Question 1

Which of the following statements is incorrect?

Accepted Answer

A)  A foreign exchange intervention affects the value of a country's currency by changing domestic interest rates. 
B)  Any central bank policy that influences the domestic interest rate will affect the exchange rate. 
C)  Higher U.S. interest rates would likely result in an appreciation of the U.S. dollar. 
D)  Sterilized changes in foreign exchange reserves alter a country's monetary base. 
A)  A foreign exchange intervention affects the value of a country's currency by changing domestic interest rates. 
B)  Any central bank policy that influences the domestic interest rate will affect the exchange rate. 
C)  Higher U.S. interest rates would likely result in an appreciation of the U.S. dollar. 
D)  Sterilized changes in foreign exchange reserves alter a country's monetary base.

Question 2

Assuming the free flow of capital, explain why the central bank of a country that has fixed its exchange rate would not find discussions of inflation on the agenda of its policy meetings.

Accepted Answer

As we saw in the chapter, a central bank

Question 3

If inflation in country A exceeds inflation in country B, we can express the percentage change in the units of currency of country A per unit of currency of country B as:

Accepted Answer

A)  the inflation rate in country B - the inflation rate in country A. 
B)  the inflation rate in country A - the inflation rate in country B. 
C)  the inflation rate in country A times the inflation rate in country B. 
D)  the inflation rate in country A divided by the inflation rate in country B. 
A)  the inflation rate in country B - the inflation rate in country A. 
B)  the inflation rate in country A - the inflation rate in country B. 
C)  the inflation rate in country A times the inflation rate in country B. 
D)  the inflation rate in country A divided by the inflation rate in country B.

Question 4

What makes countries with fixed exchange rates prone to speculative attacks? Why don't the central banks of these countries stop these attacks?

Accepted Answer

In order to maintain a fixed exchange ra

Question 5

Let if be the interest rate being paid on a foreign bond, and let i be the interest rate being paid for a domestic bond; let P be the price of the domestic bond and let Pf be the price of the foreign bond. If exchanges rates are fixed and the bonds are equal in terms of risk:

Accepted Answer

A)  if = i. 
B)  P = Pf times units of domestic currency/unit of foreign currency. 
C)  the expected return from the foreign bond = the expected return from the domestic bond. 
D)  all of the answers given are correct. 
A)  if = i. 
B)  P = Pf times units of domestic currency/unit of foreign currency. 
C)  the expected return from the foreign bond = the expected return from the domestic bond. 
D)  all of the answers given are correct.

Question 6

Which of the following statements best completes the following sentence; "Prior to World War I, when the U.S. was on the gold standard, inflation in the U.S…."?

Accepted Answer

A)  averaged 3.5 percent per year but was highly variable. 
B)  averaged less than one percent per year and was highly variable. 
C)  averaged less than one percent per year and was stable. 
D)  averaged 3.5 percent per year and was stable. 
A)  averaged 3.5 percent per year but was highly variable. 
B)  averaged less than one percent per year and was highly variable. 
C)  averaged less than one percent per year and was stable. 
D)  averaged 3.5 percent per year and was stable.

Question 7

A lesson that policymakers should learn from the Argentinean experience with currency boards is:

Accepted Answer

A)  poor fiscal policies can undermine any monetary policy regime. 
B)  a flexible exchange rate is always preferred to a pegged exchange rate. 
C)  the only fixed exchange rate that works is the gold standard. 
D)  they never work. 
A)  poor fiscal policies can undermine any monetary policy regime. 
B)  a flexible exchange rate is always preferred to a pegged exchange rate. 
C)  the only fixed exchange rate that works is the gold standard. 
D)  they never work.

Question 8

What are the risks to a country of fixing its exchange rate to that of another country?

Accepted Answer

When a country fixes the value of its cu

Question 9

What were the reasons for selecting the U.S. dollar as the currency to which the other 43 countries agreed to peg their currencies as part of the Bretton Woods System?

Accepted Answer

There are probably three main reasons fo

Question 10

Compare the monetary policy of the 50 states that make up the United States to the exchange rate regime of dollarization.

Accepted Answer

In the United States, each of the 50 sta

Question 11

How can irresponsible fiscal policy contribute to a speculative attack on a country's currency that is fixed in value to another currency?

Accepted Answer

Ensuring that a currency retains its val

Question 12

A problem with currency boards is that the central bank loses:

Accepted Answer

A)  control over the government budget. 
B)  a flexible exchange rate is always preferred to a pegged exchange rate. 
C)  influence over interest rates. 
D)  the ability to supervise banks. 
A)  control over the government budget. 
B)  a flexible exchange rate is always preferred to a pegged exchange rate. 
C)  influence over interest rates. 
D)  the ability to supervise banks.

