Question 1

Suppose a country is pursuing a fixed exchange rate regime with imperfect capital mobility.The ability of that country to move its domestic interest rate while maintaining its exchange rate will depend on

Accepted Answer

A) the degree of development of its financial markets. 
B) the degree of capital controls. 
C) the amount of foreign exchange it holds. 
D) all of the above 
E) both A and B

Question 2

For this question,assume that there is a simultaneous increase in government spending and monetary contraction.In a flexible exchange rate regime,we know with certainty that such a policy mix will cause which of the following?

Accepted Answer

A) an increase in the domestic interest rate 
B) an increase in the exchange rate 
C) a reduction in net exports 
D) all of the above 
E) only A and C

Question 3

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect an increase in foreign output (Y*)will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

Accepted Answer

The answer of Assume the exchange rate is allowed to...

Question 4

Assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that the foreign interest rate falls.Discuss what policy makers must do to maintain the pegged exchange rate.Also discuss what effect this will have on domestic output and net exports.

Accepted Answer

The answer of Assume that policy makers are pursuing a...

Question 5

Suppose there are two countries that are identical in every way with the following exception.Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange rate regime.Suppose taxes are increased in both countries rises by the same amount.Given this information,we know that

Accepted Answer

A) the change in output in A will be greater than in B. 
B) the change in output in B will be greater than in A. 
C) the change in output will be the same in both countries. 
D) the relative output effects are ambiguous.

Question 6

The interest parity condition indicates that the domestic interest rate must be equal to

Accepted Answer

A) the foreign interest rate. 
B) the expected rate of depreciation of the domestic currency. 
C) the expected rate of appreciation of the domestic currency. 
D) the foreign interest rate minus the expected rate of appreciation of the foreign currency. 
E) none of the above

Question 7

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect a reduction in foreign output (Y*)will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

Accepted Answer

The answer of Assume the exchange rate is allowed to...

Question 8

Assume that the interest parity condition holds and that both the expected exchange rate and foreign interest rate are constant.Given this information,a reduction in the domestic interest rate will cause

Accepted Answer

A) a reduction in the exchange rate expected in the future. 
B) a reduction in the current exchange rate. 
C) greater depreciation of the domestic currency expected in the future. 
D) all of the above 
E) none of the above

Question 9

Explain what effect each of the following events will have on the IS curve in a flexible exchange rate regime: (1)an increase in foreign output; (2)a reduction in the foreign interest rate; and (3)an increase in the domestic interest rate.

Accepted Answer

The answer of Explain what effect each of the following...

Question 10

In practice,under the EMS,a member country

Accepted Answer

A) could never change its interest rate. 
B) could change its interest rate only if other countries changed theirs as well. 
C) must apply to a special European Commission in order to change its interest rate. 
D) had complete freedom in choosing the interest rate it wanted. 
E) had complete freedom in choosing its interest rate only if it is a very small country.

Question 11

Under a "crawling peg" system,a country's exchange rate

Accepted Answer

A) is fixed except for small,surprise changes. 
B) changes at a predetermined rate against the dollar or some other major currency. 
C) can fluctuate within a narrow band. 
D) can change,but the changes are kept secret from the public. 
E) is determined by the central bank of another country.

Question 12

In an open economy under flexible exchange rates,a reduction in consumer confidence that causes a reduction in consumption will cause which of the following?

Accepted Answer

A) an appreciation of the domestic currency 
B) a reduction in the exchange rate,E 
C) a reduction in net exports 
D) all of the above 
E) none of the above

Question 13

Assume the interest parity condition holds and that initially i = i*.A reduction in the domestic interest rate will cause

Accepted Answer

A) an increase in the demand for the domestic currency. 
B) a reduction in E. 
C) an expected depreciation of the domestic currency. 
D) all of the above

Question 14

As the economy moves up and to the right along the IS curve,which of the following will occur when exchange rates are flexible?

Accepted Answer

A) investment spending increases 
B) consumption increases 
C) the domestic currency depreciates 
D) all of the above 
E) none of the above

Question 15

Under a fixed exchange rate regime,the central bank must act to keep

Accepted Answer

A) P = P*. 
B) the real exchange rate fixed. 
C) i = i*. 
D) E = 1. 
E) none of the above

Question 16

For a country pursuing a fixed exchange rate regime,what does the interest parity condition imply about domestic and foreign interest rates? Explain.

Accepted Answer

The answer of For a country pursuing a fixed exchange...

Question 17

In the early 1990s,which nation took the lead in driving up European interest rates?

Accepted Answer

A) Spain 
B) France 
C) Germany 
D) England 
E) none of the above

Question 18

Suppose a country with a fixed exchange rate decides to reduce the price of its currency.This change in policy is called

Accepted Answer

A) an appreciation. 
B) a depreciation. 
C) a peg. 
D) a devaluation. 
E) a revaluation.

Question 19

Suppose policy makers are pursuing a policy to fix the exchange rate.In such a system with perfect capital mobility,an open market sale of domestic bonds by the domestic central bank will eventually result in

Accepted Answer

A) a permanent increase in the monetary base. 
B) a permanent reduction in the monetary base. 
C) a gradual reduction in the domestic interest rate. 
D) a change in the composition of the monetary base.

Question 20

A common argument for fixed exchange rates is that they

Accepted Answer

A) give central banks greater freedom in adjusting their economy's level of output. 
B) forever free the central bank from have to adjust the exchange rate to fundamental changes in the economy. 
C) make trade more costly,and thus encourage domestic citizens to buy domestically produced output. 
D) all of the above 
E) none of the above

Exam 20: Output,the Interest Rate,and the Exchange Rate