Question 1

If the central bank holds no foreign currency reserves, the nation's exchange rate is:

Accepted Answer

A)  fixed. 
B)  pegged. 
C)  under the control of the IMF. 
D)  floating. 
A)  fixed. 
B)  pegged. 
C)  under the control of the IMF. 
D)  floating.

Question 2

The depreciation in value of a nation's currency hits a crisis point when the decline in value exceeds:

Accepted Answer

A)  50% for all nations. 
B)  10% for large nations and 20% for small nations. 
C)  2% for all nations. 
D)  the rise in nominal prices and wages. 
A)  50% for all nations. 
B)  10% for large nations and 20% for small nations. 
C)  2% for all nations. 
D)  the rise in nominal prices and wages.

Question 3

A shock to domestic credit, whereby the holding of domestic bonds decreases, would result in:

Accepted Answer

A)  a rise in the backing ratio and the need for the central bank to purchase domestic bonds. 
B)  a fall in the backing ratio and the need for the central bank to sell domestic bonds. 
C)  a fall in the backing ratio and the need for the central bank to purchase foreign currency reserves. 
D)  a rise in the backing ratio and the need for the central bank to purchase foreign currency reserves. 
A)  a rise in the backing ratio and the need for the central bank to purchase domestic bonds. 
B)  a fall in the backing ratio and the need for the central bank to sell domestic bonds. 
C)  a fall in the backing ratio and the need for the central bank to purchase foreign currency reserves. 
D)  a rise in the backing ratio and the need for the central bank to purchase foreign currency reserves.

Question 4

The effect of continued government deficit includes all of the following, EXCEPT a(n):

Accepted Answer

A)  decrease in reserves. 
B)  increase in interest rates. 
C)  decrease in inflation. 
D)  rapid increase in domestic credit. 
A)  decrease in reserves. 
B)  increase in interest rates. 
C)  decrease in inflation. 
D)  rapid increase in domestic credit.

Question 5

The average duration for a pegged exchange rate is about:

Accepted Answer

A)  5 years. 
B)  10 years. 
C)  2 years. 
D)  It is indefinite. 
A)  5 years. 
B)  10 years. 
C)  2 years. 
D)  It is indefinite.

Question 6

To maintain the peg, a nation must keep its money supply constant, which it does by:

Accepted Answer

A)  buying and selling foreign reserves and domestic assets for its own currency. 
B)  requiring all banks to back deposits 100%. 
C)  backing the currency by foreign reserves 100%. 
D)  selling only foreign reserves for its own currency. 
A)  buying and selling foreign reserves and domestic assets for its own currency. 
B)  requiring all banks to back deposits 100%. 
C)  backing the currency by foreign reserves 100%. 
D)  selling only foreign reserves for its own currency.

Question 7

If the central bank desires to purchase additional domestic bonds to stimulate the economy, then to maintain the peg, what must it do?

Accepted Answer

A)  Decrease domestic spending. 
B)  Sell enough reserves to keep the interest rate unchanged. 
C)  Convince the public and investors that the peg is credible. 
D)  Immediately lower domestic rates of interest. 
A)  Decrease domestic spending. 
B)  Sell enough reserves to keep the interest rate unchanged. 
C)  Convince the public and investors that the peg is credible. 
D)  Immediately lower domestic rates of interest.

Question 8

To what does global contagion refer?

Accepted Answer

A)  an equalization of world interest rates 
B)  elimination of risk premiums between countries 
C)  adverse changes in market sentiment based on events in faraway places 
D)  switching to fixed exchange rates by emerging market economies 
A)  an equalization of world interest rates 
B)  elimination of risk premiums between countries 
C)  adverse changes in market sentiment based on events in faraway places 
D)  switching to fixed exchange rates by emerging market economies

Question 9

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 what will happen to Aruba's exchange rate?

Accepted Answer

A)  The exchange rate will appreciate. 
B)  The exchange rate will depreciate. 
C)  The exchange rate will not change. 
D)  Not enough information is provided to answer. 
A)  The exchange rate will appreciate. 
B)  The exchange rate will depreciate. 
C)  The exchange rate will not change. 
D)  Not enough information is provided to answer.

Question 10

Special situations in emerging markets and developing economies, such as volatile output and an export dependent economy, usually mean:

Accepted Answer

A)  the prudent level of reserves is much higher than for higher-income nations. 
B)  there is no way they are able to maintain an exchange rate peg. 
C)  pegging exchange rates is even more important. 
D)  pegging exchange rates is much easier because the economies are smaller. 
A)  the prudent level of reserves is much higher than for higher-income nations. 
B)  there is no way they are able to maintain an exchange rate peg. 
C)  pegging exchange rates is even more important. 
D)  pegging exchange rates is much easier because the economies are smaller.

Question 11

What is meant by a self-confirming equilibrium?

Accepted Answer

A self-confirming equilibrium is a conce

Question 12

Some remedies and preventive measures have been put forth to slow or forestall currency crises, such as capital controls and intermediate regimes. Discuss these measures and comment on whether they would be effective-why or why not.

Accepted Answer

Currency crises can have devastating eff

Question 13

Whenever a nation has experienced a major banking crisis, the central bank may choose to maintain a backing ratio of more than 100% because of a fear of:

Accepted Answer

A)  unemployment. 
B)  a panic leading to capital flight. 
C)  accounting irregularities. 
D)  expropriation through excessive taxation. 
A)  unemployment. 
B)  a panic leading to capital flight. 
C)  accounting irregularities. 
D)  expropriation through excessive taxation.

