Question 1

What were the contributing factors that led to Argentina's initial adoption of a currency board and then its subsequent failure?

Accepted Answer

The main event that led to its adoption

Question 2

Completely flexible exchange rates are fairly self-explanatory, and hard pegs include dollarization and currency boards. These seem to be the extremes. Assuming free flow of capital, why do you think soft pegs are never used?

Accepted Answer

A soft peg is likely to be a range withi

Question 3

Most economists do not advocate a return to the gold standard because:

Accepted Answer

A)  it forces the central bank to fix the price of something we don't really care about while other prices can fluctuate a lot. 
B)  past willingness to exit the Gold Standard casts doubt on the credibility of committing to it again. 
C)  inflation will depend on the rate that gold is mined. 
D)  all of the answers given are correct. 
A)  it forces the central bank to fix the price of something we don't really care about while other prices can fluctuate a lot. 
B)  past willingness to exit the Gold Standard casts doubt on the credibility of committing to it again. 
C)  inflation will depend on the rate that gold is mined. 
D)  all of the answers given are correct.

Question 4

If foreigners are restricted in their ability to sell investments in a country then that 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 5

In Hong Kong, the monetary authority can only increase the monetary base if they accumulate more U.S. dollars because:

Accepted Answer

A)  the currency of Hong Kong is the U.S. dollar. 
B)  the monetary authority in Hong Kong operates a currency board where its sole objective is to fix the exchange rate between its currency and the U.S. dollar. 
C)  the IMF required Hong Kong to peg its currency to the U.S. dollar in order to obtain a loan. 
D)  Hong Kong has received substantial funding from the U.S. Treasury and the loans were conditional on maintaining the value of the Hong Kong currency. 
A)  the currency of Hong Kong is the U.S. dollar. 
B)  the monetary authority in Hong Kong operates a currency board where its sole objective is to fix the exchange rate between its currency and the U.S. dollar. 
C)  the IMF required Hong Kong to peg its currency to the U.S. dollar in order to obtain a loan. 
D)  Hong Kong has received substantial funding from the U.S. Treasury and the loans were conditional on maintaining the value of the Hong Kong currency.

Question 6

If the Fed were to enter the foreign exchange market and purchase euros, the impact on domestic banking reserves would be:

Accepted Answer

A)  the opposite of what it would be with an open market purchase. 
B)  domestic banking reserves would decrease. 
C)  the same as it would be with an open market purchase. 
D)  uncertain. 
A)  the opposite of what it would be with an open market purchase. 
B)  domestic banking reserves would decrease. 
C)  the same as it would be with an open market purchase. 
D)  uncertain.

Question 7

Most economists view capital controls:

Accepted Answer

A)  unfavorably. 
B)  unfavorably, emphasizing their harmful effects on developing countries. 
C)  favorably, since this is the main way for countries to exploit their comparative advantage. 
D)  favorably, since having them makes capital markets more efficient. 
A)  unfavorably. 
B)  unfavorably, emphasizing their harmful effects on developing countries. 
C)  favorably, since this is the main way for countries to exploit their comparative advantage. 
D)  favorably, since having them makes capital markets more efficient.

Question 8

An advantage of fixed exchange rates for a country that suffers from bouts of high inflation is:

Accepted Answer

A)  it makes imports less expensive. 
B)  it establishes a credible low inflation policy. 
C)  it unties policymakers' hands so they can alter the reserves of the banking system as needed. 
D)  policymakers will have increased control over domestic interest rates. 
A)  it makes imports less expensive. 
B)  it establishes a credible low inflation policy. 
C)  it unties policymakers' hands so they can alter the reserves of the banking system as needed. 
D)  policymakers will have increased control over domestic interest rates.

Question 9

What separates a sterilized foreign exchange market intervention from an unsterilized intervention?

Accepted Answer

Simply, if the foreign exchang

Question 10

A country that frequently uses capital controls:

Accepted Answer

A)  increases the risk for foreign investors. 
B)  decreases the risk for foreign investors. 
C)  should see lower interest rates on its domestic bonds and lower prices. 
D)  will attract more investment. 
A)  increases the risk for foreign investors. 
B)  decreases the risk for foreign investors. 
C)  should see lower interest rates on its domestic bonds and lower prices. 
D)  will attract more investment.

Question 11

If capital flows freely between countries and a country has a fixed exchange rate, one thing you know is that the country:

Accepted Answer

A)  exports more than it imports. 
B)  must have ample gold reserves. 
C)  cannot have a discretionary monetary policy. 
D)  must be running large trade deficits 
A)  exports more than it imports. 
B)  must have ample gold reserves. 
C)  cannot have a discretionary monetary policy. 
D)  must be running large trade deficits

Question 12

Within the United States, every city has:

Accepted Answer

A)  a fixed exchange rate with every other city. 
B)  a floating exchange rate with every other city. 
C)  an independent monetary policy. 
D)  their own currency board. 
A)  a fixed exchange rate with every other city. 
B)  a floating exchange rate with every other city. 
C)  an independent monetary policy. 
D)  their own currency board.

