Question 1

A current account surplus indicates that America is ________ its claims on foreign wealth,while a deficit indicates that this country is ________ its claims on foreign wealth.

Accepted Answer

A) reducing;reducing 
B) reducing;increasing 
C) increasing;reducing 
D) increasing;increasing

Question 2

Everything else held constant,if a central bank makes an unsterilized purchase of foreign assets,then the domestic money supply will ________ and the domestic currency will ________.

Accepted Answer

A) increase;appreciate 
B) increase;depreciate 
C) decrease;appreciate 
D) decrease;depreciate

Question 3

An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for ________ traded goods to what is found in the ________ country.

Accepted Answer

A) domestically;anchor 
B) domestically;domestic 
C) internationally;anchor 
D) internationally;domestic

Question 4

Both France and the United Kingdom successfully used exchange-rate targeting to lower inflation in the late 1980s and early 1990s by tying the value of their currencies to the

Accepted Answer

A) U)S. dollar. 
B) German mark. 
C) Swiss franc. 
D) Euro.

Question 5

Because central banks have not been willing to give up their option of intervening in the foreign exchange market,the current international financial system can best be described as a

Accepted Answer

A) variable-pegged exchange rate system. 
B) moving-pegged exchange rate system. 
C) hybrid of a fixed exchange rate and flexible exchange rate system. 
D) flexible-exchange,dollar-pegged exchange rate system.

Question 6

In September 1992,the Bundesbank attempted to keep the mark from appreciating relative to the British pound,but it failed because participants in the foreign exchange market came to expect the

Accepted Answer

A) appreciation of the mark. 
B) depreciation of the mark. 
C) revaluation of the dollar. 
D) end of the Exchange Rate Mechanism.

Question 7

Of the following,the one that appears in the current account of the balance of payments is

Accepted Answer

A) an Italian investor's purchase of IBM stock. 
B) income earned by U.S. subsidiaries of Barclay's Bank of London. 
C) a loan by a Swiss bank to an American corporation. 
D) a purchase of a British Treasury bond by the Fed.

Question 8

Suppose that the Bank of Japan buys U.S. dollar assets with yen-denominated assets. Everything else held constant,this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base.

Accepted Answer

A) an increase;an increase 
B) an increase;a decrease 
C) a decrease;an increase 
D) a decrease;a decrease

Question 9

Explain the 1992 crisis that led to the breakdown of the European Union's Exchange Rate Mechanism. What disadvantages of exchange-rate targeting were exhibited during this crisis?

Accepted Answer

The answer of Explain the 1992 crisis that led to...

Question 10

When the domestic currency is initially undervalued in a fixed exchange rate regime,the central bank must intervene in the foreign exchange market to ________ the domestic currency,thereby allowing the money supply to ________.

Accepted Answer

A) purchase;decline 
B) sell;decline 
C) purchase;increase 
D) sell;increase

Question 11

Under a fixed exchange rate regime,if a country has an undervalued exchange rate,then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves.

Accepted Answer

A) depreciating;gain 
B) depreciating;loss 
C) appreciating;gain 
D) appreciating;loss

Question 12

Because sterilized interventions mean offsetting open market operations,there is no impact on the monetary base and the money supply,and therefore a sterilized intervention

Accepted Answer

A) causes the exchange rate to overshoot in the short run. 
B) causes the exchange rate to undershoot in the short run. 
C) causes the exchange rate to depreciate in the short run,but has no effect on the exchange rate in the long run. 
D) has no effect on the exchange rate.

Question 13

Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

Accepted Answer

The answer of Assume that a fixed exchange rate is...

Question 14

Under the current managed float exchange rate regime,countries with balance of payments ________ frequently do not want to see their currencies ________ because it makes foreign goods more expensive for domestic consumers and can stimulate inflation.

Accepted Answer

A) surpluses;depreciate 
B) deficits;depreciate 
C) surpluses;appreciate 
D) deficits;appreciate

Question 15

Under a fixed exchange rate regime,if the domestic currency is initially overvalued,that is,below par,the central bank must intervene to purchase the ________ currency by selling ________ assets.

