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

Explain why domestic interest rates may not equal foreign interest rates.

With pegged exchange rates, in the case of fiscal dominance, if investors are unaware of pending problems as the central bank continuously monetizes government bonds, then at some point:

Nations that depend on money creation from the central bank because they cannot borrow to fund deficits are in a situation that economists call:

One economic cost of an exchange rate crisis is:

(Table: Central Bank Balance Sheet) Using the balance sheet provided, if the central bank issues 100 million more in foreign debt, then:

A banking crisis often threatens a fixed exchange rate (or peg). Why?

Typically, an exchange rate crisis can be caused by:

When the central bank offsets a fall in interest rates with the sale of foreign currency reserves, the action is called:

Saudi Arabia pegs its currency (the riyal, or SAR) to the U.S. dollar. Currently, the exchange rate is SAR3.75 = $US1. Suppose that the Saudi Arabian money multiplier is 1. By how much will the Saudi Arabian money supply change when the Saudi central bank makes loans of SAR 1 million?

What are the three types of crises discussed in the text? List and briefly explain.

Argentina could reduce the supply of money and help out ailing banks without abandoning its peg because:

(Table: Mexico's Central Bank Balance Sheet) Suppose foreign interest rates rise in the United States, causing money demand to change by 150 million pesos. What will happen to reserves, domestic credit, and the backing ratio? Explain how these changes take place.

Saudi Arabia pegs its currency (the riyal, or SAR) to the U.S. dollar. Currently, the exchange rate is SAR3.75 = $US1. Suppose that the Saudi Arabian money multiplier is 1. How does the Saudi Arabian central bank maintain the pegged exchange rate of SAR3.75 = $US1?

Which of the following occurs during a banking crisis?

Because of a rise in its risk premium and subsequent rise in interest rates, Argentina experienced a fall in ____, which resulted in a decline in ____.

Although fixed exchange rates are desirable for many reasons, nations that adopt fixed exchange rates find that:

If the price level is fixed, the demand for money depends on changes in which of the following?

The effect of an exchange crisis on large nations compared with small ones:

In general, whenever the benefits of pegging outweigh the costs of a credible peg, what will the government always choose to do?

Who was the noted financier who speculated against the British pound in 1992 and put pressure on the exchange rate by selling pounds for German Deutsche Marks, eventually forcing Britain to float?