Question 1

In fact, several studies focused on Europe concluded that higher exchange rate volatility:

Accepted Answer

A)  is associated with smaller price differentials. 
B)  is associated with larger price differentials. 
C)  often precedes a return to stability. 
D)  promotes trade and cooperation among nations. 
A)  is associated with smaller price differentials. 
B)  is associated with larger price differentials. 
C)  often precedes a return to stability. 
D)  promotes trade and cooperation among nations. B

Question 2

Suppose that Venezuela pegs its bolivar to the Mexican peso. Suppose further that both countries are in a recession. Using the IS-LM-FX model, explain what will happen in Venezuela when Mexican firms begin to expect higher profits in the future.

Accepted Answer

When Mexican firms begin to expect higher profits in the future, this will lead to an increase in demand for the Mexican peso. As a result, the value of the peso will appreciate relative to the Venezuelan bolivar.

In the IS-LM-FX model, an increase in the value of the peso relative to the bolivar will lead to a decrease in net exports for Venezuela. This is because Venezuelan goods and services will become more expensive for Mexican consumers, leading to a decrease in demand for Venezuelan exports.

Additionally, the appreciation of the peso will also lead to a decrease in the demand for Venezuelan goods and services in the Mexican market, further reducing Venezuela's net exports.

As a result, the decrease in net exports will lead to a decrease in aggregate demand in Venezuela, which will further exacerbate the recession in the country. This can lead to lower output, higher unemployment, and lower overall economic activity in Venezuela.

Overall, the expectation of higher profits in Mexico will lead to a decrease in net exports and a worsening of the recession in Venezuela, as per the IS-LM-FX model.

Question 3

Which is the best characterization of the current international payments system?

Accepted Answer

A)  The World Bank and the IMF approve nations' exchange rate regimes and ensure that financial flows are not hampered by imbalances. 
B)  All nations are now operating with floating exchange rates and free capital flows. 
C)  The four richest industrial nations have floating exchange rates, while the rest of the nations peg to those currencies. 
D)  There is no standard and no rules, and each nation chooses the regime that works best for its individual situation at the time. 
A)  The World Bank and the IMF approve nations' exchange rate regimes and ensure that financial flows are not hampered by imbalances. 
B)  All nations are now operating with floating exchange rates and free capital flows. 
C)  The four richest industrial nations have floating exchange rates, while the rest of the nations peg to those currencies. 
D)  There is no standard and no rules, and each nation chooses the regime that works best for its individual situation at the time. D

Question 4

In the example of the peg between Britain and Germany, what would have been the case if Britain had allowed the pound to float and depreciate after Germany's GDP rise?

Accepted Answer

A)  Britain would have suffered depreciation and a recession. 
B)  Britain would have had to raise interest rates. 
C)  Britain would no longer be eligible to join the new euro currency. 
D)  Britain could have lowered interest rates and enjoyed an added boost to GDP. 
A)  Britain would have suffered depreciation and a recession. 
B)  Britain would have had to raise interest rates. 
C)  Britain would no longer be eligible to join the new euro currency. 
D)  Britain could have lowered interest rates and enjoyed an added boost to GDP.

Question 5

In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, assuming Britain maintains its exchange rate peg, the likely impact on the British economy would be a(n):

Accepted Answer

A)  recession. 
B)  inflationary economy. 
C)  stronger pound. 
D)  decrease in taxes. 
A)  recession. 
B)  inflationary economy. 
C)  stronger pound. 
D)  decrease in taxes.

Question 6

In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, assuming Britain does not maintain its exchange rate peg:

Accepted Answer

A)  the only option available to Britain would be to increase its interest rate. 
B)  the British pound would depreciate. 
C)  the British pound would appreciate. 
D)  the British economy would slow down. 
A)  the only option available to Britain would be to increase its interest rate. 
B)  the British pound would depreciate. 
C)  the British pound would appreciate. 
D)  the British economy would slow down.

Question 7

One might expect the interest rate correlation between nonpegs and closed economies with the base currency to be ____, but because of other circumstances, there may be a ____ correlation.

Accepted Answer

A)  negative; positive 
B)  positive; negative 
C)  zero; positive 
D)  negative; zero 
A)  negative; positive 
B)  positive; negative 
C)  zero; positive 
D)  negative; zero

Question 8

Traditionally, nations pegged their currencies to _______, and so trade was accomplished with _______ exchange rates.

