Question 1

A sterilized intervention is actually a combination of two transactions. What are they and what is the effect on the monetary base?

Accepted Answer

First there is the purchase or sale of foreign currency reserves, which by itself changes the central bank's liabilities. But this is immediately followed by an open market operation of exactly the same size, designed to offset the impact of the first transaction on the monetary base. Together, the two actions leave the level of reserves unchanged. An intervention is sterilized if it does not change the monetary base.

Question 2

Capital flows freely between two countries and the countries have fixed exchange rates. The treasury bonds of each country have similar maturities but different expected returns. What can you deduce from this information?

Accepted Answer

The risk must be different. The ability of capital to flow freely would have investors pursuing the higher expected return and if the risk were the same these two securities should have the same expected return. Given the expected returns aren't the same we can deduce the risk is not the same.

Question 3

Reserves in the banking system will increase if the Fed:

Accepted Answer

A)  buys euros or sells dollars. 
B)  sells euros or buys dollars. 
C)  sells euro-dominated bonds and exchanges the euros for dollars. 
D)  sells euro-dominated bonds and keeps the euros from the sale. 
A)  buys euros or sells dollars. 
B)  sells euros or buys dollars. 
C)  sells euro-dominated bonds and exchanges the euros for dollars. 
D)  sells euro-dominated bonds and keeps the euros from the sale. A

Question 4

Purchasing power parity implies:

Accepted Answer

A)  a basket of goods should sell for the same price in all countries, even if trade barriers exist. 
B)  a basket of goods will sell for the same price in all countries as long as there are no trade barriers is a free flow of capital across borders. 
C)  a basket of goods cannot sell for the same price in different countries due to the different wage rates. 
D)  as long as all goods and services are traded freely across international boundaries, one unit of domestic currency should buy the same basket of goods anywhere in the world. 
A)  a basket of goods should sell for the same price in all countries, even if trade barriers exist. 
B)  a basket of goods will sell for the same price in all countries as long as there are no trade barriers is a free flow of capital across borders. 
C)  a basket of goods cannot sell for the same price in different countries due to the different wage rates. 
D)  as long as all goods and services are traded freely across international boundaries, one unit of domestic currency should buy the same basket of goods anywhere in the world.

Question 5

Using demand and supply analysis, explain why the euro/dollar exchange rate rises (the dollar appreciates) if the Fed intervenes in the foreign exchange market and sells euros.

Accepted Answer

If the Fed intervenes in the foreign exc

Question 6

Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would be the impact on the money supply in the U.S. if the euro started to decline in value and why?

Accepted Answer

If the Fed desired to fix the exchange r

Question 7

Which of the following statements is most correct?

Accepted Answer

A)  A sterilized foreign exchange intervention will alter the composition of a central bank's assets and alter commercial bank reserves. 
B)  A sterilized foreign exchange intervention will not alter the composition of a central bank's assets. 
C)  An unsterilized foreign exchange intervention will alter commercial bank reserves. 
D)  A sterilized foreign exchange intervention will leave the central bank's holdings of foreign reserves unchanged. 
A)  A sterilized foreign exchange intervention will alter the composition of a central bank's assets and alter commercial bank reserves. 
B)  A sterilized foreign exchange intervention will not alter the composition of a central bank's assets. 
C)  An unsterilized foreign exchange intervention will alter commercial bank reserves. 
D)  A sterilized foreign exchange intervention will leave the central bank's holdings of foreign reserves unchanged.

Question 8

Speculative attacks:

Accepted Answer

A)  can only result from irresponsible fiscal policy. 
B)  can always be stopped by the country's central bank if they act quickly. 
C)  can be triggered even when domestic policymakers are acting responsibly. 
D)  are illegal, and if caught, speculators are assessed large fines. 
A)  can only result from irresponsible fiscal policy. 
B)  can always be stopped by the country's central bank if they act quickly. 
C)  can be triggered even when domestic policymakers are acting responsibly. 
D)  are illegal, and if caught, speculators are assessed large fines.

