Question 1

By fixing the exchange rate,the central bank gives up its ability to

Accepted Answer

A) adjust taxes. 
B) increase government spending. 
C) influence the economy through fiscal policy. 
D) depreciate the domestic currency. 
E) influence the economy through monetary policy. 
A) adjust taxes. 
B) increase government spending. 
C) influence the economy through fiscal policy. 
D) depreciate the domestic currency. 
E) influence the economy through monetary policy.

Question 2

The signaling effect of foreign exchange intervention

Accepted Answer

A) never has any effect on exchange rates. 
B) can alter the market's view of exchange rates independent from the stance of monetary and fiscal policies. 
C) cannot cause an immediate exchange rate change when bonds denominated in different currencies are perfect substitutes. 
D) never leads to actual changes in monetary or fiscal policy. 
E) can alter the market's view of future monetary policies and cause an immediate exchange rate change. 
A) never has any effect on exchange rates. 
B) can alter the market's view of exchange rates independent from the stance of monetary and fiscal policies. 
C) cannot cause an immediate exchange rate change when bonds denominated in different currencies are perfect substitutes. 
D) never leads to actual changes in monetary or fiscal policy. 
E) can alter the market's view of future monetary policies and cause an immediate exchange rate change.

Question 3

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 4

A balance sheet for the central bank of Pecunia is shown below:
Central Bank Balance Sheet
Assets Liabilities
Foreign assets $1,000 Deposits held by private banks $500
Domestic assets $1,500 Currency in circulation $2,000
Please write the new balance sheet if the bank purchased $100 in foreign bonds by writing a check on itself.

Accepted Answer

Central Bank Balance Sheet
Ass

Question 5

Which one of the following statements is the MOST accurate?

Accepted Answer

A) Devaluation reflects a deliberate government decision. 
B) Depreciation reflects a deliberate government decision. 
C) Devaluation reflects a deliberate government decision while depreciation is an outcome of government actions and market forces acting together. 
D) Depreciation reflects a deliberate government decision while devaluation is an outcome of government actions and market forces acting together. 
E) Devaluation and depreciation have the same meaning and the same causes. 
A) Devaluation reflects a deliberate government decision. 
B) Depreciation reflects a deliberate government decision. 
C) Devaluation reflects a deliberate government decision while depreciation is an outcome of government actions and market forces acting together. 
D) Depreciation reflects a deliberate government decision while devaluation is an outcome of government actions and market forces acting together. 
E) Devaluation and depreciation have the same meaning and the same causes.

Question 6

Imperfect asset substitutability exists

Accepted Answer

A) when it is possible for the expected returns on two assets to be different. 
B) when the expected returns on two assets are the same. 
C) only when one asset is foreign and the other is domestic. 
D) when there is risk in the foreign exchange market. 
E) when assets are liquid. 
A) when it is possible for the expected returns on two assets to be different. 
B) when the expected returns on two assets are the same. 
C) only when one asset is foreign and the other is domestic. 
D) when there is risk in the foreign exchange market. 
E) when assets are liquid.

Question 7

A balance of payments crisis is best described as

Accepted Answer

A) a sharp change in interest rates sparked by a change in expectations about the level of imports. 
B) a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate. 
C) a sharp change in interest rates sparked by a change in expectations about the level of exports. 
D) a sharp change in foreign reserves sparked by a change in expectations about the level of imports. 
E) a sharp change in foreign reserves sparked by a change in expectations about domestic production. 
A) a sharp change in interest rates sparked by a change in expectations about the level of imports. 
B) a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate. 
C) a sharp change in interest rates sparked by a change in expectations about the level of exports. 
D) a sharp change in foreign reserves sparked by a change in expectations about the level of imports. 
E) a sharp change in foreign reserves sparked by a change in expectations about domestic production.

Question 8

Please draw a figure illustrating the actions the central bank must take to maintain a fixed exchange rate following an increase in output.

Accepted Answer

@#IMG-DLM& 
A rise in output from @#IMG-DLM& 
to @#IMG-DLM& 
will incr

Question 9

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 attempt 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 attempt 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 10

What are the factors affecting the demand for foreign currency?

Accepted Answer

Three factors affect

Question 11

Please briefly describe what is meant by a gold exchange standard.

Accepted Answer

Under a gold exchange standard,central b

Question 12

Does the signalling effect of foreign exchange intervention support or refute the claim that assets cannot be perfect substitutes if sterilized intervention is going to have any effect? Please explain.

Accepted Answer

The signalling effect refutes the claim.

