Question 1

How can a central bank change the composition of the money supply and increase the backing ratio?

Accepted Answer

A)  It can confiscate any foreign currency held by private citizens. 
B)  It can borrow from the public and investing in foreign currency assets. 
C)  It can bail out insolvent banks. 
D)  It can expand the money supply. 
A)  It can confiscate any foreign currency held by private citizens. 
B)  It can borrow from the public and investing in foreign currency assets. 
C)  It can bail out insolvent banks. 
D)  It can expand the money supply.

Question 2

Which of the following is correct?

Accepted Answer

A)  Exchange rate crises typically impose larger costs on advanced countries than on emerging market countries. 
B)  Exchange rate crises typically impose larger costs on emerging market countries than on advanced countries. 
C)  Exchange rate crises typically impose the same costs on advanced countries and on emerging market countries. 
D)  Exchange rate crises typically do not impose any costs on advanced countries. 
A)  Exchange rate crises typically impose larger costs on advanced countries than on emerging market countries. 
B)  Exchange rate crises typically impose larger costs on emerging market countries than on advanced countries. 
C)  Exchange rate crises typically impose the same costs on advanced countries and on emerging market countries. 
D)  Exchange rate crises typically do not impose any costs on advanced countries.

Question 3

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. Which of the following is NOT included in the assets of the Saudi Arabian central bank?

Accepted Answer

A)  reserves 
B)  domestic credit 
C)  the money supply 
D)  domestic credit and the money supply 
A)  reserves 
B)  domestic credit 
C)  the money supply 
D)  domestic credit and the money supply

Question 4

One may predict the timing of a crisis by analyzing the expectations of investors with respect to:

Accepted Answer

A)  the tendency of the central bank to monetize debt. 
B)  the health of the economy, especially unemployment and GDP. 
C)  the long-run current account deficit. 
D)  the credentials of bank officials and their previous experience handling currency crises. 
A)  the tendency of the central bank to monetize debt. 
B)  the health of the economy, especially unemployment and GDP. 
C)  the long-run current account deficit. 
D)  the credentials of bank officials and their previous experience handling currency crises.

Question 5

Weighing the costs and benefits of maintaining the peg would involve comparing the cost of:

Accepted Answer

A)  output gaps and a slower economy versus the benefits from additional trade. 
B)  fixed prices versus the benefits of higher interest rates. 
C)  a trade deficit versus the benefits of greater economic growth. 
D)  international instability versus the benefits of lower rates of interest. 
A)  output gaps and a slower economy versus the benefits from additional trade. 
B)  fixed prices versus the benefits of higher interest rates. 
C)  a trade deficit versus the benefits of greater economic growth. 
D)  international instability versus the benefits of lower rates of interest.

Question 6

If a nation's interest rate on foreign currency deposits is higher inside than outside the nation, which of the following is the cause?

Accepted Answer

A)  a fall in the domestic money supply 
B)  a country premium, meaning investors are concerned about defaults or capital controls 
C)  a currency premium 
D)  an exchange rate premium 
A)  a fall in the domestic money supply 
B)  a country premium, meaning investors are concerned about defaults or capital controls 
C)  a currency premium 
D)  an exchange rate premium

Question 7

Aruba pegs its currency (the Aruban florin) to the U.S. dollar at a rate of Af 2 = $US1. Suppose that the actual exchange rate is equal to this pegged rate. Now suppose that the Aruban central bank buys dollars. Which of the following describes the effect of this dollar purchase on Aruba's exchange rate?

Accepted Answer

A)  upward pressure on the exchange rate (depreciation of florin) 
B)  downward pressure on the exchange rate (appreciation of florin) 
C)  no effect on the exchange rate 
D)  Not enough information is provided to answer. 
A)  upward pressure on the exchange rate (depreciation of florin) 
B)  downward pressure on the exchange rate (appreciation of florin) 
C)  no effect on the exchange rate 
D)  Not enough information is provided to answer.

Question 8

In general, when market expectations indicate a non-credible peg, or when the costs of the peg are not greater than the benefits of pegging, what will be the equilibrium situation?

