________.

A country will have a balance-of-payments deficit when its exchange rate:

Based on this figure, if the official value of krone is fixed at $0.09 per krone, then the Norwegian krone is ________ and the international reserves of Norway will ________ krone per period.

European households wishing to purchase shares of stock in an American company are ________ the foreign exchange market.

The following table provides nominal exchange rates for the U.S. dollar. \multicolumn 1 |c| Cauntry Fareign currency/dallar Dollar/iareimn currency Poland (zloty) 4.367 0.229 South Africa (rard) 6.944 0.144   Based on these data, the nominal exchange rate equals approximately ________ zloty per South African rand or, equivalently, ________ rand per Polish zloty.

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

An exchange rate that has an officially fixed value less than its fundamental or market equilibrium value is called a(n)________ exchange rate.

If monetary policy is used to set the market equilibrium value of the exchange rate equal to the official value, it is no longer available to:

A decrease in the real exchange rate will tend to ________ exports and to ________ imports.

If a country pegs its currency to a foreign currency, it no longer has the ability to use monetary policy to stabilize the economy because:

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds and if the price of oil is 200 pesos per barrel in Mexico, the price of oil is ________ per barrel in the United States.

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S. dollar will:

The theory that nominal exchange rates are determined so that the law of one price holds is called:

To counter a speculative attack on an overvalued currency, the monetary policymakers must ________ monetary policy and to fight a recession the monetary policymakers must ________ monetary policy.

The foreign exchange market is the market on which the ________ of various nations are traded for one another.

Holding all else equal, if the U.S. government imposes tariffs on imported products, then the equilibrium value of the U.S. dollar will: