Question 1

Assuming the free flow of capital across borders, if country A wants to fix its exchange rate with country B, then:

Accepted Answer

A) country A's inflation rate will have to match country B's. 
B) country A's monetary policy must be conducted so the inflation rate in country A matches the inflation rate in country B. 
C) country A's monetary policy will not be able to be used to address domestic issues. 
D) all of the answers given are correct. 
A) country A's inflation rate will have to match country B's. 
B) country A's monetary policy must be conducted so the inflation rate in country A matches the inflation rate in country B. 
C) country A's monetary policy will not be able to be used to address domestic issues. 
D) all of the answers given are correct.

Question 2

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.

Question 3

Purchasing power parity implies:

Accepted Answer

A) a basket of goods should sell for the same price in all countries, even if trade barriers exist. 
B) a basket of goods will sell for the same price in all countries as long as there are no trade barriers is a free flow of capital across borders. 
C) a basket of goods cannot sell for the same price in different countries due to the different wage rates. 
D) as long as all goods and services are traded freely across international boundaries, one unit of domestic currency should buy the same basket of goods anywhere in the world. 
A) a basket of goods should sell for the same price in all countries, even if trade barriers exist. 
B) a basket of goods will sell for the same price in all countries as long as there are no trade barriers is a free flow of capital across borders. 
C) a basket of goods cannot sell for the same price in different countries due to the different wage rates. 
D) as long as all goods and services are traded freely across international boundaries, one unit of domestic currency should buy the same basket of goods anywhere in the world.

Question 4

The Bretton Woods System failed in 1971 due to:

Accepted Answer

A) high rates of inflation in the U.S. 
B) greater mobility of capital across international borders. 
C) the desire on the part of participating countries to have an independent monetary policy. 
D) all of the reasons given are correct. 
A) high rates of inflation in the U.S. 
B) greater mobility of capital across international borders. 
C) the desire on the part of participating countries to have an independent monetary policy. 
D) all of the reasons given are correct.

Question 5

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 6

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.

Question 7

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 8

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 9

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 10

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 11

China has used its current account surplus to:

Accepted Answer

A) buy stocks on the New York Stock Exchange. 
B) buy German government and agency securities. 
C) buy U.S.government and agency securities. 
D) make loans to foreigners. 
A) buy stocks on the New York Stock Exchange. 
B) buy German government and agency securities. 
C) buy U.S.government and agency securities. 
D) make loans to foreigners.

Question 12

If foreigners are restricted in their ability to buy 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 13

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 14

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

Accepted Answer

A) they increase the number of dollars. 
B) downward pressure is put on domestic interest rates. 
C) the domestic money supply increases. 
D) all of the answers given are correct. 
A) they increase the number of dollars. 
B) downward pressure is put on domestic interest rates. 
C) the domestic money supply increases. 
D) all of the answers given are correct.

Question 15

For several years before the crisis of 2007-2009, people in U.S.business and government called for China to move away from its fixed-exchange rate regime because:

Accepted Answer

A) its pegged value was far below purchasing power parity estimates. 
B) its pegged value was far above purchasing power parity estimates. 
C) it was adding to China's current account deficit. 
D) it was exporting its inflation to the United States. 
A) its pegged value was far below purchasing power parity estimates. 
B) its pegged value was far above purchasing power parity estimates. 
C) it was adding to China's current account deficit. 
D) it was exporting its inflation to the United States.

Question 16

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 17

A country with a fixed exchange rate policy and free cross-border capital flows that is experiencing an economic slowdown will find:

Accepted Answer

A) their central bank will reduce the domestic interest rate in order to fend off the slowdown. 
B) their currency will depreciate to stimulate exports. 
C) their corporate equities will become more attractive to foreign investors. 
D) monetary policy in not available as an economic stabilization tool. 
A) their central bank will reduce the domestic interest rate in order to fend off the slowdown. 
B) their currency will depreciate to stimulate exports. 
C) their corporate equities will become more attractive to foreign investors. 
D) monetary policy in not available as an economic stabilization tool.

Question 18

The benefits to a country from dollarization include each of the following, except:

Accepted Answer

A) a lower risk premium since inflationary finance is no longer a possibility. 
B) greater and faster integration into world markets, increasing trade and investment. 
C) no risk of an exchange rate crisis. 
D) increased revenue from seignorage. 
A) a lower risk premium since inflationary finance is no longer a possibility. 
B) greater and faster integration into world markets, increasing trade and investment. 
C) no risk of an exchange rate crisis. 
D) increased revenue from seignorage.

Question 19

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 20

Using demand and supply analysis, explain why the euro/dollar exchange rate rises (the dollar appreciates) if the Fed intervenes in the foreign exchange market and sells euros.

Accepted Answer

If the Fed intervenes in the foreign exc

Exam 19: Exchange-Rate Policy and the Central Bank

Assuming the free flow of capital across borders, if country A wants to fix its exchange rate with country B, then:

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

Purchasing power parity implies:

The Bretton Woods System failed in 1971 due to:

Which of the following statements is incorrect?

Under the Bretton Woods System each participating country had to:

Which of the following best defines dollarization?

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

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?

China has used its current account surplus to:

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

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

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

For several years before the crisis of 2007-2009, people in U.S.business and government called for China to move away from its fixed-exchange rate regime because:

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

A country with a fixed exchange rate policy and free cross-border capital flows that is experiencing an economic slowdown will find:

The benefits to a country from dollarization include each of the following, except:

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.

Using demand and supply analysis, explain why the euro/dollar exchange rate rises (the dollar appreciates) if the Fed intervenes in the foreign exchange market and sells euros.

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

Filters