Question 1

In 1997, there was a speculative attack on the Thai baht. This resulted from the:

Accepted Answer

A)  belief by speculators that the Thai central bank had an oversupply of U.S. dollar reserves. 
B)  belief by speculators that the Thai central bank didn't have sufficient U.S. dollar reserves to maintain the current fixed rate. 
C)  revelation that the Thai central bank had converted its gold reserves into foreign exchange. 
D)  overthrow of the Thai president and the central bank. 
A)  belief by speculators that the Thai central bank had an oversupply of U.S. dollar reserves. 
B)  belief by speculators that the Thai central bank didn't have sufficient U.S. dollar reserves to maintain the current fixed rate. 
C)  revelation that the Thai central bank had converted its gold reserves into foreign exchange. 
D)  overthrow of the Thai president and the central bank.

Question 2

If the bonds of two different countries are identical, their expected returns will:

Accepted Answer

A)  be equal if capital flows freely internationally. 
B)  always be equal. 
C)  be equal only if the exchange rate between the two countries is fixed. 
D)  be equal only if the inflation rate is the same in each country. 
A)  be equal if capital flows freely internationally. 
B)  always be equal. 
C)  be equal only if the exchange rate between the two countries is fixed. 
D)  be equal only if the inflation rate is the same in each country.

Question 3

While it is true that central banks of many countries intervene in the foreign exchange market, why wouldn't it be correct to say that central banks of these countries fix the exchange rates?

Accepted Answer

As the opening of this chapter points ou

Question 4

Which of the following statements is most correct?

Accepted Answer

A)  A fixed exchange rate policy is a lack of a monetary policy. 
B)  A fixed exchange rate policy is appropriate for a country that lacks a central bank. 
C)  A fixed exchange rate policy is only appropriate for countries with little international reserves. 
D)  A fixed exchange rate policy is a monetary policy. 
A)  A fixed exchange rate policy is a lack of a monetary policy. 
B)  A fixed exchange rate policy is appropriate for a country that lacks a central bank. 
C)  A fixed exchange rate policy is only appropriate for countries with little international reserves. 
D)  A fixed exchange rate policy is a monetary policy.

Question 5

A speculative attack on a country with a fixed exchange rate occurs when:

Accepted Answer

A)  financial market participants believe the government will have to devalue its currency. 
B)  financial market participants believe the government has a large excess of international reserves. 
C)  financial market participants believe the currency is undervalued. 
D)  the country converts its gold reserves into foreign exchange. 
A)  financial market participants believe the government will have to devalue its currency. 
B)  financial market participants believe the government has a large excess of international reserves. 
C)  financial market participants believe the currency is undervalued. 
D)  the country converts its gold reserves into foreign exchange.

Question 6

If domestic residents are restricted in their ability to purchase foreign assets then their government is imposing:

Accepted Answer

A)  controls on capital inflows. 
B)  controls on capital outflows. 
C)  controls on both capital inflows and outflows. 
D)  fixed exchange rates. 
A)  controls on capital inflows. 
B)  controls on capital outflows. 
C)  controls on both capital inflows and outflows. 
D)  fixed exchange rates.

Question 7

Fixing an exchange rate between two countries makes the most sense when:

Accepted Answer

A)  the countries macroeconomic fluctuations are positively correlated. 
B)  the countries macroeconomic fluctuations are negatively correlated. 
C)  the countries' macroeconomic fluctuations are uncorrelated. 
D)  one country has a lot of international reserves and the other doesn't. 
A)  the countries macroeconomic fluctuations are positively correlated. 
B)  the countries macroeconomic fluctuations are negatively correlated. 
C)  the countries' macroeconomic fluctuations are uncorrelated. 
D)  one country has a lot of international reserves and the other doesn't.

Question 8

The Fed holds its euro reserves primarily in the form of:

Accepted Answer

A)  euro currency. 
B)  a weighted portfolio of European government bonds. 
C)  German government bonds. 
D)  international mutual funds. 
A)  euro currency. 
B)  a weighted portfolio of European government bonds. 
C)  German government bonds. 
D)  international mutual funds.

Question 9

You are an American resident but have invested in a German bond (paying face value) that matures in two years, pays a 5 percent interest rate and is denominated in euros. What could cause your rate of return to fall below 5 percent even though the bond pays off at maturity?

Accepted Answer

The exchange rate at the time the bond m

Question 10

Consider the current peso/dollar exchange rate is 100 pesos per dollar and the current inflation rate in Mexico and the U.S. is 3 percent in each country. Assuming purchasing power parity, what will the exchange rate be if the inflation rate increases to 5 percent in Mexico and falls to 2 percent in the U.S.?

Accepted Answer

We can use the percentage change formula

Question 11

The failure of the Argentinean currency board can be attributed to many factors, including the:

Accepted Answer

A)  failure right from the start to lower inflation. 
B)  pegging of the Argentine peso to the euro. 
C)  pegging of the Argentine peso to the U.S. dollar, even though the countries' economies were not that highly integrated. 
D)  prices of goods Argentine exported dropped significantly in the late 1990s hurting their economy. 
A)  failure right from the start to lower inflation. 
B)  pegging of the Argentine peso to the euro. 
C)  pegging of the Argentine peso to the U.S. dollar, even though the countries' economies were not that highly integrated. 
D)  prices of goods Argentine exported dropped significantly in the late 1990s hurting their economy.

