Exam 21: Exchange Rate Regimes

Assume that policy makers are pursuing a fixed exchange rate regime.Assume that the economy is initially operating at the natural level (i.e.,Y = Yn).Suppose a reduction in wealth causes households to reduce consumption.This wealth-induced decrease in consumption will cause which of the following to occur?

When policy makers decide to revalue the currency,such an action generally represents

When we no longer assume that the exchange rate expected to occur in one year is constant,explain what variables affect the current exchange rate in a flexible exchange rate regime.Include in your answer an explanation of how changes in these variables affect the current exchange rate.

For this question,assume that policy makers are pursuing a fixed exchange rate regime and that output is initially less than the natural level of output.The economy will tend to move toward the natural level of output when which of the following occur?

Changes in which of the following variables will cause the current nominal exchange rate to change?

Euro coins and bank notes were introduced in January

Assume that policy makers are pursuing a fixed exchange rate regime.Assume that the economy is initially operating at the natural level (i.e.,Y = Yn).Suppose fiscal policy makers increase government spending.This fiscal contraction will cause which of the following?

Suppose foreign exchange markets anticipate a revaluation for country A.Further assume that policy makers in country A will continue to fix its nominal exchange rate.In order to peg the currency at its original level,which of the following must occur?

A country which does not devalue when financial markets expect it to will probably suffer

Assume a country is in a fixed exchange rate regime.Now suppose that individuals expect that policy makers will devalue its currency.Explain the various actions that policy makers can choose in response to this expected devaluation.

Assume that policy makers are pursuing a fixed exchange rate regime.Assume that the economy is initially operating at the natural level (i.e.,Y = Yn).Suppose fiscal policy makers increase taxes.This fiscal contraction will cause which of the following?

A number of situations can arise that will cause individuals to believe that policy makers might change the pegged value of a fixed exchange rate.Suppose financial market participants expect a revaluation in the future.The interest parity condition will be maintained if which of the following policy actions are taken in the current period?

Explain why exchange rates are more volatile than is suggested by the relatively simply interest parity condition presented earlier in the course.

Suppose a reduction in the domestic one-year interest rate expected to occur in two years .All else fixed,will the reduction in interest rate have which of the following effects in a flexible exchange rate regime?

Suppose the country that pegs its currency has an overvalued real exchange rate and that output is currently above the natural level of output.Which of the following will occur as the economy adjusts to this situation?

Which of the following is an advantage of a common currency in Europe?

Suppose country A pegs its nominal exchange rate to country B and that country A has a higher inflation rate than country B.In this situation,country A will experience

Does Europe constitute an optimal common currency area? Why?

A devaluation causes which of the following to occur in the medium run?

Assume that policy makers are pursuing a fixed exchange rate regime.Assume that the economy is initially operating at the natural level (i.e.,Y = Yn).Suppose an increase in wealth causes households to increase consumption.This wealth-induced increase in consumption will cause which of the following to occur?