Accepted Answer

A) domestic;foreign 
B) domestic;domestic 
C) foreign;foreign 
D) foreign;domestic

Question 16

Under the current managed float exchange rate regime,countries with balance of payments deficits frequently do not want to see their currencies depreciate because it makes ________ goods more expensive for ________ consumers and can stimulate inflation.

Accepted Answer

A) foreign;foreign 
B) foreign;domestic 
C) domestic;foreign 
D) domestic;domestic

Question 17

In the early 1970s,the U.S. ran large balance of payments ________,causing an ________ dollar and an ________ German mark.

Accepted Answer

A) deficits;undervalued;overvalued 
B) deficits;overvalued;undervalued 
C) surpluses;undervalued;overvalued 
D) surpluses;overvalued;undervalued

Question 18

Under exchange-rate targeting,the central bank in the targeting country ________ lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is ________ transmitted to the targeting country.

Accepted Answer

A) does;directly 
B) does not;directly 
C) does;not directly 
D) does not;not directly

Question 19

Under a fixed exchange rate regime,if the domestic currency is initially undervalued,that is,above par,the central bank must intervene to sell the ________ currency by purchasing ________ assets.

Accepted Answer

A) domestic;foreign 
B) domestic;domestic 
C) foreign;foreign 
D) foreign;domestic

Question 20

An emerging market country that successfully used exchange-rate targeting to lower its inflation from above 100 percent in 1988 to below 10 percent in 1994 (before devaluation)was

Accepted Answer

A) Thailand. 
B) Mexico. 
C) The Philippines. 
D) Indonesia.

Exam 18: The International Financial System

A current account surplus indicates that America is its claims on foreign wealth,while a deficit indicates that this country is its claims on foreign wealth.

Everything else held constant,if a central bank makes an unsterilized purchase of foreign assets,then the domestic money supply will and the domestic currency will .

An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for traded goods to what is found in the country.

Both France and the United Kingdom successfully used exchange-rate targeting to lower inflation in the late 1980s and early 1990s by tying the value of their currencies to the

Because central banks have not been willing to give up their option of intervening in the foreign exchange market,the current international financial system can best be described as a

In September 1992,the Bundesbank attempted to keep the mark from appreciating relative to the British pound,but it failed because participants in the foreign exchange market came to expect the

Of the following,the one that appears in the current account of the balance of payments is

Suppose that the Bank of Japan buys U.S. dollar assets with yen-denominated assets. Everything else held constant,this transaction will cause in the foreign assets held by the Federal Reserve and in the U.S. monetary base.

Explain the 1992 crisis that led to the breakdown of the European Union's Exchange Rate Mechanism. What disadvantages of exchange-rate targeting were exhibited during this crisis?

When the domestic currency is initially undervalued in a fixed exchange rate regime,the central bank must intervene in the foreign exchange market to the domestic currency,thereby allowing the money supply to .

Under a fixed exchange rate regime,if a country has an undervalued exchange rate,then its central bank's attempt to keep its currency from will result in a of international reserves.

Because sterilized interventions mean offsetting open market operations,there is no impact on the monetary base and the money supply,and therefore a sterilized intervention

Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

Under the current managed float exchange rate regime,countries with balance of payments frequently do not want to see their currencies because it makes foreign goods more expensive for domestic consumers and can stimulate inflation.

Under a fixed exchange rate regime,if the domestic currency is initially overvalued,that is,below par,the central bank must intervene to purchase the currency by selling assets.

Under the current managed float exchange rate regime,countries with balance of payments deficits frequently do not want to see their currencies depreciate because it makes goods more expensive for consumers and can stimulate inflation.

In the early 1970s,the U.S. ran large balance of payments ,causing an dollar and an German mark.

Under exchange-rate targeting,the central bank in the targeting country lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is transmitted to the targeting country.

Under a fixed exchange rate regime,if the domestic currency is initially undervalued,that is,above par,the central bank must intervene to sell the currency by purchasing assets.

An emerging market country that successfully used exchange-rate targeting to lower its inflation from above 100 percent in 1988 to below 10 percent in 1994 (before devaluation) was