Question 12

Monetary union, in comparison to dollarization, means that:

Accepted Answer

A)  countries forgo revenues from seignorage. 
B)  countries share in monetary policy decisions. 
C)  the central bank no longer has the ability to be the lender of last resort. 
D)  all of the answers given are correct. 
A)  countries forgo revenues from seignorage. 
B)  countries share in monetary policy decisions. 
C)  the central bank no longer has the ability to be the lender of last resort. 
D)  all of the answers given are correct.

Question 13

A sterilized foreign exchange intervention would:

Accepted Answer

A)  alter the asset side of a central bank's balance sheet but leave the domestic monetary base unchanged. 
B)  alter the liability side of the central bank's balance sheet but leave the asset side unchanged. 
C)  leave the central bank's balance sheet unchanged. 
D)  not alter the central bank's holdings of international reserves. 
A)  alter the asset side of a central bank's balance sheet but leave the domestic monetary base unchanged. 
B)  alter the liability side of the central bank's balance sheet but leave the asset side unchanged. 
C)  leave the central bank's balance sheet unchanged. 
D)  not alter the central bank's holdings of international reserves.

Question 14

If inflation in country A exceeds inflation in country B, purchasing power parity implies that:

Accepted Answer

A)  the currency of country B should depreciate relative to the currency of country A. 
B)  the inflation rate in country B will rise to match the inflation rate in country A. 
C)  the currency of country A will depreciate relative to the currency of country B. 
D)  the inflation rate in country A will fall to match the inflation rate in country B. 
A)  the currency of country B should depreciate relative to the currency of country A. 
B)  the inflation rate in country B will rise to match the inflation rate in country A. 
C)  the currency of country A will depreciate relative to the currency of country B. 
D)  the inflation rate in country A will fall to match the inflation rate in country B.

Question 15

Is the European Monetary Union a form of dollarization? Explain.

Accepted Answer

No it isn't. Using an example form the c

Question 16

Any central bank policy that influences the domestic interest rate will:

Accepted Answer

A)  have no effect on the exchange rate if exchange rates are flexible. 
B)  have an effect on the exchange rate. 
C)  not impact the supply of and demand for the domestic currency if exchange rates are flexible. 
D)  be compatible with fixed exchange rates. 
A)  have no effect on the exchange rate if exchange rates are flexible. 
B)  have an effect on the exchange rate. 
C)  not impact the supply of and demand for the domestic currency if exchange rates are flexible. 
D)  be compatible with fixed exchange rates.

Question 17

In the short run, a country's exchange rate is determined by:

Accepted Answer

A)  monetary policy. 
B)  purchasing power parity. 
C)  the domestic inflation rate. 
D)  supply and demand. 
A)  monetary policy. 
B)  purchasing power parity. 
C)  the domestic inflation rate. 
D)  supply and demand.

Question 18

What are the general conditions under which a fixed exchange rate makes sense for a country?

Accepted Answer

A fixed exchange rate makes sense for a

Question 19

Which of the following best defines dollarization?

Accepted Answer

A)  A country uses the U.S. dollar as well as its currency for all transactions. 
B)  A country adopts a foreign currency for all transactions basically eliminating its own monetary policy. 
C)  A country eliminates its own currency for international transactions and requires that all international transactions be conducted in U.S. dollars. 
D)  The central bank of a country agrees to exchange its own currency for U.S. dollars at a fixed exchange rate. 
A)  A country uses the U.S. dollar as well as its currency for all transactions. 
B)  A country adopts a foreign currency for all transactions basically eliminating its own monetary policy. 
C)  A country eliminates its own currency for international transactions and requires that all international transactions be conducted in U.S. dollars. 
D)  The central bank of a country agrees to exchange its own currency for U.S. dollars at a fixed exchange rate.

Question 20

Which of the following best completes the sentence; "Under a gold standard a central bank … "?

Accepted Answer

A)  can have too much gold. 
B)  can have too little gold but never have too much. 
C)  wants to keep their gold reserves fixed. 
D)  will have gold reserves depleted when exports exceed imports. 
A)  can have too much gold. 
B)  can have too little gold but never have too much. 
C)  wants to keep their gold reserves fixed. 
D)  will have gold reserves depleted when exports exceed imports.

Exam 19:Exchange Rate Policy and the Central Bank

In 1997, there was a speculative attack on the Thai baht. This resulted from the:

If the bonds of two different countries are identical, their expected returns will:

While it is true that central banks of many countries intervene in the foreign exchange market, why wouldn't it be correct to say that central banks of these countries fix the exchange rates?

Which of the following statements is most correct?

A speculative attack on a country with a fixed exchange rate occurs when:

If domestic residents are restricted in their ability to purchase foreign assets then their government is imposing:

Fixing an exchange rate between two countries makes the most sense when:

The Fed holds its euro reserves primarily in the form of:

You are an American resident but have invested in a German bond (paying face value) that matures in two years, pays a 5 percent interest rate and is denominated in euros. What could cause your rate of return to fall below 5 percent even though the bond pays off at maturity?

The failure of the Argentinean currency board can be attributed to many factors, including the:

Monetary union, in comparison to dollarization, means that:

A sterilized foreign exchange intervention would:

If inflation in country A exceeds inflation in country B, purchasing power parity implies that:

Is the European Monetary Union a form of dollarization? Explain.

Any central bank policy that influences the domestic interest rate will:

In the short run, a country's exchange rate is determined by:

What are the general conditions under which a fixed exchange rate makes sense for a country?

Which of the following best defines dollarization?

Which of the following best completes the sentence; "Under a gold standard a central bank … "?

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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