Question 1

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

Accepted Answer

Under a gold exchange standard, central

Question 2

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 3

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 4

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 5

Explain risk and liquidity of assets.

Accepted Answer

Risk is the variability an asset contrib

Question 6

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

Accepted Answer

A)  Fiscal policy can affect output, employment and international reserves at the same time. 
B)  Fiscal policy can affect only employment. 
C)  Fiscal policy can affect only international reserves. 
D)  Fiscal policy can affect only output and employment. 
E)  Fiscal employment can affect only output and international reserves. 
A)  Fiscal policy can affect output, employment and international reserves at the same time. 
B)  Fiscal policy can affect only employment. 
C)  Fiscal policy can affect only international reserves. 
D)  Fiscal policy can affect only output and employment. 
E)  Fiscal employment can affect only output and international reserves.

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

A balance of payments crises under fixed exchange rates occurs when

Accepted Answer

A)  a country runs out of foreign reserves. 
B)  a country is in a liquidity trap. 
C)  exports and imports expand beyond some point. 
D)  marginal returns on foreign exchange investments approach zero. 
E)  forward currency markets undergo high volatility. 
A)  a country runs out of foreign reserves. 
B)  a country is in a liquidity trap. 
C)  exports and imports expand beyond some point. 
D)  marginal returns on foreign exchange investments approach zero. 
E)  forward currency markets undergo high volatility.

Question 9

Under fixed exchange rates, 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.

Question 10

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 11

From the Civil War up to 1914, the United States adhered to a

Accepted Answer

A)  gold standard. 
B)  silver standard. 
C)  bimetallic standard. 
D)  bronze standard. 
E)  copper standard. 
A)  gold standard. 
B)  silver standard. 
C)  bimetallic standard. 
D)  bronze standard. 
E)  copper standard.

Question 12

Which one of the following statements is most correct?

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 13

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 14

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 =   How much will the central bank have to reduce domestic assets A s.t. the domestic interest rate will increase by (a) 1% (b) 4%?

Accepted Answer

(a) ρ = .01 = @#IMG-DLM& ΔA =

Question 15

Which one of the following statements is most correct?

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 16

Which of the following best describes a deliberate government decision to lower the exchange rate, E?

Accepted Answer

A)  appreciation 
B)  depreciation 
C)  revaluation 
D)  devaluation 
E)  accumulation 
A)  appreciation 
B)  depreciation 
C)  revaluation 
D)  devaluation 
E)  accumulation

Question 17

What are the factors affecting the demand for foreign currency?

Accepted Answer

Three factors affect the deman

Question 18

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 sells $100 worth of foreign bonds for domestic currency.

Accepted Answer

Central Bank Balance Sheet
Ass

Question 19

Perfect asset substitutability is the assumption that

Accepted Answer

A)  the foreign exchange market is in equilibrium only when expected returns on domestic assets are greater than returns on foreign currency bonds. 
B)  the foreign exchange market is in equilibrium only when expected returns on foreign currency bonds are greater than returns on domestic assets. 
C)  the foreign exchange market is in equilibrium only when expected returns on all assets are negative. 
D)  the foreign exchange market is in equilibrium only when expected returns on domestic assets are equal to returns on foreign currency bonds. 
E)  the foreign exchange market is in equilibrium only when domestic assets are risk-free. 
A)  the foreign exchange market is in equilibrium only when expected returns on domestic assets are greater than returns on foreign currency bonds. 
B)  the foreign exchange market is in equilibrium only when expected returns on foreign currency bonds are greater than returns on domestic assets. 
C)  the foreign exchange market is in equilibrium only when expected returns on all assets are negative. 
D)  the foreign exchange market is in equilibrium only when expected returns on domestic assets are equal to returns on foreign currency bonds. 
E)  the foreign exchange market is in equilibrium only when domestic assets are risk-free.

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 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

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

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.

A balance of payments crisis is best described as

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

Explain risk and liquidity of assets.

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

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

A balance of payments crises under fixed exchange rates occurs when

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

From the Civil War up to 1914, the United States adhered to a

Which one of the following statements is most correct?

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

Which one of the following statements is most correct?

Which of the following best describes a deliberate government decision to lower the exchange rate, E?

What are the factors affecting the demand for foreign currency?

Perfect asset substitutability is the assumption that

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

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

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.

A balance of payments crisis is best described as

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

Explain risk and liquidity of assets.

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

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

A balance of payments crises under fixed exchange rates occurs when

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

From the Civil War up to 1914, the United States adhered to a

Which one of the following statements is most correct?

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

Which one of the following statements is most correct?

Which of the following best describes a deliberate government decision to lower the exchange rate, E?

What are the factors affecting the demand for foreign currency?

Perfect asset substitutability is the assumption that

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

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.