Exam 28: Exchange Rates and the Open Economy

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the ________ and affects net exports by changing the ________.

The demand for euros in the foreign exchange market equals 8,000 - 2,000 e and the supply of euros in the foreign exchange market equals 3,000 + 3,000 e, where e is the nominal exchange rate expressed in U.S. dollars per euro. If the euro is fixed at 1.25 U.S. dollars per euro, then the euro is ________ and Euroland has a balance-of-payments ________.

When a currency is overvalued, international reserves ________ and the country has a balance-of-payments ________.

A fixed exchange rate is an exchange rate whose value:

In an open economy with flexible exchange rates, monetary policy affects ________ through changes in the real interest rate and affects ________ through changes in the exchange rate.

The demand for euros in the foreign exchange market equals 8,000 - 2,000 e and the supply of euros in the foreign exchange market equals 3,000 + 3,000 e, where e is the nominal exchange rate expressed in U.S. dollars per euro. If the euro is fixed at 0.85 U.S. dollars per euro, then the euro is ________ and Euroland has a balance-of-payments ________.

An undervalued exchange rate is an exchange rate:

Suppose the price of gold is initially $300 per ounce in New York and 450 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ________ Canadian dollars per U.S. dollar. If Canada experiences inflation, such that the price of gold rises to 510 Canadian dollars per ounce, but the U.S. does not experience any inflation, the nominal exchange rate would be ________ Canadian dollars per U.S. dollar.

The gold standard is an example of a ________ exchange rate system.

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 $0.50 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 international reserves by purchasing New Pesos.

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 increases, then the domestic currency has:

The exchange rate that equates the quantities of currency supplied and demanded in the foreign exchange market is called the ________ exchange rate.

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 2 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

Tight monetary policy ________ interest rates which ________ the demand for a currency and ________ the fundamental value of the exchange rate.

Easy monetary policy reduces the real interest rate, which ________ the demand for dollars, ________ the supply of dollars, and ________ the equilibrium value of the dollar.

International reserves are:

To stop a speculative attack interest rates must be ________, which will ________ aggregate demand.

A currency depreciation is a(n):

Each of the following would decrease the demand for U.S. dollars, shifting the demand curve for dollars to the left, EXCEPT:

An overvalued exchange rate is an exchange rate: