Question 1

Purchasing power parity is a good theory of explaining exchange rate behavior:

Accepted Answer

A) over very short periods. 
B) over periods lasting six to twelve months. 
C) over very long periods, such as decades. 
D) over both long and short periods. 
A) over very short periods. 
B) over periods lasting six to twelve months. 
C) over very long periods, such as decades. 
D) over both long and short periods.

Question 2

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

Accepted Answer

There are three main costs.First, there

Question 3

International capital mobility:

Accepted Answer

A) contributes to the rigidity of exchange rates. 
B) contributes to the equalization of expected returns across countries. 
C) eliminates arbitrage opportunities. 
D) makes interest rates equal across countries. 
A) contributes to the rigidity of exchange rates. 
B) contributes to the equalization of expected returns across countries. 
C) eliminates arbitrage opportunities. 
D) makes interest rates equal across countries.

Question 4

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.

Question 5

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 6

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) hindering its own growth. 
B) building up inflation risks. 
C) adding to its current account deficit. 
D) exporting its inflation to the United States. 
A) hindering its own growth. 
B) building up inflation risks. 
C) adding to its current account deficit. 
D) exporting its inflation to the United States.

Question 7

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 8

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 9

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 10

One reason a country would be better off fixing its exchange rate is if:

Accepted Answer

A) it has a strong reputation for controlling inflation on its own. 
B) it lacks ample foreign exchange reserves. 
C) it is well-integrated with the economy of the country to whose currency its currency is fixed. 
D) its own macroeconomic characteristics are inversely correlated with the macroeconomic characteristics of the country to whose currency its currency is fixed. 
A) it has a strong reputation for controlling inflation on its own. 
B) it lacks ample foreign exchange reserves. 
C) it is well-integrated with the economy of the country to whose currency its currency is fixed. 
D) its own macroeconomic characteristics are inversely correlated with the macroeconomic characteristics of the country to whose currency its currency is fixed.

Question 11

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

Question 12

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 13

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 14

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 15

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 16

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 17

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 18

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 19

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 20

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.

Exam 19: Exchange-Rate Policy and the Central Bank

Purchasing power parity is a good theory of explaining exchange rate behavior:

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

International capital mobility:

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

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

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

Which of the following statements is most correct?

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

One reason a country would be better off fixing its exchange rate is if:

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

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

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?

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:

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.

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

Most economists view capital controls:

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

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

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:

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

Let i_f 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 P_f be the price of the foreign bond.If exchanges rates are fixed and the bonds are equal in terms of risk: