Question 1

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 country that has a poor reputation for controlling inflation on its own.The country's economy should also be well integrated with the economy of the country they are fixing their exchange rate with, including significant trade with the country and a close positive correlation with its macroeconomic fluctuations.Finally, the country needs to have a high level of foreign exchange reserves.

Question 2

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. B

Question 3

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.Here the percentage change in the number of pesos per dollar will equal the Mexican inflation rate less the U.S.inflation rate, or 3 percent.If the original exchange rate was 100 pesos per dollar, the new exchange rate will be 3 percent more than this or 103 pesos per dollar.

Question 4

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 5

If the U.S.were to revert to a gold standard, trade deficits would:

Accepted Answer

A) result in gold reserves in the U.S.decreasing. 
B) result in lower domestic interest rates. 
C) quickly disappear. 
D) result in high inflation. 
A) result in gold reserves in the U.S.decreasing. 
B) result in lower domestic interest rates. 
C) quickly disappear. 
D) result in high inflation.

Question 6

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 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

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 9

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 10

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 11

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 12

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 13

The International Monetary Fund's primary role under the Bretton Woods System was to be:

Accepted Answer

A) the issuer of gold. 
B) the clearinghouse for international transactions. 
C) a short-term lender for countries with an excess of imports over exports. 
D) the arbiter of trade disputes. 
A) the issuer of gold. 
B) the clearinghouse for international transactions. 
C) a short-term lender for countries with an excess of imports over exports. 
D) the arbiter of trade disputes.

Question 14

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 15

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 16

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 17

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 18

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 19

If the exchange rate between the Canadian dollar and the American dollar was fixed at 1.30 Canadian dollars per U.S.dollar and investors perceived Canadian bonds to be equal in value and risk to U.S.bonds, if the U.S.bonds are selling for $1,000 and have a 5 percent interest rate, assuming capital flows freely between the two countries what will be the price and the interest rate of the Canadian bonds?

Accepted Answer

The price of the Canadian bond

Question 20

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

Exam 19: Exchange-Rate Policy and the Central Bank

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

The United States would be characterized as having:

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

If the U.S.were to revert to a gold standard, trade deficits would:

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

Which of the following statements is most correct?

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

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:

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

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

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

The International Monetary Fund's primary role under the Bretton Woods System was to be:

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

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

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

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

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

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

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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