Question 14

What is a problem in emerging markets that affects a nation's ability to peg its currency?

Accepted Answer

A)  The low level of GDP means the demand for money is always small. 
B)  The high level of GDP means the demand for money is always large. 
C)  As the nation develops, the ratio of the demand for money to GDP rises. 
D)  Because of the volatility of GDP, the demand for money is volatile and the nation must hold higher levels of reserves to peg. 
A)  The low level of GDP means the demand for money is always small. 
B)  The high level of GDP means the demand for money is always large. 
C)  As the nation develops, the ratio of the demand for money to GDP rises. 
D)  Because of the volatility of GDP, the demand for money is volatile and the nation must hold higher levels of reserves to peg.

Question 15

A danger to the peg is a situation in which the central bank lends to insolvent private financial institutions to bail them out of crises. Why might this cause a problem?

Accepted Answer

A)  The private financial institutions are often corrupt and should not be bailed out. 
B)  Foreign investors are helped and domestic investors harmed. 
C)  It requires a drawdown of foreign reserves to maintain the peg, lowering the backing ratio. 
D)  The central bank is assuming more than its share of political power, which can cause problems down the road. 
A)  The private financial institutions are often corrupt and should not be bailed out. 
B)  Foreign investors are helped and domestic investors harmed. 
C)  It requires a drawdown of foreign reserves to maintain the peg, lowering the backing ratio. 
D)  The central bank is assuming more than its share of political power, which can cause problems down the road.

Question 16

Under what circumstances will a peg have a longer grace period before investors get nervous and dump the currency?

Accepted Answer

A)  when there is no coordinated effort to attack the currency 
B)  when there is a lower cost to the economy of maintaining the peg 
C)  when traders and speculators are spread out and small in size with no common belief about the situation 
D)  when there is no coordinated effort to attack the currency, a lower cost to the economy of maintaining the peg, and when traders and speculators are spread out and small in size with no common belief about the situation 
A)  when there is no coordinated effort to attack the currency 
B)  when there is a lower cost to the economy of maintaining the peg 
C)  when traders and speculators are spread out and small in size with no common belief about the situation 
D)  when there is no coordinated effort to attack the currency, a lower cost to the economy of maintaining the peg, and when traders and speculators are spread out and small in size with no common belief about the situation

Question 17

Whenever a nation opts to back its fixed exchange rate 100% with foreign currency reserves, it is known as:

Accepted Answer

A)  a floating rate system. 
B)  a currency peg. 
C)  a currency board. 
D)  a full concentration ratio. 
A)  a floating rate system. 
B)  a currency peg. 
C)  a currency board. 
D)  a full concentration ratio.

Question 18

What is the difference between myopic and forward-looking investors, and what are the implications for fixed exchange rates?

Accepted Answer

Myopic investors are those who have a sh

Question 19

(Table: Mexico's Central Bank Balance Sheet) Suppose the central bank engages in an open-market purchase of 300 million pesos. What will happen to reserves, domestic credit, and the backing ratio? Explain how these changes take place.

Accepted Answer

The answer of (Table: Mexico's Central Bank Balance Sheet) Suppose...

Question 20

Which of the following is counted in the domestic assets of a central bank?

Accepted Answer

A)  money that the central bank issues to pay for purchases of domestic bonds 
B)  domestic bonds that it purchases with money that it issues 
C)  reserve currencies that it purchases with money that it issues 
D)  money that it issues to purchase reserve currencies 
A)  money that the central bank issues to pay for purchases of domestic bonds 
B)  domestic bonds that it purchases with money that it issues 
C)  reserve currencies that it purchases with money that it issues 
D)  money that it issues to purchase reserve currencies

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

If the central bank holds no foreign currency reserves, the nation's exchange rate is:

The depreciation in value of a nation's currency hits a crisis point when the decline in value exceeds:

A shock to domestic credit, whereby the holding of domestic bonds decreases, would result in:

The effect of continued government deficit includes all of the following, EXCEPT a(n):

The average duration for a pegged exchange rate is about:

To maintain the peg, a nation must keep its money supply constant, which it does by:

If the central bank desires to purchase additional domestic bonds to stimulate the economy, then to maintain the peg, what must it do?

To what does global contagion refer?

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 what will happen to Aruba's exchange rate?

Special situations in emerging markets and developing economies, such as volatile output and an export dependent economy, usually mean:

What is meant by a self-confirming equilibrium?

Some remedies and preventive measures have been put forth to slow or forestall currency crises, such as capital controls and intermediate regimes. Discuss these measures and comment on whether they would be effective-why or why not.

Whenever a nation has experienced a major banking crisis, the central bank may choose to maintain a backing ratio of more than 100% because of a fear of:

What is a problem in emerging markets that affects a nation's ability to peg its currency?

A danger to the peg is a situation in which the central bank lends to insolvent private financial institutions to bail them out of crises. Why might this cause a problem?

Under what circumstances will a peg have a longer grace period before investors get nervous and dump the currency?

Whenever a nation opts to back its fixed exchange rate 100% with foreign currency reserves, it is known as:

What is the difference between myopic and forward-looking investors, and what are the implications for fixed exchange rates?

(Table: Mexico's Central Bank Balance Sheet) Suppose the central bank engages in an open-market purchase of 300 million pesos. What will happen to reserves, domestic credit, and the backing ratio? Explain how these changes take place.

Which of the following is counted in the domestic assets of a central bank?

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

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