Question 13

In the interest rate parity condition with imperfect substitutes and a risk premium of ρ

Accepted Answer

A) an increased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds. 
B) a decreased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds. 
C) an increased stock of domestic government debt will reduce the difference between the expected returns on domestic and foreign currency bonds. 
D) an increased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds. 
E) a decreased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds. 
A) an increased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds. 
B) a decreased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds. 
C) an increased stock of domestic government debt will reduce the difference between the expected returns on domestic and foreign currency bonds. 
D) an increased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds. 
E) a decreased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds.

Question 14

Explain risk and liquidity of assets.

Accepted Answer

Risk is the variability an asset contrib

Question 15

Which of the following is an example of a regional currency arrangement?

Accepted Answer

A) exchange rate union 
B) currency cartel associations 
C) free-trade zones 
D) most-favored nation status 
E) agreement on commercial trade 
A) exchange rate union 
B) currency cartel associations 
C) free-trade zones 
D) most-favored nation status 
E) agreement on commercial trade

Question 16

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.

Question 17

Assume that initially,the risk premium,ρ = 0 and that the domestic and foreign interest rates are given by R = .06,R* = .05.Suppose that the risk premium depends linearly on the difference between domestic government debt,B,and domestic assets of the central bank,A,i.e. ,
ρ =   Find the new domestic interest rate if a sterilized purchase of foreign assets adjusts A s.t.
(a)B - A = -.01/   (b)B - A = .01/   (c)B - A = .03/

Accepted Answer

(a)R = .05 + .01 + (

Question 18

Use a figure to explain how a balance of payments crisis and its hand in capital flight.

Accepted Answer

@#IMG-DLM& 
Suppose the foreign exchange market ex

Question 19

When a country's currency is devalued

Accepted Answer

A) output decreases. 
B) output increases and the money supply decreases. 
C) the money supply decreases. 
D) output decreases and the money supply increases. 
E) both the output and the money supply increases. 
A) output decreases. 
B) output increases and the money supply decreases. 
C) the money supply decreases. 
D) output decreases and the money supply increases. 
E) both the output and the money supply increases.

Question 20

Balance of payments crises under fixed exchange rates occur because of

Accepted Answer

A) government policies that are inconsistent with fixed exchange rates. 
B) punitive currency wars. 
C) global inflation and trade imbalances due to war. 
D) excessive exports and imports that overload the global system. 
E) monotonic expansion in global currency volume. 
A) government policies that are inconsistent with fixed exchange rates. 
B) punitive currency wars. 
C) global inflation and trade imbalances due to war. 
D) excessive exports and imports that overload the global system. 
E) monotonic expansion in global currency volume.

By fixing the exchange rate,the central bank gives up its ability to

The signaling effect of foreign exchange intervention

Which one of the following statements is the MOST accurate?

Which one of the following statements is the MOST accurate?

Imperfect asset substitutability exists

A balance of payments crisis is best described as

Please draw a figure illustrating the actions the central bank must take to maintain a fixed exchange rate following an increase in output.

A system of managed floating exchange rates is

What are the factors affecting the demand for foreign currency?

Please briefly describe what is meant by a gold exchange standard.

Does the signalling effect of foreign exchange intervention support or refute the claim that assets cannot be perfect substitutes if sterilized intervention is going to have any effect? Please explain.

In the interest rate parity condition with imperfect substitutes and a risk premium of ρ

Explain risk and liquidity of assets.

Which of the following is an example of a regional currency arrangement?

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

Use a figure to explain how a balance of payments crisis and its hand in capital flight.

When a country's currency is devalued

Balance of payments crises under fixed exchange rates occur because of

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

Exam 18: Fixed Exchange Rates and Foreign Exchange Intervention

By fixing the exchange rate,the central bank gives up its ability to

The signaling effect of foreign exchange intervention

Which one of the following statements is the MOST accurate?

Which one of the following statements is the MOST accurate?

Imperfect asset substitutability exists

A balance of payments crisis is best described as

Please draw a figure illustrating the actions the central bank must take to maintain a fixed exchange rate following an increase in output.

A system of managed floating exchange rates is

What are the factors affecting the demand for foreign currency?

Please briefly describe what is meant by a gold exchange standard.

Does the signalling effect of foreign exchange intervention support or refute the claim that assets cannot be perfect substitutes if sterilized intervention is going to have any effect? Please explain.

In the interest rate parity condition with imperfect substitutes and a risk premium of ρ

Explain risk and liquidity of assets.

Which of the following is an example of a regional currency arrangement?

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

Use a figure to explain how a balance of payments crisis and its hand in capital flight.

When a country's currency is devalued

Balance of payments crises under fixed exchange rates occur because of

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