Question 1

Assume a country is in a fixed exchange rate regime.Explain what factors might cause individuals to expect that a country will revalue its currency.

Accepted Answer

The answer of Assume a country is in a fixed...

Question 2

For this question,assume that exchange rates flexible and that the exchange rate expected to occur in one year is NOT constant.Suppose that individuals now expect that the domestic central bank will pursue expansionary monetary policy in one year.This expected future monetary expansion will cause which of the following to occur?

Accepted Answer

A) the current nominal exchange rate will decrease. 
B) the current nominal exchange rate will increase. 
C) the current nominal exchange rate will not change. 
D) the effects on the current nominal exchange rate are ambiguous.

Question 3

What is an "optimal currency area"? Also,discuss the conditions that must be satisfied for an optimal currency area to exist.

Accepted Answer

The answer of What is an "optimal currency area"? Also,discuss...

Question 4

Suppose a country that has been pegging its currency is faced with a situation where financial market participants now expect some future revaluation.In such a situation,we would generally expect which of the following to occur?

Accepted Answer

A) an increase in the domestic interest rate 
B) an announcement by the central bank that a large revaluation will occur in the near future 
C) an increase in demand for the country's currency 
D) all of the above 
E) none of the above

Question 5

For this question,assume that interest parity holds,the future expected exchange rate is constant,the current nominal exchange rate is 1.2,the one-year foreign interest rate is 6% and the one-year domestic interest rate is 3%.Given this information,one can conclude that

Accepted Answer

A) financial market participants expect that the exchange rate (
E) will increase by 3% over the coming year. 
B) financial market participants expect that the exchange rate (
E) will decrease by 3% over the coming year. 
C) financial market participants expect that the domestic currency to depreciate by 3% over the coming year. 
D) financial market participants expect that the exchange rate (
E) will increase by 20% over the coming year.

Question 6

Suppose output is above the natural level of output.In a fixed exchange rate regime,explain the two ways the economy can return to the natural level of output.

Accepted Answer

The answer of Suppose output is above the natural level...

Question 7

For this question,assume that exchange rates are flexible and that the exchange rate expected to occur in one year is NOT constant.Suppose that individuals now expect that the foreign central bank will pursue expansionary monetary policy in one year.This expected future monetary expansion by the foreign central bank will cause which of the following to occur?

Accepted Answer

A) the current nominal exchange rate will decrease. 
B) the current nominal exchange rate will increase. 
C) the current nominal exchange rate will not change. 
D) the effects on the current nominal exchange rate are ambiguous.

Question 8

Assume a country is in a fixed exchange rate regime.Now suppose that individuals expect that policy makers will revalue its currency.Explain the various actions that policy makers can choose in response to this expected revaluation.

Accepted Answer

The answer of Assume a country is in a fixed...

Question 9

Refer to the information above.The price of U.S.goods measured in pounds is

Accepted Answer

A) .8. 
B) 1.0. 
C) 1.6. 
D) 2. 
E) none of the above

Question 10

After Britain returned to the Gold Standard in the 1920s,the British pound was

Accepted Answer

A) undervalued,contributing to a long period of inflation. 
B) undervalued,contributing to a long period of recession. 
C) overvalued,contributing to a long period of inflation. 
D) overvalued,contributing to a long period of recession. 
E) value about right,leading to a long period healthy growth with almost no inflation.

Question 11

Suppose country A pegs its nominal exchange rate to country B and that country A has a lower inflation rate than country B.In this situation,country A will experience

Accepted Answer

A) a real depreciation. 
B) a better trade position. 
C) a reduction in the real exchange rate. 
D) all of the above 
E) none of the above

Question 12

Policy makers can select from a number of different exchange rate regimes and exchange rate policies.Which of the following policies would most likely represent a hard peg?