Accepted Answer

A)  the pound sterling; floating 
B)  gold; fixed 
C)  the U.S. dollar; floating 
D)  silver; fixed 
A)  the pound sterling; floating 
B)  gold; fixed 
C)  the U.S. dollar; floating 
D)  silver; fixed

Question 9

The gold standard system was:

Accepted Answer

A)  a floating exchange rate system. 
B)  a fixed exchange rate system, in which the country's currency was fixed relative to a pound of gold. 
C)  a fixed exchange rate system, in which the country's currency was fixed relative to an ounce of gold. 
D)  only used by the United States. 
A)  a floating exchange rate system. 
B)  a fixed exchange rate system, in which the country's currency was fixed relative to a pound of gold. 
C)  a fixed exchange rate system, in which the country's currency was fixed relative to an ounce of gold. 
D)  only used by the United States.

Question 10

Under a gold standard, as trade takes place, the importing nation experiences a ________ and a(n) _________ in its money supply, while the exporting nation experiences the opposite.

Accepted Answer

A)  gold outflow; contraction 
B)  gold inflow; expansion 
C)  gold outflow; expansion 
D)  gold inflow; contraction 
A)  gold outflow; contraction 
B)  gold inflow; expansion 
C)  gold outflow; expansion 
D)  gold inflow; contraction

Question 11

If the amount of seigniorage is 50, the monetary supply is 1000, and the price level is 20, what is the inflation rate?

Accepted Answer

A)  10% 
B)  50% 
C)  100% 
D)  200% 
A)  10% 
B)  50% 
C)  100% 
D)  200%

Question 12

Lower transaction costs are a benefit of fixed exchange rates. Therefore, relative prices in two trading nations linked by fixed exchange rates should:

Accepted Answer

A)  experience more price divergence. 
B)  experience more price convergence. 
C)  have less arbitrage and more speculation. 
D)  have lower costs of production. 
A)  experience more price divergence. 
B)  experience more price convergence. 
C)  have less arbitrage and more speculation. 
D)  have lower costs of production.

Question 13

All else equal, an increase in the base country's interest rate should cause a(n) ____ in the interest rate of a country that fixes its exchange rate to the base country.

Accepted Answer

A)  decline 
B)  negligible impact 
C)  increase 
D)  change in the exchange rate regime 
A)  decline 
B)  negligible impact 
C)  increase 
D)  change in the exchange rate regime

Question 14

At its peak in 1913, the gold standard system had been adopted by_______ of countries.

Accepted Answer

A)  85% 
B)  35% 
C)  13% 
D)  70% 
A)  85% 
B)  35% 
C)  13% 
D)  70%

Question 15

Suppose that Argentina's dollar-denominated external assets and liabilities are $10 billion and $100 billion, respectively, and its Argentine peso-denominated external assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes its exchange rate at P1 = $US1. What is the likely effect of the change in Argentina's external wealth on Argentine aggregate demand as a result of the devaluation of the peso (from P1 = $US1 to P3 = $US1)?

Accepted Answer

A)  It will increase Argentine aggregate demand. 
B)  It will decrease Argentine aggregate demand. 
C)  It will neither increase nor decrease Argentine aggregate demand. 
D)  It will first increase, then decrease Argentine aggregate demand. 
A)  It will increase Argentine aggregate demand. 
B)  It will decrease Argentine aggregate demand. 
C)  It will neither increase nor decrease Argentine aggregate demand. 
D)  It will first increase, then decrease Argentine aggregate demand.

Question 16

Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. Would it expand, contract, or not change the European money supply?

Accepted Answer

A)  expand 
B)  contract 
C)  not change 
D)  The answer cannot be determined using the information provided. 
A)  expand 
B)  contract 
C)  not change 
D)  The answer cannot be determined using the information provided.

Question 17

Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. Will there be pressure for the Canadian dollar to change in value against the U.S. dollar as a result of the leftward shift of the U.S. IS curve?

Accepted Answer

A)  Yes, the value will appreciate. 
B)  Yes, the value will depreciate. 
C)  No, the value will not change in value. 
D)  Yes, but that pressure will be offset. 
A)  Yes, the value will appreciate. 
B)  Yes, the value will depreciate. 
C)  No, the value will not change in value. 
D)  Yes, but that pressure will be offset.

