Question 1

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 2

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

Accepted Answer

A)  Monetary policy can affect only output. 
B)  Monetary policy can affect only employment. 
C)  Monetary policy can affect only international reserves. 
D)  Monetary policy can not affect international reserves. 
E)  Monetary policy can only affect money supply. 
A)  Monetary policy can affect only output. 
B)  Monetary policy can affect only employment. 
C)  Monetary policy can affect only international reserves. 
D)  Monetary policy can not affect international reserves. 
E)  Monetary policy can only affect money supply.

Question 3

Which one of the following statements is most true?

Accepted Answer

A)  Any central bank purchase of assets automatically results in an increase in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline. 
B)  Any central bank purchase of assets results in an increase in the domestic money supply, while any central bank sale of assets causes the money supply to decline. 
C)  Any central bank purchase of assets automatically results in a decrease in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline. 
D)  Any central bank purchase of assets automatically results in a decrease in the domestic money supply, while any central bank sale of assets automatically causes the money supply to increase. 
E)  Any central bank purchase of assets automatically results in an increase in the domestic money supply, while any central bank sale of assets does not necessarily affect the money supply. 
A)  Any central bank purchase of assets automatically results in an increase in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline. 
B)  Any central bank purchase of assets results in an increase in the domestic money supply, while any central bank sale of assets causes the money supply to decline. 
C)  Any central bank purchase of assets automatically results in a decrease in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline. 
D)  Any central bank purchase of assets automatically results in a decrease in the domestic money supply, while any central bank sale of assets automatically causes the money supply to increase. 
E)  Any central bank purchase of assets automatically results in an increase in the domestic money supply, while any central bank sale of assets does not necessarily affect the money supply.

Question 4

The main reason(s) why governments sometimes chose to devalue their currencies is (are):

Accepted Answer

A)  devaluation makes domestic goods more expensive in relation to foreign goods. 
B)  devaluation makes domestic services more expensive in relation to foreign services. 
C)  devaluation increases foreign reserves held by the central bank. 
D)  devaluation improves the current account and increases foreign reserves held by the central bank. 
E)  devaluation hurts foreign currencies. 
A)  devaluation makes domestic goods more expensive in relation to foreign goods. 
B)  devaluation makes domestic services more expensive in relation to foreign services. 
C)  devaluation increases foreign reserves held by the central bank. 
D)  devaluation improves the current account and increases foreign reserves held by the central bank. 
E)  devaluation hurts foreign currencies.

Question 5

If assets are imperfect substitutes, then a decrease 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)  decrease; leave unchanged 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; decrease 
E)  leave unchanged; decrease 
A)  decrease; leave unchanged 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; decrease 
E)  leave unchanged; decrease

Question 6

Please use a figure to discuss whether or not a devaluation under a fixed exchange rate has the same long-run effect as a proportional increase in the money supply under a floating rate.

Accepted Answer

@#IMG-DLM& A currency devaluation shifts the AA sc

Question 7

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 8

Currency crises may result from

Accepted Answer

A)  central bank balance sheets with higher liabilities than assets. 
B)  political upheaval leading to lowering exports. 
C)  a reconfiguration of central bank balance sheets. 
D)  speculative attacks on the currency or central banks purchasing excessive amounts of government bonds. 
E)  depreciation of foreign reserves. 
A)  central bank balance sheets with higher liabilities than assets. 
B)  political upheaval leading to lowering exports. 
C)  a reconfiguration of central bank balance sheets. 
D)  speculative attacks on the currency or central banks purchasing excessive amounts of government bonds. 
E)  depreciation of foreign reserves.

Question 9

Please list the drawbacks of the gold standard.

Accepted Answer

1. Undesirable constraints on the use of

Question 10

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

Accepted Answer

A)  The following condition should hold for domestic money market equilibrium: Ms/P = L(R, Y). 
B)  The following condition should hold for domestic money market equilibrium: Md/P = L(R, Y). 
C)  The following condition should hold for domestic money market equilibrium: Ms = L(R, Y). 
D)  The following condition should hold for domestic money market equilibrium: P = L(R, Y). 
E)  The following condition should hold for domestic money market equilibrium: R*Md/P = L(Y). 
A)  The following condition should hold for domestic money market equilibrium: Ms/P = L(R, Y). 
B)  The following condition should hold for domestic money market equilibrium: Md/P = L(R, Y). 
C)  The following condition should hold for domestic money market equilibrium: Ms = L(R, Y). 
D)  The following condition should hold for domestic money market equilibrium: P = L(R, Y). 
E)  The following condition should hold for domestic money market equilibrium: R*Md/P = L(Y).

Question 11

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 12

Assuming perfect asset substitutability, can sterilized intervention by the central bank be effective? Please discuss.

Accepted Answer

No, a sterilized foreign exchange interv

Question 13

Fiscal Expansion under a fixed exchange has what effect(s) on the economy:

Accepted Answer

A)  the money supply decreases. 
B)  output decreases. 
C)  the exchange rate increases. 
D)  the exchange rate decreases initially but then returns to its original point. 
E)  output is unchanged. 
A)  the money supply decreases. 
B)  output decreases. 
C)  the exchange rate increases. 
D)  the exchange rate decreases initially but then returns to its original point. 
E)  output is unchanged.

Question 14

Under the gold standard, if the dollar price of gold is pegged at $35 per ounce and the dollar/euro exchange rate is set at $2.40 per euro, what must the euro price of gold be pegged at?

Accepted Answer

The euro price of gold is cons

Question 15

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 16

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

Question 17

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

Accepted Answer

Under a gold exchange standard, central

Question 18

The liabilities side of a central bank include

Accepted Answer

A)  deposits held by the private banks. 
B)  currency in circulation. 
C)  deposits held by the private banks and currency in circulation. 
D)  deposits held by the private banks, foreign assets, and currency in circulation. 
E)  foreign assets and domestic assets. 
A)  deposits held by the private banks. 
B)  currency in circulation. 
C)  deposits held by the private banks and currency in circulation. 
D)  deposits held by the private banks, foreign assets, and currency in circulation. 
E)  foreign assets and domestic assets.

Question 19

The expectation of future devaluation 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 rise in reserves and a rise in the home interest rate to the level of the world interest. 
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 rise in reserves and a rise in the home interest rate to the level of the world interest.

Question 20

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

Exam 18: Fixed Exchange Rates and Foreign Exchange Intervention

When a country's currency is devalued:

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

Which one of the following statements is most true?

The main reason(s) why governments sometimes chose to devalue their currencies is (are):

If assets are imperfect substitutes, then a decrease 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.

Please use a figure to discuss whether or not a devaluation under a fixed exchange rate has the same long-run effect as a proportional increase in the money supply under a floating rate.

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

Currency crises may result from

Please list the drawbacks of the gold standard.

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

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

Assuming perfect asset substitutability, can sterilized intervention by the central bank be effective? Please discuss.

Fiscal Expansion under a fixed exchange has what effect(s) on the economy:

Under the gold standard, if the dollar price of gold is pegged at $35 per ounce and the dollar/euro exchange rate is set at $2.40 per euro, what must the euro price of gold be pegged at?

Which one of the following statements is the most accurate?

Which one of the following statements is the most true?

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

The liabilities side of a central bank include

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

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 a decrease 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.