Question 9

When Argentina fixed the exchange rate of their peso to the U.S. dollar, one outcome was:

Accepted Answer

A)  Argentinean central bankers regained control of their domestic interest rate. 
B)  Argentinean central bankers were finally able to focus their attention on domestic monetary policy. 
C)  Argentinean central bankers effectively gave control of their domestic interest rate to the FOMC. 
D)  Argentineans began using the U.S. dollar for all of their transactions. 
A)  Argentinean central bankers regained control of their domestic interest rate. 
B)  Argentinean central bankers were finally able to focus their attention on domestic monetary policy. 
C)  Argentinean central bankers effectively gave control of their domestic interest rate to the FOMC. 
D)  Argentineans began using the U.S. dollar for all of their transactions.

Question 10

A country with a fixed exchange rate policy and free cross-border capital flows that is experiencing an economic slowdown will find:

Accepted Answer

A)  their central bank will reduce the domestic interest rate in order to fend off the slowdown. 
B)  their currency will depreciate to stimulate exports. 
C)  their corporate equities will become more attractive to foreign investors. 
D)  monetary policy in not available as an economic stabilization tool. 
A)  their central bank will reduce the domestic interest rate in order to fend off the slowdown. 
B)  their currency will depreciate to stimulate exports. 
C)  their corporate equities will become more attractive to foreign investors. 
D)  monetary policy in not available as an economic stabilization tool.

Question 11

The United States would be characterized as having:

Accepted Answer

A)  a controlled domestic interest rate, a closed capital market and a flexible exchange rate. 
B)  a controlled domestic interest rate, an open capital market and a flexible exchange rate. 
C)  no control over the domestic interest rate, an open capital market and a flexible exchange rate. 
D)  a controlled domestic interest rate, an open capital market and a fixed exchange rate. 
A)  a controlled domestic interest rate, a closed capital market and a flexible exchange rate. 
B)  a controlled domestic interest rate, an open capital market and a flexible exchange rate. 
C)  no control over the domestic interest rate, an open capital market and a flexible exchange rate. 
D)  a controlled domestic interest rate, an open capital market and a fixed exchange rate.

Question 12

Which of the following would be an example of a capital outflow control?

Accepted Answer

A)  Mexico limiting the number of U.S. dollars an American can bring into the country 
B)  Mexico excludes foreigners from purchasing short-term debt 
C)  Mexico limiting the number of pesos its citizens can take out of the country 
D)  All of the answers given would be examples of capital outflow controls 
A)  Mexico limiting the number of U.S. dollars an American can bring into the country 
B)  Mexico excludes foreigners from purchasing short-term debt 
C)  Mexico limiting the number of pesos its citizens can take out of the country 
D)  All of the answers given would be examples of capital outflow controls

Question 13

What is the relationship between a nation's monetary and fiscal policy and its exchange rate?

Accepted Answer

Poor fiscal prospects for a nation can l

Question 14

Could a country be open to international capital flows, control its domestic interest rate and fix its exchange rate? Explain.

Accepted Answer

No, if a country is open to internationa

Question 15

A country announces capital outflow controls that will take effect in three months. This announcement will likely:

Accepted Answer

A)  stabilize the country's exchange rate. 
B)  attract significant amounts of foreign investors. 
C)  result in a significant appreciation of the country's currency. 
D)  result in a significant depreciation in the country's currency. 
A)  stabilize the country's exchange rate. 
B)  attract significant amounts of foreign investors. 
C)  result in a significant appreciation of the country's currency. 
D)  result in a significant depreciation in the country's currency.

Question 16

Imagine the exchange rate between the British pound (£) and the U.S. dollar ($) is fixed at
$1.40/£ and capital flows freely between Great Britain and the U.S. Explain what the price of shares of stock in XYZ Inc. would be selling for in London if they are $80 per share in the U.S. and why.