Question 13

Assume that the Fed performs a foreign exchange intervention in which it does nothing except buy German government bonds. One result of this will be that:

Accepted Answer

A)  the dollar depreciates. 
B)  the euro depreciates. 
C)  both the dollar and the euro depreciate. 
D)  the dollar appreciates and the euro depreciates. 
A)  the dollar depreciates. 
B)  the euro depreciates. 
C)  both the dollar and the euro depreciate. 
D)  the dollar appreciates and the euro depreciates.

Question 14

How did the gold standard contribute to the spreading of the Great Depression of the 1930s?

Accepted Answer

After World War I most of the major indu

Question 15

Are foreign exchange market interventions the only tool available to a central bank to change the exchange rate? Explain.

Accepted Answer

No, any central bank policy that influen

Question 16

A country that suffers from bouts of high inflation and wants to fix its exchange rate should tie its currency to the currency of a:

Accepted Answer

A)  country with a strong reputation for low inflation. 
B)  larger country. 
C)  country with similar inflation performance. 
D)  country that is still on the gold standard. 
A)  country with a strong reputation for low inflation. 
B)  larger country. 
C)  country with similar inflation performance. 
D)  country that is still on the gold standard.

Question 17

If the Fed were to purchase euros for dollars and at the same time sell U.S. Treasury securities in the open market, this would be an example of:

Accepted Answer

A)  an unsterilized foreign exchange intervention. 
B)  the Fed not changing their balance sheet at all. 
C)  a sterilized foreign exchange intervention. 
D)  the Fed altering the domestic monetary base. 
A)  an unsterilized foreign exchange intervention. 
B)  the Fed not changing their balance sheet at all. 
C)  a sterilized foreign exchange intervention. 
D)  the Fed altering the domestic monetary base.

Question 18

In September of 2000, the Federal Reserve Bank of New York sold dollars in exchange for euro. To keep the federal funds rate on target, the Open Market desk:

Accepted Answer

A)  sold U.S. Treasury bonds. 
B)  bought U.S. Treasury bonds. 
C)  bought dollars. 
D)  sold dollars. 
A)  sold U.S. Treasury bonds. 
B)  bought U.S. Treasury bonds. 
C)  bought dollars. 
D)  sold dollars.

Question 19

If interest rates in the U.S. increases relative to interest rates in Europe:

Accepted Answer

A)  the demand for dollars on the foreign exchange market would increase. 
B)  the supply of euros on the foreign exchange market would increase. 
C)  the price of U.S. assets should increase. 
D)  all of the answers given are correct. 
A)  the demand for dollars on the foreign exchange market would increase. 
B)  the supply of euros on the foreign exchange market would increase. 
C)  the price of U.S. assets should increase. 
D)  all of the answers given are correct.

Question 20

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

Accepted Answer

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

Exam 19:Exchange Rate Policy and the Central Bank

What were the contributing factors that led to Argentina's initial adoption of a currency board and then its subsequent failure?

Completely flexible exchange rates are fairly self-explanatory, and hard pegs include dollarization and currency boards. These seem to be the extremes. Assuming free flow of capital, why do you think soft pegs are never used?

Most economists do not advocate a return to the gold standard because:

If foreigners are restricted in their ability to sell investments in a country then that government is imposing:

In Hong Kong, the monetary authority can only increase the monetary base if they accumulate more U.S. dollars because:

If the Fed were to enter the foreign exchange market and purchase euros, the impact on domestic banking reserves would be:

Most economists view capital controls:

An advantage of fixed exchange rates for a country that suffers from bouts of high inflation is:

What separates a sterilized foreign exchange market intervention from an unsterilized intervention?

A country that frequently uses capital controls:

If capital flows freely between countries and a country has a fixed exchange rate, one thing you know is that the country:

Within the United States, every city has:

Assume that the Fed performs a foreign exchange intervention in which it does nothing except buy German government bonds. One result of this will be that:

How did the gold standard contribute to the spreading of the Great Depression of the 1930s?

Are foreign exchange market interventions the only tool available to a central bank to change the exchange rate? Explain.

A country that suffers from bouts of high inflation and wants to fix its exchange rate should tie its currency to the currency of a:

If the Fed were to purchase euros for dollars and at the same time sell U.S. Treasury securities in the open market, this would be an example of:

In September of 2000, the Federal Reserve Bank of New York sold dollars in exchange for euro. To keep the federal funds rate on target, the Open Market desk:

If interest rates in the U.S. increases relative to interest rates in Europe:

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

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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