Question 1

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. E

Question 2

A central bank's international reserves include

Accepted Answer

A)  any gold that it owns. 
B)  any silver that it owns. 
C)  any gold that it owns and foreign and domestic assets. 
D)  any silver that it owns and foreign and domestic assets. 
E)  only foreign and domestic assets. 
A)  any gold that it owns. 
B)  any silver that it owns. 
C)  any gold that it owns and foreign and domestic assets. 
D)  any silver that it owns and foreign and domestic assets. 
E)  only foreign and domestic assets. C

Question 3

Under fixed exchange rate, which one of the following statements is the most accurate?

Accepted Answer

A)  Devaluation causes a rise in output. 
B)  Devaluation causes a decrease in output. 
C)  Devaluation has no effect on output. 
D)  Devaluation causes a rise in output and a decrease in official reserves. 
E)  Devaluation causes a decrease in output and in official reserves. 
A)  Devaluation causes a rise in output. 
B)  Devaluation causes a decrease in output. 
C)  Devaluation has no effect on output. 
D)  Devaluation causes a rise in output and a decrease in official reserves. 
E)  Devaluation causes a decrease in output and in official reserves. A

Question 4

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 5

Explain risk and liquidity of assets.

Accepted Answer

Risk is the variability an asset contrib

Question 6

Which of the following is not accurate? After introducing the Real as its new currency in 1994, Brazil

Accepted Answer

A)  lost competitiveness in foreign markets since the Real experienced a real appreciation. 
B)  experienced high domestic interest rates. 
C)  reduced its annual rate of inflation. 
D)  experienced bank failures. 
E)  raised the foreign reserves in its central bank 
A)  lost competitiveness in foreign markets since the Real experienced a real appreciation. 
B)  experienced high domestic interest rates. 
C)  reduced its annual rate of inflation. 
D)  experienced bank failures. 
E)  raised the foreign reserves in its central bank

Question 7

Define devaluation and use a figure to show the effect of a currency devaluation on the economy.

Accepted Answer

@#IMG-DLM& A devaluation occurs when the central b

Question 8

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 = ρ(B-A)
Find the new domestic interest rate if a sterilized purchase of foreign assets adjusts A s.t.
(a) B - A = -.01/ ρo
(b) B - A = .01/ ρo
(c) B - A = .03/ ρo

Accepted Answer

(a) R = .05 + .01 +

Question 9

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will ________ the risk premium and ________ the amount of domestic currency bonds held by the central bank.

Accepted Answer

A)  increase; leave unchanged 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; decrease 
E)  leave unchanged; decrease 
A)  increase; leave unchanged 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; decrease 
E)  leave unchanged; decrease

Question 10

Which one of the following statements is most true?

Accepted Answer

A)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
B)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money demand. 
C)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
D)  If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
E)  If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies an increased domestic money supply. 
A)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
B)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money demand. 
C)  If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
D)  If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply. 
E)  If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies an increased domestic money supply.

Question 11

Please discuss the difference between the terms devaluation and depreciation.

Accepted Answer

Depreciation is a rise in the exchange r

Question 12

Use a figure to show the effect of a sterilized central bank purchase of foreign assets under the imperfect asset substitutability assumption.

Accepted Answer

@#IMG-DLM& The interest parity condition is given

Question 13

Which one of the following statements is the most accurate?

Accepted Answer

A)  A devaluation occurs when the central bank lowers the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank raises E. 
B)  A devaluation occurs when the central bank raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank lowers E. 
C)  Devaluation occurs when the domestic currency price of foreign currency, E, raises and a revaluation occurs when E is lowered. 
D)  A devaluation occurs when the central bank of the foreign country raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank of the foreign country lowers E. 
E)  A devaluation occurs when the central bank raises the foreign currency price of domestic currency, E, and a revaluation occurs when the central bank lowers E. 
A)  A devaluation occurs when the central bank lowers the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank raises E. 
B)  A devaluation occurs when the central bank raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank lowers E. 
C)  Devaluation occurs when the domestic currency price of foreign currency, E, raises and a revaluation occurs when E is lowered. 
D)  A devaluation occurs when the central bank of the foreign country raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank of the foreign country lowers E. 
E)  A devaluation occurs when the central bank raises the foreign currency price of domestic currency, E, and a revaluation occurs when the central bank lowers E.

Question 14

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 15

This question concerns the mechanism of a reserve currency standard.
Two countries, X and Y, have two currencies, x and y, fixed to the reserve currency, the U.S. dollar. Suppose the exchange rate between x and the U.S. dollar is 3x per dollar. Suppose the exchange rate between y and the U.S. dollar is 5y per dollar. Please explain (using numbers) the mechanism if the x-y exchange rate was 0.8 x per y.