Accepted Answer

Each share would sell for 57.14£s in Gre

Question 17

A foreign exchange intervention by a central bank affects the value of a country's currency if it:

Accepted Answer

A)  alters banking system reserves. 
B)  leaves domestic interest rates unchanged. 
C)  results in a fixed exchange rate. 
D)  alters banking system reserves and it changes domestic interest rates. 
A)  alters banking system reserves. 
B)  leaves domestic interest rates unchanged. 
C)  results in a fixed exchange rate. 
D)  alters banking system reserves and it changes domestic interest rates.

Question 18

The Bretton Woods System failed in 1971 due to:

Accepted Answer

A)  high rates of inflation in the U.S. 
B)  greater mobility of capital across international borders. 
C)  the desire on the part of participating countries to have an independent monetary policy. 
D)  all of the reasons given are correct. 
A)  high rates of inflation in the U.S. 
B)  greater mobility of capital across international borders. 
C)  the desire on the part of participating countries to have an independent monetary policy. 
D)  all of the reasons given are correct.

Question 19

The benefits to a country from dollarization include each of the following, except:

Accepted Answer

A)  a lower risk premium since inflationary finance is no longer a possibility. 
B)  greater and faster integration into world markets, increasing trade and investment. 
C)  no risk of an exchange rate crisis. 
D)  increased revenue from seignorage. 
A)  a lower risk premium since inflationary finance is no longer a possibility. 
B)  greater and faster integration into world markets, increasing trade and investment. 
C)  no risk of an exchange rate crisis. 
D)  increased revenue from seignorage.

Question 20

Suppose that you purchase a Korean government bond and the number of won needed to purchase one dollar increases. Your return on the bond:

Accepted Answer

A)  decreases by the amount of the dollar's appreciation. 
B)  decreases by more than the amount of the dollar's appreciation. 
C)  decreases by less than the amount of the dollar's appreciation. 
D)  increases by the amount of the dollar's appreciation. 
A)  decreases by the amount of the dollar's appreciation. 
B)  decreases by more than the amount of the dollar's appreciation. 
C)  decreases by less than the amount of the dollar's appreciation. 
D)  increases by the amount of the dollar's appreciation.

Exam 19:Exchange Rate Policy and the Central Bank

A sterilized intervention is actually a combination of two transactions. What are they and what is the effect on the monetary base?

Capital flows freely between two countries and the countries have fixed exchange rates. The treasury bonds of each country have similar maturities but different expected returns. What can you deduce from this information?

Reserves in the banking system will increase if the Fed:

Purchasing power parity implies:

Using demand and supply analysis, explain why the euro/dollar exchange rate rises (the dollar appreciates) if the Fed intervenes in the foreign exchange market and sells euros.

Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would be the impact on the money supply in the U.S. if the euro started to decline in value and why?

Which of the following statements is most correct?

Speculative attacks:

When Argentina fixed the exchange rate of their peso to the U.S. dollar, one outcome was:

A country with a fixed exchange rate policy and free cross-border capital flows that is experiencing an economic slowdown will find:

The United States would be characterized as having:

Which of the following would be an example of a capital outflow control?

What is the relationship between a nation's monetary and fiscal policy and its exchange rate?

Could a country be open to international capital flows, control its domestic interest rate and fix its exchange rate? Explain.

A country announces capital outflow controls that will take effect in three months. This announcement will likely:

Imagine the exchange rate between the British pound (£) and the U.S. dollar ($) is fixed at $1.40/£ and capital flows freely between Great Britain and the U.S. Explain what the price of shares of stock in XYZ Inc. would be selling for in London if they are $80 per share in the U.S. and why.

A foreign exchange intervention by a central bank affects the value of a country's currency if it:

The Bretton Woods System failed in 1971 due to:

The benefits to a country from dollarization include each of the following, except:

Suppose that you purchase a Korean government bond and the number of won needed to purchase one dollar increases. Your return on the bond:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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