Question 1

Capital flows freely between two countries and the countries have fixed exchange rates.The treasury bonds of each country have similar maturities but different expected returns.What can you deduce from this information?

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The answer of Capital flows freely between two countries and...

Question 2

In April 1991, Argentina adopted a currency board primarily to address the problem of:

Accepted Answer

A) slow growth. 
B) high interest rates. 
C) large trade surpluses. 
D) triple-digit inflation.

Question 3

What separates a sterilized foreign exchange market intervention from an unsterilized intervention?

Accepted Answer

The answer of What separates a sterilized foreign exchange market...

Question 4

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.

Question 5

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?

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The answer of What were the reasons for selecting the...

Question 6

Imagine the exchange rate between the British pound (£) and the U.S.dollar ($) is fixed at $1.40/£ and capital flows freely between Great Britain and the U.S.Explain what the price of shares of stock in XYZ Inc.would be selling for in London if they are $80 per share in the U.S.and why.

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The answer of Imagine the exchange rate between the British...

Question 7

A sterilized intervention is actually a combination of two transactions.What are they and what is the effect on the monetary base?

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Question 8

A country announces capital outflow controls that will take effect in three months.This announcement will likely:

Accepted Answer

A) stabilize the country's exchange rate. 
B) attract significant amounts of foreign investors. 
C) result in a significant appreciation of the country's currency. 
D) result in a significant depreciation in the country's currency.

Question 9

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.

Question 10

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

Accepted Answer

A) poor fiscal policies 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 11

The failure of the Argentinean currency board can be attributed to many factors, including the:

Accepted Answer

A) failure right from the start to lower inflation. 
B) pegging of the Argentine peso to the euro. 
C) pegging of the Argentine peso to the U.S.dollar, even though the countries' economies were not that highly integrated. 
D) prices of goods Argentine exported dropped significantly in the late 1990s hurting their economy.

Question 12

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

Accepted Answer

The answer of Everything else equal, if the Fed decided...

Question 13

Most economic historians believe that:

Accepted Answer

A) if more countries would have been on the gold standard the Great Depression would have been averted. 
B) the gold standard didn't play a major role in the Great Depression. 
C) the gold flows played a central role in spreading the Great Depression. 
D) countries that held on to the gold standard recovered from the Great Depression the quickest.

Question 14

A speculative attack on a country with a fixed exchange rate occurs when:

Accepted Answer

A) financial market participants believe the government will have to devalue its currency. 
B) financial market participants believe the government has a large excess of international reserves. 
C) financial market participants believe the currency is undervalued. 
D) the country converts its gold reserves into foreign exchange.

Question 15

A foreign exchange intervention that does not alter the domestic monetary base is:

Accepted Answer

A) sterilized. 
B) unsterilized. 
C) likely to change domestic interest rates. 
D) impossible.

Question 16

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.

Question 17

Suppose that you purchase a Korean government bond and the number of won needed to purchase one dollar increases.Your return on the bond:

Accepted Answer

A) decreases by the amount of the dollar's appreciation. 
B) decreases by more than the amount of the dollar's appreciation. 
C) decreases by less than the amount of the dollar's appreciation. 
D) increases by the amount of the dollar's appreciation.

Question 18

If a country has a flexible exchange rate, will high rates of inflation, though generally harmful, price this country's goods off world markets? Explain.

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Question 19

If domestic residents are restricted in their ability to purchase foreign assets then their 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.

Question 20

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.

Exam 19: Exchange-Rate Policy and the Central Bank