Question 18

Limiting net external wealth effects could be accomplished by limiting movements in the exchange rate. What measure might address this situation?

Accepted Answer

A)  devaluing the currency 
B)  keeping nominal interest rates exactly 1% higher than one's trading partners 
C)  borrowing only in U.S. dollars 
D)  pegging the exchange rate to the currency of the largest creditor nation 
A)  devaluing the currency 
B)  keeping nominal interest rates exactly 1% higher than one's trading partners 
C)  borrowing only in U.S. dollars 
D)  pegging the exchange rate to the currency of the largest creditor nation

Question 19

Many large developing countries with large dollar-denominated external liabilities experienced large depreciations of their currencies between 1990 and 2003. What effects, if any, did these depreciations have on these countries' external wealth and their GDPs?

Accepted Answer

A)  Both their external wealth and their GDPs fell. 
B)  Their external wealth fell and their GDPs rose. 
C)  Their external wealth rose and their GDPs fell. 
D)  The depreciations reduced their external wealth but had no effect on their GDPs. 
A)  Both their external wealth and their GDPs fell. 
B)  Their external wealth fell and their GDPs rose. 
C)  Their external wealth rose and their GDPs fell. 
D)  The depreciations reduced their external wealth but had no effect on their GDPs.

Question 20

If net external wealth increases for firms, it could ____ their ability to borrow and expand.

Accepted Answer

A)  cut off completely 
B)  increase 
C)  decrease 
D)  have no effect 
A)  cut off completely 
B)  increase 
C)  decrease 
D)  have no effect

Exam 19: Fixed Versus Floating: International Monetary Experience

In fact, several studies focused on Europe concluded that higher exchange rate volatility:

Suppose that Venezuela pegs its bolivar to the Mexican peso. Suppose further that both countries are in a recession. Using the IS-LM-FX model, explain what will happen in Venezuela when Mexican firms begin to expect higher profits in the future.

Which is the best characterization of the current international payments system?

In the example of the peg between Britain and Germany, what would have been the case if Britain had allowed the pound to float and depreciate after Germany's GDP rise?

In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, assuming Britain maintains its exchange rate peg, the likely impact on the British economy would be a(n):

In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, assuming Britain does not maintain its exchange rate peg:

One might expect the interest rate correlation between nonpegs and closed economies with the base currency to be ____, but because of other circumstances, there may be a ____ correlation.

Traditionally, nations pegged their currencies to _______, and so trade was accomplished with _______ exchange rates.

The gold standard system was:

Under a gold standard, as trade takes place, the importing nation experiences a ________ and a(n) _________ in its money supply, while the exporting nation experiences the opposite.

If the amount of seigniorage is 50, the monetary supply is 1000, and the price level is 20, what is the inflation rate?

Lower transaction costs are a benefit of fixed exchange rates. Therefore, relative prices in two trading nations linked by fixed exchange rates should:

All else equal, an increase in the base country's interest rate should cause a(n) ____ in the interest rate of a country that fixes its exchange rate to the base country.

At its peak in 1913, the gold standard system had been adopted by_______ of countries.

Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. Would it expand, contract, or not change the European money supply?

Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. Will there be pressure for the Canadian dollar to change in value against the U.S. dollar as a result of the leftward shift of the U.S. IS curve?

Limiting net external wealth effects could be accomplished by limiting movements in the exchange rate. What measure might address this situation?

Many large developing countries with large dollar-denominated external liabilities experienced large depreciations of their currencies between 1990 and 2003. What effects, if any, did these depreciations have on these countries' external wealth and their GDPs?

If net external wealth increases for firms, it could ____ their ability to borrow and expand.

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

Exchange Rate Crises: How Pegs Work and How They Break

The Euro

Topics in International Macroeconomics

Filters

One might expect the interest rate correlation between nonpegs and closed economies with the base currency to be , but because of other circumstances, there may be a correlation.

Traditionally, nations pegged their currencies to _, and so trade was accomplished with _ exchange rates.

Under a gold standard, as trade takes place, the importing nation experiences a and a(n) _ in its money supply, while the exporting nation experiences the opposite.