Question 1

Most economists view capital controls:

Accepted Answer

A)  Unfavorably
B)  Unfavorably, emphasizing their harmful effects on developing countries
C)  Favorably, since this is the main way for countries to exploit their comparative advantage
D)  Favorably, since having them makes capital markets more efficient A

Question 2

Completely flexible exchange rates are fairly self-explanatory, and hard pegs include dollarization and currency boards.These seem to be the extremes.Why do you think soft pegs are never used?

Accepted Answer

a soft peg is likely to be a range within which the central bank agrees to keep the exchange rate.The problems with soft pegs include a lack of credibility and then the likelihood for speculative attack.If the peg isn't hard, the central bank can always alter the range as it is convenient.Also, since speculators know the peg isn't fixed and can be altered, the currency would become attractive for attack.As a result, it seems that the only alternatives are to have a completely flexible exchange rate where the monetary authorities do not commit to any peg and the market sets the exchange rate or a completely hard peg where a fixed exchange rate is maintained and the market determines the interest rate.

Question 3

A problem with currency boards is that the central bank loses:

Accepted Answer

A)  Ability to control inflation
B)  A flexible exchange rate is always preferred to a pegged exchange rate
C)  Influence over interest rates
D)  Control of the money supply C

Question 4

If the Fed desired to fix the euro/dollar exchange rate, they would have to:

Accepted Answer

A)  Get the European Central Bank to also agree to fixed exchange rates
B)  Maintain ample reserves of dollars
C)  Be willing to exchange dollars for euros whenever anyone asked
D)  Impose capital controls

Question 5

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.

Accepted Answer

The answer of If a country has a flexible exchange...

Question 6

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

Accepted Answer

The answer of Could a country be open to international...

Question 7

A fixed exchange rate policy:

Accepted Answer

A)  Decreases central bank policy accountability and transparency
B)  Strengthens domestic interest rate policy
C)  Will likely make domestic inflation more volatile
D)  Imports monetary policy

Question 8

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?

Accepted Answer

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

Question 9

Are foreign exchange market interventions the only tool available to a central bank to change the exchange rate? Explain.

Accepted Answer

The answer of Are foreign exchange market interventions the only...

Question 10

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)  Buys both euros and dollars at the same time
D)  Sells both euros and dollars at the same time

Question 11

A sterilized foreign exchange intervention would:

Accepted Answer

A)  Alter the asset side of a central bank's balance sheet but leave the domestic monetary base unchanged
B)  Alter the liability side of the central bank's balance sheet but leave the asset side unchanged
C)  Leave the central bank's balance sheet unchanged
D)  Not alter the central bank's holdings of international reserves

Question 12

Consider the following: if is the interest rate being paid on a foreign bond, and i is the interest rate being paid for a domestic bond; P is the price of the domestic bond and Pf is the price of the foreign bond.If exchanges rates are fixed and the bonds are equal in terms of risk:

Accepted Answer

A)  if = i
B)  P = Pf times units of domestic currency/unit of foreign currency
C)  The expected return from the foreign bond = the expected return from the domestic bond
D)  All of the answers given are correct

Question 13

Reasons individuals should not own gold include:

Accepted Answer

A)  Governments own a lot of it and are large sellers of gold
B)  Governments and central banks are large demanders of gold
C)  Gold can deteriorate
D)  The price of gold rarely changes

Question 14

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

Accepted Answer

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Question 15

Consider the following: an investor in the U.S.is pondering a one-year investment.She can purchase a domestic bond for $1,000 that has an interest rate of i or she can purchase a bond in England for 1,500 British pounds ($\le$) that pays an interest rate of if.The current exchange rate is $1.50/$\le$.She considers the bonds to be of equal risk.i ¹ if.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)  The exchange rate must be flexible
D)  Arbitrage doesn't work

Question 16

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 17

A foreign exchange intervention that alters the domestic monetary base is:

Accepted Answer

A)  Sterilized
B)  Unsterilized
C)  Not likely to change domestic interest rates
D)  Impossible

Question 18

Which of the following statements best completes the following sentence; "Prior to World War I, when the U.S.was on the gold standard, inflation in the U.S1/4"?

Accepted Answer

A)  Averaged 3.5 percent per year but was highly variable
B)  Averaged less than one percent per year and was highly variable
C)  Averaged less than one percent per year and was stable
D)  Averaged 3.5 percent per year and was stable

Question 19

You live in a small country that suffers constantly from high and variable rates of inflation.You are quite sure it has something to do with the fact that the head of the central bank is the President's brother.A rival presidential candidate is advocating fixing the exchange rate between your country's currency and the dollar.What are the advantages to this proposal and how do you think the current head of the central bank will respond?

Accepted Answer

The answer of You live in a small country that...

Question 20

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

Accepted Answer

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Exam 19: Exchange-Rate Policy and the Central Bank