Exam 18: Fixed Exchange Rates and Foreign Exchange Intervention

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.

Imperfect asset substitutability exists

Which one of the following statements is the MOST accurate?

Which one of the following statements is the MOST accurate?

If the central bank does not purchase foreign assets when output increases but instead holds the money stock constant, can it still keep the exchange rate fixed at ? Please explain.

Which one of the following statements is the most correct?

Which one of the following statements is the MOST accurate?

Briefly describe two systems for fixing the exchange rates of all currencies against each other and the time periods in which they were used.

Please define and give an example of sterilized foreign exchange intervention.

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

Why is it important to understand fixed exchange rates in the modern global economy?

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.

Which one of the following statements is the MOST accurate?

Which one of the following statements is the MOST accurate?

Fiscal expansion under fixed exchange rates will have what temporary effect?

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. Explain (using numbers) the mechanism if the x-y exchange rate was 0.5 x per y.

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. Explain (using numbers) the mechanism if the x-y exchange rate was 0.8 x per y.

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

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

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