Question 1

Reserves in the banking system will increase if the Fed:

Accepted Answer

A) buys euros or sells dollars. 
B) sells euros or buys dollars. 
C) sells euro-dominated bonds and exchanges the euros for dollars. 
D) sells euro-dominated bonds and keeps the euros from the sale. 
A) buys euros or sells dollars. 
B) sells euros or buys dollars. 
C) sells euro-dominated bonds and exchanges the euros for dollars. 
D) sells euro-dominated bonds and keeps the euros from the sale.

Question 2

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

Accepted Answer

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

Question 3

What are the cost and benefits to a country instituting capital controls?

Accepted Answer

The benefits to a country instituting ca

Question 4

What is the relationship between a nation's monetary and fiscal policy and its exchange rate?

Accepted Answer

Poor fiscal prospects for a nation can l

Question 5

Consider the following: an investor in the U.S.is pondering a one-year investment.She can purchase a domestic bond for $1,000 that has an interest rate of i or she can purchase a bond in England for 1,500 British pounds (£) that pays an interest rate of if.The current exchange rate is $1.50/£.She considers the bonds to be of equal risk.If i = if, the expected returns are not equal.What do you know?

Accepted Answer

A) The exchange rate is fixed between the U.S.and Britain 
B) The bonds initially sold for different prices 
C) Arbitrage doesn't work 
D) The exchange rate must be flexible 
A) The exchange rate is fixed between the U.S.and Britain 
B) The bonds initially sold for different prices 
C) Arbitrage doesn't work 
D) The exchange rate must be flexible

Question 6

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 7

Capital controls:

Accepted Answer

A) can be controls on capital inflows. 
B) can only be controls on capital outflows. 
C) can be controls on capital inflows or outflows. 
D) must be controls on both capital inflows and outflows in order to be effective. 
A) can be controls on capital inflows. 
B) can only be controls on capital outflows. 
C) can be controls on capital inflows or outflows. 
D) must be controls on both capital inflows and outflows in order to be effective.

Question 8

Assuming the free flow of capital across borders, which of the following statements is most correct?

Accepted Answer

A) A central bank can have both a fixed exchange rate and an independent inflation policy. 
B) A central bank cannot have both a fixed exchange rate and an independent inflation policy. 
C) The central banks of most industrialized countries focus on fixed exchange rates. 
D) While most central banks of industrialized countries favor fixing exchange rates, their primary concern is on domestic inflation. 
A) A central bank can have both a fixed exchange rate and an independent inflation policy. 
B) A central bank cannot have both a fixed exchange rate and an independent inflation policy. 
C) The central banks of most industrialized countries focus on fixed exchange rates. 
D) While most central banks of industrialized countries favor fixing exchange rates, their primary concern is on domestic inflation.

Question 9

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 10

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 11

Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would be the impact on the interest rate in the U.S.if the euro started to appreciate in value and why?

Accepted Answer

If the Fed desired to fix the exchange r

Question 12

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 13

If inflation in country A exceeds inflation in country B, we can express the percentage change in the units of currency of country A per unit of currency of country B as:

Accepted Answer

A)  the inflation rate in country B - the inflation rate in country A. 
B)  the inflation rate in country A - the inflation rate in country B. 
C)  the inflation rate in country A times the inflation rate in country B. 
D)  the inflation rate in country A divided by the inflation rate in country B. 
A)  the inflation rate in country B - the inflation rate in country A. 
B)  the inflation rate in country A - the inflation rate in country B. 
C)  the inflation rate in country A times the inflation rate in country B. 
D)  the inflation rate in country A divided by the inflation rate in country B.

Question 14

Which of the following statements is incorrect?

Accepted Answer

A) A foreign exchange intervention affects the value of a country's currency by changing domestic interest rates. 
B) Any central bank policy that influences the domestic interest rate will affect the exchange rate. 
C) Higher U.S.interest rates would likely result in an appreciation of the U.S.dollar. 
D) Sterilized changes in foreign exchange reserves alter a country's monetary base. 
A) A foreign exchange intervention affects the value of a country's currency by changing domestic interest rates. 
B) Any central bank policy that influences the domestic interest rate will affect the exchange rate. 
C) Higher U.S.interest rates would likely result in an appreciation of the U.S.dollar. 
D) Sterilized changes in foreign exchange reserves alter a country's monetary base.

Question 15

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 16

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 17

Dollarization is associated with each of the following, except:

Accepted Answer

A) slower integration into world markets. 
B) adopting the monetary policy of the country whose currency is being used. 
C) the central bank no longer has the ability to be the lender of last resort. 
D) the loss of revenue from printing currency. 
A) slower integration into world markets. 
B) adopting the monetary policy of the country whose currency is being used. 
C) the central bank no longer has the ability to be the lender of last resort. 
D) the loss of revenue from printing currency.

Question 18

How would the impact on the exchange rate differ if the Fed were to sell U.S.Treasury securities instead of selling an equal amount (in $ terms) of euros?

Accepted Answer

It wouldn't.In either case the Fed would

Question 19

During the 1990s, the country of Chile required foreigners wishing to invest in the country to make a one-year, zero-interest deposit in the Chilean central bank equal to at least 20 percent of the investment.This is an example of:

Accepted Answer

A) a capital outflow control. 
B) a capital inflow control. 
C) an exchange rate mechanism. 
D) a currency board. 
A) a capital outflow control. 
B) a capital inflow control. 
C) an exchange rate mechanism. 
D) a currency board.

Question 20

Could a country be open to international capital flows, control its domestic interest rate and fix its exchange rate? Explain.

Accepted Answer

No, if a country is open to internationa

Exam 19: Exchange-Rate Policy and the Central Bank

Reserves in the banking system will increase if the Fed:

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

What are the cost and benefits to a country instituting capital controls?

What is the relationship between a nation's monetary and fiscal policy and its exchange rate?

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

Capital controls:

Assuming the free flow of capital across borders, which of the following statements is most correct?

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:

Monetary union, in comparison to dollarization, means that:

Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would be the impact on the interest rate in the U.S.if the euro started to appreciate in value and why?

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

If inflation in country A exceeds inflation in country B, we can express the percentage change in the units of currency of country A per unit of currency of country B as:

Which of the following statements is incorrect?

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

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

Dollarization is associated with each of the following, except:

How would the impact on the exchange rate differ if the Fed were to sell U.S.Treasury securities instead of selling an equal amount (in $ terms) of euros?

During the 1990s, the country of Chile required foreigners wishing to invest in the country to make a one-year, zero-interest deposit in the Chilean central bank equal to at least 20 percent of the investment.This is an example of:

Could a country be open to international capital flows, control its domestic interest rate and fix its exchange rate? Explain.

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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