Question 1

When a country operates with a currency board, the central bank's sole objective is to

Accepted Answer

A) Focus on domestic monetary policy 
B) Maintain the domestic interest rate 
C) Maintain the exchange rate 
D) Maintain the target inflation rate 
A) Focus on domestic monetary policy 
B) Maintain the domestic interest rate 
C) Maintain the exchange rate 
D) Maintain the target inflation rate

Question 2

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

Question 3

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 4

A lesson that policymakers should learn from the Argentinean experience with currency boards is:

Accepted Answer

A) Irresponsible politicians can undermine any monetary policy regime 
B) A flexible exchange rate is always preferred to a pegged exchange rate 
C) The only fixed exchange rate that works is the gold standard 
D) They never work 
A) Irresponsible politicians can undermine any monetary policy regime 
B) A flexible exchange rate is always preferred to a pegged exchange rate 
C) The only fixed exchange rate that works is the gold standard 
D) They never work

Question 5

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

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) Most of the gold mined today comes from relatively few countries 
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) Most of the gold mined today comes from relatively few countries 
C) Inflation will depend on the rate that gold is mined 
D) All of the answers given are correct

Question 7

What are the pros and cons of a currency board?

Accepted Answer

With a currency board, the central bank'

Question 8

Which of the following statements is most correct?

Accepted Answer

A) A central bank can select between a fixed exchange rate and an independent inflation policy provided fiscal policy cooperates 
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 select between a fixed exchange rate and an independent inflation policy provided fiscal policy cooperates 
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

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 10

A country that frequently uses capital controls:

Accepted Answer

A) Increases the risk for foreign investors 
B) Decreases the risk for foreign investors 
C) Should see lower interest rates on its domestic bonds and lower prices 
D) Will attract more investment 
A) Increases the risk for foreign investors 
B) Decreases the risk for foreign investors 
C) Should see lower interest rates on its domestic bonds and lower prices 
D) Will attract more investment

Question 11

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 12

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

Accepted Answer

A) Sacrificing control of the domestic inflation rate 
B) Higher import prices 
C) The cost of maintaining ample international reserves 
D) It means importing monetary policy 
A) Sacrificing control of the domestic inflation rate 
B) Higher import prices 
C) The cost of maintaining ample international reserves 
D) It means importing monetary policy

Question 13

In Hong Kong, the monetary authority can only increase the monetary base if they accumulate more U.S.dollars because:

Accepted Answer

A) The currency of Hong Kong is the U.S.dollar 
B) The monetary authority in Hong Kong operates a currency board where its sole objective is to fix the exchange rate between its currency and the U.S.dollar 
C) The IMF required Hong Kong to peg its currency to the U.S.dollar in order to obtain a loan 
D) Hong Kong has received substantial funding from the U.S.Treasury and the loans were conditional on maintaining the value of the Hong Kong currency 
A) The currency of Hong Kong is the U.S.dollar 
B) The monetary authority in Hong Kong operates a currency board where its sole objective is to fix the exchange rate between its currency and the U.S.dollar 
C) The IMF required Hong Kong to peg its currency to the U.S.dollar in order to obtain a loan 
D) Hong Kong has received substantial funding from the U.S.Treasury and the loans were conditional on maintaining the value of the Hong Kong currency

Question 14

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 15

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 16

What were the reasons for selecting the U.S.dollar as the currency to which the other 43 countries agreed to peg their currencies as part of the Bretton Woods System?

Accepted Answer

There are probably three main reasons fo

Question 17

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

Accepted Answer

The benefits to a country instituting ca

Question 18

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 19

Adding international reserves for a central bank:

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 20

The costs to a country that dollarizes include 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

Exam 19: Exchange-Rate Policy and the Central Bank

When a country operates with a currency board, the central bank's sole objective is to

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.

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

A lesson that policymakers should learn from the Argentinean experience with currency boards is:

The United States would be characterized as having:

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

What are the pros and cons of a currency board?

Which of the following statements is most correct?

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?

A country that frequently uses capital controls:

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

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

In Hong Kong, the monetary authority can only increase the monetary base if they accumulate more U.S.dollars because:

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

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

What were the reasons for selecting the U.S.dollar as the currency to which the other 43 countries agreed to peg their currencies as part of the Bretton Woods System?

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

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

Adding international reserves for a central bank:

The costs to a country that dollarizes include each of the following, except:

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