Question 1

Describe the automatic stabilizers that are lost to a country that fixes its exchange rate to another currency.

Accepted Answer

If a country is experiencing an economic

Question 2

If the Fed decides to maintain a fixed euro/dollar exchange rate when they sell euros:

Accepted Answer

A)  there will be pressure on domestic interest rates to increase. 
B)  the domestic money supply will increase. 
C)  this will increase banking system reserves. 
D)  they will have to impose capital controls. 
A)  there will be pressure on domestic interest rates to increase. 
B)  the domestic money supply will increase. 
C)  this will increase banking system reserves. 
D)  they will have to impose capital controls.

Question 3

What should be the impact on the U.S. interest rates if the Fed undertakes a sterilized foreign exchange intervention? Be sure to explain your answer.

Accepted Answer

A sterilized foreign exchange interventi

Question 4

If the Fed decides to control the euro/dollar exchange rate:

Accepted Answer

A)  they will also have to control the domestic interest rate. 
B)  they will have to control the amount of banking system reserves. 
C)  the market will determine the interest rate. 
D)  they will have to control the domestic rate of inflation or it won't work. 
A)  they will also have to control the domestic interest rate. 
B)  they will have to control the amount of banking system reserves. 
C)  the market will determine the interest rate. 
D)  they will have to control the domestic rate of inflation or it won't work.

Question 5

Fixed exchange rate regimes include each of the following, except:

Accepted Answer

A)  the Bretton Woods exchange rate system. 
B)  exchange rate pegs. 
C)  dollarization. 
D)  currency boards. 
A)  the Bretton Woods exchange rate system. 
B)  exchange rate pegs. 
C)  dollarization. 
D)  currency boards.

Question 6

Which of the following statements is incorrect?

Accepted Answer

A)  A country cannot be open to international capital flows, control its domestic interest rate and fix its exchange rate. 
B)  A country can be open to international capital flows and control its own domestic interest rate but it can't fix its exchange rate. 
C)  A country can be open to international capital flows, control its domestic interest rate, and fix its exchange rate. 
D)  A country can be open to international capital flows and fix its exchange rate but could not also control its own domestic interest rate. 
A)  A country cannot be open to international capital flows, control its domestic interest rate and fix its exchange rate. 
B)  A country can be open to international capital flows and control its own domestic interest rate but it can't fix its exchange rate. 
C)  A country can be open to international capital flows, control its domestic interest rate, and fix its exchange rate. 
D)  A country can be open to international capital flows and fix its exchange rate but could not also control its own domestic interest rate.

Question 7

One reason a country would be better off fixing its exchange rate is if:

Accepted Answer

A)  it has a strong reputation for controlling inflation on its own. 
B)  it lacks ample foreign exchange reserves. 
C)  it is well-integrated with the economy of the country to whose currency its currency is fixed. 
D)  its own macroeconomic characteristics are inversely correlated with the macroeconomic characteristics of the country to whose currency its currency is fixed. 
A)  it has a strong reputation for controlling inflation on its own. 
B)  it lacks ample foreign exchange reserves. 
C)  it is well-integrated with the economy of the country to whose currency its currency is fixed. 
D)  its own macroeconomic characteristics are inversely correlated with the macroeconomic characteristics of the country to whose currency its currency is fixed.

Question 8

Purchasing power parity is a good theory of explaining exchange rate behavior:

Accepted Answer

A)  over very short periods. 
B)  over periods lasting six to twelve months. 
C)  over very long periods, such as decades. 
D)  over both long and short periods. 
A)  over very short periods. 
B)  over periods lasting six to twelve months. 
C)  over very long periods, such as decades. 
D)  over both long and short periods.

Question 9

In April 1991, Argentina adopted a currency board primarily to address the problem of:

Accepted Answer

A)  slow growth. 
B)  high interest rates. 
C)  large trade surpluses. 
D)  triple-digit inflation. 
A)  slow growth. 
B)  high interest rates. 
C)  large trade surpluses. 
D)  triple-digit inflation.

Question 10

You live in a small country that suffers constantly from high and variable rates of inflation. You are quite sure it has something to do with the fact that the head of the central bank is the President's brother. A rival presidential candidate is advocating fixing the exchange rate between your country's currency and the dollar. What are the advantages to this proposal and how do you think the current head of the central bank will respond?

Accepted Answer

The idea is a good one from the standpoi

Question 11

The impact on the foreign exchange market for dollars resulting from the Fed selling euros will be:

Accepted Answer

A)  a decrease in the demand for dollars. 
B)  a decrease in the supply of dollars. 
C)  an increase in the supply of dollars. 
D)  a decrease in the interest rate in the U.S. 
A)  a decrease in the demand for dollars. 
B)  a decrease in the supply of dollars. 
C)  an increase in the supply of dollars. 
D)  a decrease in the interest rate in the U.S.

Question 12

The International Monetary Fund was created as a part of:

Accepted Answer

A)  the United Nations. 
B)  the Bretton Woods System. 
C)  the European Monetary Union. 
D)  the Federal Reserve System. 
A)  the United Nations. 
B)  the Bretton Woods System. 
C)  the European Monetary Union. 
D)  the Federal Reserve System.