Accepted Answer

A)  to depreciate 
B)  to peg 
C)  uncertain, because in this situation there is no self-fulfilling equilibrium 
D)  to sell more government bonds 
A)  to depreciate 
B)  to peg 
C)  uncertain, because in this situation there is no self-fulfilling equilibrium 
D)  to sell more government bonds

Question 9

When maintaining a peg, if the central bank runs out of foreign currency reserves, then:

Accepted Answer

A)  it can always print more of the domestic currency. 
B)  it can back the money supply by purchasing domestic assets. 
C)  it can sell its own currency and purchase foreign currency reserves. 
D)  it must allow the domestic currency to float. 
A)  it can always print more of the domestic currency. 
B)  it can back the money supply by purchasing domestic assets. 
C)  it can sell its own currency and purchase foreign currency reserves. 
D)  it must allow the domestic currency to float.

Question 10

The reason for the concurrence of exchange rate crises and other financial disruptions centers on:

Accepted Answer

A)  the inherent instability of most banks in low-income nations. 
B)  the tendency of most elected officials to be susceptible to influence and corruption. 
C)  the fact that changes in exchange rates can raise debt burdens (denominated in other currencies) to intolerable levels. 
D)  the tendency of the current administration to react by nationalizing banks and implementing capital controls. 
A)  the inherent instability of most banks in low-income nations. 
B)  the tendency of most elected officials to be susceptible to influence and corruption. 
C)  the fact that changes in exchange rates can raise debt burdens (denominated in other currencies) to intolerable levels. 
D)  the tendency of the current administration to react by nationalizing banks and implementing capital controls.

Question 11

Countries accumulate foreign currency reserves for all of the following reasons, EXCEPT:

Accepted Answer

A)  to achieve a higher backing ratio. 
B)  to safeguard against future shortfalls in foreign capital. 
C)  to safeguard against a domestic banking crisis. 
D)  to improve the stature of the country in the WTO. 
A)  to achieve a higher backing ratio. 
B)  to safeguard against future shortfalls in foreign capital. 
C)  to safeguard against a domestic banking crisis. 
D)  to improve the stature of the country in the WTO.

Question 12

(Table: Mexico's Central Bank Balance Sheet) To maintain a fixed exchange rate, which of the following will Mexico do?

Accepted Answer

A)  always buy more government bonds 
B)  always sell more government bonds 
C)  buy and sell reserves 
D)  print more money 
A)  always buy more government bonds 
B)  always sell more government bonds 
C)  buy and sell reserves 
D)  print more money

Question 13

A balance sheet for the central bank shows assets of _____ and liabilities of ______.

Accepted Answer

A)  gold and silver; foreign obligations 
B)  reserves (foreign currency and foreign bonds); domestic currency (money supply) 
C)  private individuals; public entities 
D)  large money center banks; corporate borrowers 
A)  gold and silver; foreign obligations 
B)  reserves (foreign currency and foreign bonds); domestic currency (money supply) 
C)  private individuals; public entities 
D)  large money center banks; corporate borrowers

Question 14

Aruba pegs its currency (the Aruban florin) to the U.S. dollar at a rate of Af 2 = $US1. Suppose that the actual exchange rate is equal to this pegged rate. Suppose that Aruba's money supply is Af 20 billion and Aruba's central bank holds $5 billion of dollar reserves and Af 10 billion of domestic bonds. What will happen to Aruba's backing ratio if its central bank sells $2.5 billion of U.S. dollars to Aruban citizens?

Accepted Answer

A)  It will not change. 
B)  It will fall to 33%. 
C)  It will fall to 2.6%. 
D)  It will fall to 81%. 
A)  It will not change. 
B)  It will fall to 33%. 
C)  It will fall to 2.6%. 
D)  It will fall to 81%.

Question 15

A ratio indicating how safe the peg is from breaking is calculated by _______ and is called ________.