Accepted Answer

At this exchange rate, an investor can m

Question 16

Under fixed exchange rate, which one of the following statements is the most accurate?

Accepted Answer

A)  Devaluation causes a decrease in output, a decrease in official reserves, and a contraction of the money supply. 
B)  Devaluation causes a rise in output, a rise in official reserves, and an expansion of the money supply. 
C)  Devaluation causes a rise in output and a rise in official reserves. 
D)  Devaluation causes a rise in output and an expansion of the money supply. 
E)  Devaluation causes a rise in official reserves, and an expansion of the money supply. 
A)  Devaluation causes a decrease in output, a decrease in official reserves, and a contraction of the money supply. 
B)  Devaluation causes a rise in output, a rise in official reserves, and an expansion of the money supply. 
C)  Devaluation causes a rise in output and a rise in official reserves. 
D)  Devaluation causes a rise in output and an expansion of the money supply. 
E)  Devaluation causes a rise in official reserves, and an expansion of the money supply.

Question 17

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 makes a sterilized transaction by selling $100 of foreign assets for domestic currency and then purchasing $100 of domestic assets by writing a check on itself.

Accepted Answer

Central Bank Balance Sheet
Ass

Question 18

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 19

From the figure below, please provide an explanation for the large growth rate of international reserves held by developing countries and the sharp decline in the 1980s.

Accepted Answer

The growth of global capital markets has

Question 20

Imperfect asset substitutability assumes:

Accepted Answer

A)  the returns on foreign and domestic currency bonds are the same. 
B)  the returns on foreign and domestic currency are unrelated. 
C)  the returns on foreign and domestic currency are not influenced by risk. 
D)  Sterilized intervention proves to be unproductive. 
E)  the returns on foreign and domestic currency are different, but both are influenced by risk. 
A)  the returns on foreign and domestic currency bonds are the same. 
B)  the returns on foreign and domestic currency are unrelated. 
C)  the returns on foreign and domestic currency are not influenced by risk. 
D)  Sterilized intervention proves to be unproductive. 
E)  the returns on foreign and domestic currency are different, but both are influenced by risk.

The signaling effect of foreign exchange intervention

A central bank's international reserves include

Under fixed exchange rate, which one of the following statements is the most accurate?

A system of managed floating exchange rates is

Explain risk and liquidity of assets.

Which of the following is not accurate? After introducing the Real as its new currency in 1994, Brazil

Define devaluation and use a figure to show the effect of a currency devaluation on the economy.

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will the risk premium and the amount of domestic currency bonds held by the central bank.

Which one of the following statements is most true?

Please discuss the difference between the terms devaluation and depreciation.

Use a figure to show the effect of a sterilized central bank purchase of foreign assets under the imperfect asset substitutability assumption.

Which one of the following statements is the most accurate?

Imperfect asset substitutability exists

Under fixed exchange rate, which one of the following statements is the most accurate?

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

From the figure below, please provide an explanation for the large growth rate of international reserves held by developing countries and the sharp decline in the 1980s.

Imperfect asset substitutability assumes:

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

Optimum Currency Areas and the European Experience

Financial Globalization: Opportunity and Crisis

Developing Countries: Growth, Crisis, and Reform

Filters

Exam 18: Fixed Exchange Rates and Foreign Exchange Intervention

The signaling effect of foreign exchange intervention

A central bank's international reserves include

Under fixed exchange rate, which one of the following statements is the most accurate?

A system of managed floating exchange rates is

Explain risk and liquidity of assets.

Which of the following is not accurate? After introducing the Real as its new currency in 1994, Brazil

Define devaluation and use a figure to show the effect of a currency devaluation on the economy.

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will ________ the risk premium and ________ the amount of domestic currency bonds held by the central bank.

Which one of the following statements is most true?

Please discuss the difference between the terms devaluation and depreciation.

Use a figure to show the effect of a sterilized central bank purchase of foreign assets under the imperfect asset substitutability assumption.

Which one of the following statements is the most accurate?

Imperfect asset substitutability exists

Under fixed exchange rate, which one of the following statements is the most accurate?

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

From the figure below, please provide an explanation for the large growth rate of international reserves held by developing countries and the sharp decline in the 1980s.

Imperfect asset substitutability assumes:

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

Optimum Currency Areas and the European Experience

Financial Globalization: Opportunity and Crisis

Developing Countries: Growth, Crisis, and Reform

Filters

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will the risk premium and the amount of domestic currency bonds held by the central bank.