Accepted Answer

A) a revaluation 
B) a devaluation 
C) a flexible exchange rate regime 
D) a dollarization

Question 13

Under the Gold Standard,

Accepted Answer

A) exchange rates could float. 
B) real interest rates were fixed. 
C) real exchange rates were fixed. 
D) nominal interest rates were fixed. 
E) none of the above

Question 14

A country which does not revalue when financial markets expect it to will probably suffer

Accepted Answer

A) a real depreciation of its currency 
B) lower interest rates 
C) a default on its national debt 
D) all of the above 
E) none of the above

Question 15

Assume a country is in a fixed exchange rate regime.Explain what factors might cause individuals to expect that a country will devalue its currency.

Accepted Answer

The answer of Assume a country is in a fixed...

Question 16

European currencies taken out of circulation and replaced with the Euro in

Accepted Answer

A) 1992. 
B) 1997. 
C) 1999. 
D) 2004. 
E) none of the above

Question 17

During the EMS crisis in 1992,

Accepted Answer

A) all the EMS countries abandoned the system. 
B) Germany abandoned the system. 
C) England and Italy abandoned the system. 
D) France was put in charge of the system. 
E) all the EMS countries stood firm,and refused to change central parities.

Question 18

Part of the reason for the Mexican peso crisis of 1994 was Mexico's decision to

Accepted Answer

A) allow the peso to depreciate too rapidly. 
B) allow the peso to appreciate too rapidly. 
C) maintain relatively low nominal interest rates in the face of relatively high inflation. 
D) maintain a roughly fixed nominal exchange rate in the face of relatively high inflation. 
E) run a very small budget deficit in the face of relatively high inflation.

Question 19

An increase in the domestic one-year interest rate expected to occur in,say,two years will,all else fixed,have which of the following effects in a flexible exchange rate regime?

Accepted Answer

A) the real exchange rate will increase with no change in the nominal exchange rate. 
B) the nominal exchange rate will increase with no change in the real exchange rate. 
C) both the real and nominal exchange rate will increase. 
D) no change in either the nominal or real exchange rate.

Question 20

An adjustment of central parities in the EMS is called a

Accepted Answer

A) realignment. 
B) nominal appreciation or nominal depreciation. 
C) real appreciation or real depreciation. 
D) re-coupling. 
E) re-paritization.

Exam 21: Exchange Rate Regimes

Assume a country is in a fixed exchange rate regime.Explain what factors might cause individuals to expect that a country will revalue its currency.

What is an "optimal currency area"? Also,discuss the conditions that must be satisfied for an optimal currency area to exist.

Suppose a country that has been pegging its currency is faced with a situation where financial market participants now expect some future revaluation.In such a situation,we would generally expect which of the following to occur?

For this question,assume that interest parity holds,the future expected exchange rate is constant,the current nominal exchange rate is 1.2,the one-year foreign interest rate is 6% and the one-year domestic interest rate is 3%.Given this information,one can conclude that

Suppose output is above the natural level of output.In a fixed exchange rate regime,explain the two ways the economy can return to the natural level of output.

Assume a country is in a fixed exchange rate regime.Now suppose that individuals expect that policy makers will revalue its currency.Explain the various actions that policy makers can choose in response to this expected revaluation.

Refer to the information above.The price of U.S.goods measured in pounds is

After Britain returned to the Gold Standard in the 1920s,the British pound was

Suppose country A pegs its nominal exchange rate to country B and that country A has a lower inflation rate than country B.In this situation,country A will experience

Policy makers can select from a number of different exchange rate regimes and exchange rate policies.Which of the following policies would most likely represent a hard peg?

Under the Gold Standard,

A country which does not revalue when financial markets expect it to will probably suffer

Assume a country is in a fixed exchange rate regime.Explain what factors might cause individuals to expect that a country will devalue its currency.

European currencies taken out of circulation and replaced with the Euro in

During the EMS crisis in 1992,

Part of the reason for the Mexican peso crisis of 1994 was Mexico's decision to

An increase in the domestic one-year interest rate expected to occur in,say,two years will,all else fixed,have which of the following effects in a flexible exchange rate regime?

An adjustment of central parities in the EMS is called a