Accepted Answer

A)  foreign reserves as a percent of GDP; the safety margin 
B)  foreign reserves as a percent of the total money supply; the backing ratio 
C)  money demand as a percent of money supply; the financial adequacy quotient 
D)  foreign reserves as a percent of domestic credit; the marginal propensity to break 
A)  foreign reserves as a percent of GDP; the safety margin 
B)  foreign reserves as a percent of the total money supply; the backing ratio 
C)  money demand as a percent of money supply; the financial adequacy quotient 
D)  foreign reserves as a percent of domestic credit; the marginal propensity to break

Question 16

What results in changes in the domestic money supply?

Accepted Answer

A)  changes in the central bank's holding of domestic credit only 
B)  changes in the central bank's holding of foreign reserves only 
C)  some combination of changes in the central bank's holdings of domestic credit or foreign reserves 
D)  changes in the nation's stock of gold 
A)  changes in the central bank's holding of domestic credit only 
B)  changes in the central bank's holding of foreign reserves only 
C)  some combination of changes in the central bank's holdings of domestic credit or foreign reserves 
D)  changes in the nation's stock of gold

Question 17

Argentina's experience in defending its peg after 1994 resulted in all of the following, EXCEPT:

Accepted Answer

A)  an increase in the nominal rate of interest as the risk premium rose because of the Tequila Crisis. 
B)  a bailout of domestic banks damaged by excessive defaults. 
C)  domestic investors selling pesos and purchasing assets denominated in U.S. dollars. 
D)  a significant decrease in the nominal rate of interest as the risk premium rose. 
A)  an increase in the nominal rate of interest as the risk premium rose because of the Tequila Crisis. 
B)  a bailout of domestic banks damaged by excessive defaults. 
C)  domestic investors selling pesos and purchasing assets denominated in U.S. dollars. 
D)  a significant decrease in the nominal rate of interest as the risk premium rose.

Question 18

Once a nation "runs out" of reserves to back the currency, the peg cannot be maintained because:

Accepted Answer

A)  the supply of money grows uncontrollably at the same rate that the central bank monetizes deficits. 
B)  the central bank cannot raise or lower the supply of money. 
C)  the IMF will refuse to lend reserves to such a nation. 
D)  the nation's currency is overvalued so that its exports diminish. 
A)  the supply of money grows uncontrollably at the same rate that the central bank monetizes deficits. 
B)  the central bank cannot raise or lower the supply of money. 
C)  the IMF will refuse to lend reserves to such a nation. 
D)  the nation's currency is overvalued so that its exports diminish.

Question 19

An exchange rate crisis causes all of the following, EXCEPT:

Accepted Answer

A)  a large and sudden depreciation of the currency. 
B)  economic hardships. 
C)  political turmoil. 
D)  a sharp appreciation of the currency. 
A)  a large and sudden depreciation of the currency. 
B)  economic hardships. 
C)  political turmoil. 
D)  a sharp appreciation of the currency.

Question 20

In emerging markets, a banking crisis threatens the peg when a bailout occurs because:

Accepted Answer

A)  the central bank will act too cautiously. 
B)  the central bank will bail out other financial firms as well. 
C)  the central bank cannot then lend to other solvent banks. 
D)  fear of unsafe banks might encourage depositors to convert funds into foreign currency deposits offshore. 
A)  the central bank will act too cautiously. 
B)  the central bank will bail out other financial firms as well. 
C)  the central bank cannot then lend to other solvent banks. 
D)  fear of unsafe banks might encourage depositors to convert funds into foreign currency deposits offshore.

How can a central bank change the composition of the money supply and increase the backing ratio?

Which of the following is correct?

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. Which of the following is NOT included in the assets of the Saudi Arabian central bank?

One may predict the timing of a crisis by analyzing the expectations of investors with respect to:

Weighing the costs and benefits of maintaining the peg would involve comparing the cost of:

If a nation's interest rate on foreign currency deposits is higher inside than outside the nation, which of the following is the cause?

In general, when market expectations indicate a non-credible peg, or when the costs of the peg are not greater than the benefits of pegging, what will be the equilibrium situation?

When maintaining a peg, if the central bank runs out of foreign currency reserves, then:

The reason for the concurrence of exchange rate crises and other financial disruptions centers on:

Countries accumulate foreign currency reserves for all of the following reasons, EXCEPT:

(Table: Mexico's Central Bank Balance Sheet) To maintain a fixed exchange rate, which of the following will Mexico do?