Question 13

A fixed exchange rate policy:

Accepted Answer

A)  decreases central bank policy accountability and transparency. 
B)  strengthens domestic interest rate policy. 
C)  will likely make domestic inflation more volatile. 
D)  imports monetary policy. 
A)  decreases central bank policy accountability and transparency. 
B)  strengthens domestic interest rate policy. 
C)  will likely make domestic inflation more volatile. 
D)  imports monetary policy.

Question 14

If a U.S. dollar currently purchases 1.3 Canadian dollars and the inflation rate in Canada over the next year is 5 percent while it is 2 percent in the U.S., we should expect a U.S. dollar to purchase:

Accepted Answer

A)  1.365 Canadian dollars. 
B)  1.262 Canadian dollars. 
C)  1.300 Canadian dollars. 
D)  1.339 Canadian dollars. 
A)  1.365 Canadian dollars. 
B)  1.262 Canadian dollars. 
C)  1.300 Canadian dollars. 
D)  1.339 Canadian dollars.

Question 15

Only two exchange rate regimes can be considered hard pegs. These are:

Accepted Answer

A)  currency boards and dollarization. 
B)  dollarization and managed floating. 
C)  flexible exchange rates and currency boards. 
D)  the gold standard and inflation targeting. 
A)  currency boards and dollarization. 
B)  dollarization and managed floating. 
C)  flexible exchange rates and currency boards. 
D)  the gold standard and inflation targeting.

Question 16

What are the cost and benefits to a country instituting capital controls?

Accepted Answer

The benefits to a country instituting ca

Question 17

All of the following are associated with a fixed exchange rate policy except:

Accepted Answer

A)  sacrificing control of the domestic inflation rate. 
B)  higher import prices. 
C)  the need to maintain ample international reserves. 
D)  it means importing monetary policy. 
A)  sacrificing control of the domestic inflation rate. 
B)  higher import prices. 
C)  the need to maintain ample international reserves. 
D)  it means importing monetary policy.

Question 18

If a country has a flexible exchange rate, will high rates of inflation, though generally harmful, price this country's goods off world markets? Explain.

Accepted Answer

Lacking any type of fixed exchange rate

Question 19

What are the main costs to a country that adopts dollarization?

Accepted Answer

There are three main costs. First, there

Question 20

The Breton Woods System was an agreement that:

Accepted Answer

A)  required each participating country to peg their currency to the U.S. dollar. 
B)  required each participating country to abolish all trade barriers. 
C)  required each participating country to stay on the gold standard. 
D)  standardized tariffs across all participating countries. 
A)  required each participating country to peg their currency to the U.S. dollar. 
B)  required each participating country to abolish all trade barriers. 
C)  required each participating country to stay on the gold standard. 
D)  standardized tariffs across all participating countries.

Exam 19:Exchange Rate Policy and the Central Bank

Which of the following statements is incorrect?

Assuming the free flow of capital, explain why the central bank of a country that has fixed its exchange rate would not find discussions of inflation on the agenda of its policy meetings.

If inflation in country A exceeds inflation in country B, we can express the percentage change in the units of currency of country A per unit of currency of country B as:

What makes countries with fixed exchange rates prone to speculative attacks? Why don't the central banks of these countries stop these attacks?

Let if be the interest rate being paid on a foreign bond, and let i be the interest rate being paid for a domestic bond; let P be the price of the domestic bond and let Pf be the price of the foreign bond. If exchanges rates are fixed and the bonds are equal in terms of risk:

Which of the following statements best completes the following sentence; "Prior to World War I, when the U.S. was on the gold standard, inflation in the U.S…."?

A lesson that policymakers should learn from the Argentinean experience with currency boards is:

What are the risks to a country of fixing its exchange rate to that of another country?

What were the reasons for selecting the U.S. dollar as the currency to which the other 43 countries agreed to peg their currencies as part of the Bretton Woods System?

Compare the monetary policy of the 50 states that make up the United States to the exchange rate regime of dollarization.

How can irresponsible fiscal policy contribute to a speculative attack on a country's currency that is fixed in value to another currency?

A problem with currency boards is that the central bank loses:

A fixed exchange rate policy:

If a U.S. dollar currently purchases 1.3 Canadian dollars and the inflation rate in Canada over the next year is 5 percent while it is 2 percent in the U.S., we should expect a U.S. dollar to purchase:

Only two exchange rate regimes can be considered hard pegs. These are:

What are the cost and benefits to a country instituting capital controls?

All of the following are associated with a fixed exchange rate policy except:

If a country has a flexible exchange rate, will high rates of inflation, though generally harmful, price this country's goods off world markets? Explain.

What are the main costs to a country that adopts dollarization?

The Breton Woods System was an agreement that:

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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