Question 1

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 2

In the spring of 2005, people in business and government were calling for China to move away from its fixed-exchange rate regime because by pegging its currency China was:

Accepted Answer

A) Hindering its own growth 
B) Importing U.S.monetary policy 
C) Adding to its current account deficit 
D) Exporting its inflation to the United States 
A) Hindering its own growth 
B) Importing U.S.monetary policy 
C) Adding to its current account deficit 
D) Exporting its inflation to the United States

Question 3

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 4

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 5

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

Accepted Answer

A) Currency boards and dollarization 
B) Dollarization and the gold standard 
C) Flexible exchange rates and currency boards 
D) The gold standard and currency boards 
A) Currency boards and dollarization 
B) Dollarization and the gold standard 
C) Flexible exchange rates and currency boards 
D) The gold standard and currency boards

Question 6

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) Changes in foreign exchange reserves always affect 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) Changes in foreign exchange reserves always affect a country's monetary base

Question 7

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 8

A U.S.resident purchases a bond issued by the Canadian government.If the Canadian dollar appreciates relative to the U.S.dollar over the term of the bond, the U.S.investor will:

Accepted Answer

A) See a higher return on her investment as a result 
B) See a lower return on her investment as a result 
C) Not see her return affected since exchange rates are flexible 
D) None of the answers provided is correct 
A) See a higher return on her investment as a result 
B) See a lower return on her investment as a result 
C) Not see her return affected since exchange rates are flexible 
D) None of the answers provided is correct

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

When Argentina fixed the exchange rate of their peso to the U.S.dollar, one outcome was:

Accepted Answer

A) Argentinean central bankers regained control of their domestic interest rate 
B) Argentinean central bankers were finally able to focus their attention on domestic monetary policy 
C) Argentinean central bankers effectively gave control of their domestic interest rate to the FOMC 
D) Argentineans began using the U.S.dollar for all of their transactions 
A) Argentinean central bankers regained control of their domestic interest rate 
B) Argentinean central bankers were finally able to focus their attention on domestic monetary policy 
C) Argentinean central bankers effectively gave control of their domestic interest rate to the FOMC 
D) Argentineans began using the U.S.dollar for all of their transactions

Question 11

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 12

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 13

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) Both countries are similar in population 
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) Both countries are similar in population 
D) One country has a lot of international reserves and the other doesn't

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 limiting the number of U.S.dollars its citizens can purchase before leaving on their vacation to the U.S. 
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 limiting the number of U.S.dollars its citizens can purchase before leaving on their vacation to the U.S. 
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

Speculative attacks:

Accepted Answer

A) Can only result from irresponsible fiscal policy 
B) Can always be stopped by the country's central bank if they act quickly 
C) Can be triggered even when domestic policymakers are acting responsibly 
D) Are illegal, and if caught, speculators are assessed large fines 
A) Can only result from irresponsible fiscal policy 
B) Can always be stopped by the country's central bank if they act quickly 
C) Can be triggered even when domestic policymakers are acting responsibly 
D) Are illegal, and if caught, speculators are assessed large fines

Question 16

The Breton Woods System was an agreement that:

Accepted Answer

A) Required each participating country to peg their currency to the U.S.dollar 
B) Required each participating country to abolish all trade barriers 
C) Required each participating country to stay on the gold standard 
D) Standardized tariffs across all participating countries 
A) Required each participating country to peg their currency to the U.S.dollar 
B) Required each participating country to abolish all trade barriers 
C) Required each participating country to stay on the gold standard 
D) Standardized tariffs across all participating countries

Question 17

Which of the following best completes the sentence; "Under a gold standard a central bank ¼"?

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 18

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 19

Capital controls:

Accepted Answer

A) Can be controls on capital inflows 
B) Can 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 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 20

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

Exam 19: Exchange-Rate Policy and the Central Bank

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

In the spring of 2005, people in business and government were calling for China to move away from its fixed-exchange rate regime because by pegging its currency China was:

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

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

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

Which of the following statements is incorrect?

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:

A U.S.resident purchases a bond issued by the Canadian government.If the Canadian dollar appreciates relative to the U.S.dollar over the term of the bond, the U.S.investor will:

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:

When Argentina fixed the exchange rate of their peso to the U.S.dollar, one outcome was:

The Bretton Woods System failed in 1971 due to:

Which of the following best defines dollarization?

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

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

Speculative attacks:

The Breton Woods System was an agreement that:

Which of the following best completes the sentence; "Under a gold standard a central bank ¼"?

If country A wants to fix its exchange rate with country B, then:

Capital controls:

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

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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