A balance sheet for the central bank shows assets of _ and liabilities of __.

A ratio indicating how safe the peg is from breaking is calculated by _ and is called __.

What results in changes in the domestic money supply?

Argentina's experience in defending its peg after 1994 resulted in all of the following, EXCEPT:

Once a nation "runs out" of reserves to back the currency, the peg cannot be maintained because:

An exchange rate crisis causes all of the following, EXCEPT:

In emerging markets, a banking crisis threatens the peg when a bailout occurs because:

Trade in the Global Economy

Trade and Technology: The Ricardian Model

Gains and Losses From Trade in the Specific-Factors Model

Trade and Resources: the Heckscher-Ohlin Model

Movement of Labor and Capital Between Countries

Increasing Returns to Scale and Monopolistic Competition

Offshoring of Goods and Services

Import Tariffs and Quotas Under Perfect Competition

Import Tariffs and Quotas Under Imperfect Competition

Export Subsidies in Agriculture and High-Technology Industries

International Agreements: Trade, Labor, and the Environment

The Global Macroeconomy

Introduction to Exchange Rates and the Foreign Exchange Market

Exchange Rates I: the Monetary Approach in the Long Run

Exchange Rates II: the Asset Approach in the Short Run

National and International Accounts: Income, Wealth, and the Balance of Payments

Balance of Payments I: the Gains From Financial Globalization

Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run

Fixed Versus Floating: International Monetary Experience

The Euro

Topics in International Macroeconomics

Filters

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

How can a central bank change the composition of the money supply and increase the backing ratio?

Which of the following is correct?

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. Which of the following is NOT included in the assets of the Saudi Arabian central bank?

One may predict the timing of a crisis by analyzing the expectations of investors with respect to:

Weighing the costs and benefits of maintaining the peg would involve comparing the cost of:

If a nation's interest rate on foreign currency deposits is higher inside than outside the nation, which of the following is the cause?

In general, when market expectations indicate a non-credible peg, or when the costs of the peg are not greater than the benefits of pegging, what will be the equilibrium situation?

When maintaining a peg, if the central bank runs out of foreign currency reserves, then:

The reason for the concurrence of exchange rate crises and other financial disruptions centers on:

Countries accumulate foreign currency reserves for all of the following reasons, EXCEPT:

(Table: Mexico's Central Bank Balance Sheet) To maintain a fixed exchange rate, which of the following will Mexico do?

A balance sheet for the central bank shows assets of _____ and liabilities of ______.

A ratio indicating how safe the peg is from breaking is calculated by _______ and is called ________.

What results in changes in the domestic money supply?

Argentina's experience in defending its peg after 1994 resulted in all of the following, EXCEPT:

Once a nation "runs out" of reserves to back the currency, the peg cannot be maintained because:

An exchange rate crisis causes all of the following, EXCEPT:

In emerging markets, a banking crisis threatens the peg when a bailout occurs because:

Trade in the Global Economy

Trade and Technology: The Ricardian Model

Gains and Losses From Trade in the Specific-Factors Model

Trade and Resources: the Heckscher-Ohlin Model

Movement of Labor and Capital Between Countries

Increasing Returns to Scale and Monopolistic Competition

Offshoring of Goods and Services

Import Tariffs and Quotas Under Perfect Competition

Import Tariffs and Quotas Under Imperfect Competition

Export Subsidies in Agriculture and High-Technology Industries

International Agreements: Trade, Labor, and the Environment

The Global Macroeconomy

Introduction to Exchange Rates and the Foreign Exchange Market

Exchange Rates I: the Monetary Approach in the Long Run

Exchange Rates II: the Asset Approach in the Short Run

National and International Accounts: Income, Wealth, and the Balance of Payments

Balance of Payments I: the Gains From Financial Globalization

Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run

Fixed Versus Floating: International Monetary Experience

The Euro

Topics in International Macroeconomics

Filters

A balance sheet for the central bank shows assets of _ and liabilities of __.

A ratio indicating how safe the peg is from breaking is calculated by _ and is called __.