Question 13

A foreign exchange intervention that does not alter the domestic monetary base is:

Accepted Answer

A)  sterilized. 
B)  unsterilized. 
C)  likely to change domestic interest rates. 
D)  impossible. 
A)  sterilized. 
B)  unsterilized. 
C)  likely to change domestic interest rates. 
D)  impossible.

Question 14

A U.S. resident purchases a bond issued by the Canadian government. If the Canadian dollar appreciates relative to the U.S. dollar over the term of the bond, the U.S. investor will:

Accepted Answer

A)  see a higher return on her investment as a result. 
B)  see a lower return on her investment as a result. 
C)  not see her return affected since exchange rates are flexible. 
D)  none of the answers provided is correct. 
A)  see a higher return on her investment as a result. 
B)  see a lower return on her investment as a result. 
C)  not see her return affected since exchange rates are flexible. 
D)  none of the answers provided is correct.

Question 15

Capital controls:

Accepted Answer

A)  can be controls on capital inflows. 
B)  can only be controls on capital outflows. 
C)  can be controls on capital inflows or outflows. 
D)  must be controls on both capital inflows and outflows in order to be effective. 
A)  can be controls on capital inflows. 
B)  can only be controls on capital outflows. 
C)  can be controls on capital inflows or outflows. 
D)  must be controls on both capital inflows and outflows in order to be effective.

Question 16

If the inflation rate in country A is 3.5% and the inflation rate in country B is 3.0%, we should expect the percentage change in the number of units of country A's currency per unit of country B's currency to be:

Accepted Answer

A)  +0.5%. 
B)  -0.5%. 
C)  +16.7%. 
D)  +6.5%. 
A)  +0.5%. 
B)  -0.5%. 
C)  +16.7%. 
D)  +6.5%.

Question 17

An open-market purchase of foreign bonds to increase a central bank's international reserves:

Accepted Answer

A)  increases the central bank's liabilities and assets. 
B)  decreases the central bank's assets and liabilities. 
C)  increases the central bank's assets but decreases its liabilities. 
D)  increases the central bank's liabilities and decreases its assets. 
A)  increases the central bank's liabilities and assets. 
B)  decreases the central bank's assets and liabilities. 
C)  increases the central bank's assets but decreases its liabilities. 
D)  increases the central bank's liabilities and decreases its assets.

Question 18

A foreign exchange intervention that alters the domestic monetary base is:

Accepted Answer

A)  sterilized. 
B)  unsterilized. 
C)  not likely to change domestic interest rates. 
D)  impossible. 
A)  sterilized. 
B)  unsterilized. 
C)  not likely to change domestic interest rates. 
D)  impossible.

Question 19

Assuming the free flow of capital across borders, which of the following statements is most correct?

Accepted Answer

A)  A central bank can have both a fixed exchange rate and an independent inflation policy. 
B)  A central bank cannot have both a fixed exchange rate and an independent inflation policy. 
C)  The central banks of most industrialized countries focus on fixed exchange rates. 
D)  While most central banks of industrialized countries favor fixing exchange rates, their primary concern is on domestic inflation. 
A)  A central bank can have both a fixed exchange rate and an independent inflation policy. 
B)  A central bank cannot have both a fixed exchange rate and an independent inflation policy. 
C)  The central banks of most industrialized countries focus on fixed exchange rates. 
D)  While most central banks of industrialized countries favor fixing exchange rates, their primary concern is on domestic inflation.

Question 20

Under the Bretton Woods System each participating country had to:

Accepted Answer

A)  be willing to exchange their own currency for gold. 
B)  hold ample reserves of currency of each of the participating countries. 
C)  stand ready to exchange its own currency for U.S. dollars at a fixed exchange rate. 
D)  adopt capital controls. 
A)  be willing to exchange their own currency for gold. 
B)  hold ample reserves of currency of each of the participating countries. 
C)  stand ready to exchange its own currency for U.S. dollars at a fixed exchange rate. 
D)  adopt capital controls.

Exam 19:Exchange Rate Policy and the Central Bank

Describe the automatic stabilizers that are lost to a country that fixes its exchange rate to another currency.

If the Fed decides to maintain a fixed euro/dollar exchange rate when they sell euros:

What should be the impact on the U.S. interest rates if the Fed undertakes a sterilized foreign exchange intervention? Be sure to explain your answer.

If the Fed decides to control the euro/dollar exchange rate:

Fixed exchange rate regimes include each of the following, except:

Which of the following statements is incorrect?

One reason a country would be better off fixing its exchange rate is if:

Purchasing power parity is a good theory of explaining exchange rate behavior:

In April 1991, Argentina adopted a currency board primarily to address the problem of:

The impact on the foreign exchange market for dollars resulting from the Fed selling euros will be:

The International Monetary Fund was created as a part of:

A foreign exchange intervention that does not alter the domestic monetary base is:

A U.S. resident purchases a bond issued by the Canadian government. If the Canadian dollar appreciates relative to the U.S. dollar over the term of the bond, the U.S. investor will:

Capital controls:

If the inflation rate in country A is 3.5% and the inflation rate in country B is 3.0%, we should expect the percentage change in the number of units of country A's currency per unit of country B's currency to be:

An open-market purchase of foreign bonds to increase a central bank's international reserves:

A foreign exchange intervention that alters the domestic monetary base is:

Assuming the free flow of capital across borders, which of the following statements is most correct?

Under the Bretton Woods System each participating country had to:

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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