Exam 20: Exchange Rate Crises: How Pegs Work and How They Break

In the event a nation adopts a currency board system to peg its exchange rate:

(Figure: Central Bank Balance Sheet) When an economy with a pegged exchange rate operates with the money supply backed 100% by reserves, it is at point __________ on the diagram, and the situation is known as __________.

With a credible peg, whenever there is a rise in the foreign interest rate:

An economy is better able to withstand a shock to the money demand if:

(Table: Central Bank Balance Sheet) In the balance sheet provided, if the central bank did not issue debt (domestic and foreign), then:

Part of the default risk in developing nations is investor fear of all of the following, EXCEPT:

(Table: Mexico's Central Bank Balance Sheet) Suppose output in Mexico rises, causing money demand to change by 75 million pesos. What will happen to reserves, domestic credit, and the backing ratio? Explain how these changes take place.

Investors in emerging markets often require ______ added to their return because they are concerned about defaults and exchange rate volatility.

Because of speculative attacks due to the belief a fixed rate will fail, pegged exchange rates:

Consider an economy with a fixed exchange rate and money supply equal to 2 billion pesos. The country has 1 billion in reserves and 1 billion in domestic credit. If the output in the country were to increase by 5%, then:

When other emerging market nations experience an exchange rate crisis, it affects healthy emerging market economies (raises risk premiums) because of investor worry. This phenomenon is known as:

An expansion of the domestic money supply can be offset by the sale of foreign reserves. This technique is called:

If domestic credit is constant, then any change in the demand for money will result in:

(Table: Mexico's Central Bank Balance Sheet) If the country sells 325 million pesos of foreign assets and reduces domestic credit by 425 million pesos, then:

In the home economy, when "money" is a liability of the government, the supply of money is equal to:

Paul Krugman has analyzed fixed currency pegs and the likely cause for them to break. His model is one in which the central bank is under political control, which results in:

A phenomenon that has perplexed many is that emerging market economies have sought to ____ their foreign currency reserves, thus _____ the backing ratio to _____.

What is the likely cause of an interest rate spread for similar assets denominated in the same currency?

To have adequate protection to cover a depreciation, the central bank must keep its foreign currency reserves at the level at which:

When the central bank engages in sterilization of reserves, it is: