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Economics of Money: Chapter 18
front 1 A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant.
| back 1 Answer: C |
front 2 A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base, everything else held constant.
| back 2 Answer: A |
front 3 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.
| back 3 Answer: A |
front 4 Suppose that the Bank of Japan buys yen-denominated assets with U.S. dollar 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.
| back 4 Answer: D |
front 5 When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called
| back 5 Answer: A |
front 6 A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called
| back 6 Answer: B |
front 7 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 ________.
| back 7 Answer: B |
front 8 Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will increase and the domestic currency will ________.
| back 8 Answer: B |
front 9 Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will appreciate.
| back 9 Answer: D |
front 10 Everything else held constant, if a central bank makes an unsterilized sale of foreign assets, then the domestic money supply will ________ and the domestic currency will ________.
| back 10 Answer: C |
front 11 Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will decrease and the domestic currency will ________.
| back 11 Answer: C |
front 12 Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will depreciate.
| back 12 Answer: A |
front 13 Everything else held constant, if a central bank makes a sterilized purchase of foreign assets, then the domestic currency will
| back 13 Answer: D |
front 14 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
| back 14 Answer: D |
front 15 Everything else held constant, if a central bank makes a sterilized sale of foreign assets, then the domestic currency will
| back 15 Answer: D |
front 16 If the United States has a current account deficit with England of $1 million, and the Bank of England sells $1 million worth of pounds in the foreign exchange market, then England ________ $1 million of international reserves and its monetary base ________ by $1 million.
| back 16 Answer: A |
front 17 The difference between merchandise exports and imports is called the ________ balance.
| back 17 Answer: D |
front 18 The account that shows international transactions involving currently produced goods and services is called the
| back 18 Answer: B |
front 19 The account that shows international transactions involving financial transactions (stocks, bonds, bank loans, etc.) is called the
| back 19 Answer: D |
front 20 Which of the following does NOT appear in the current account part of the balance of payments?
| back 20 Answer: A |
front 21 Of the following, the one that appears in the current account of the balance of payments is
| back 21 Answer: B |
front 22 Capital ________ are American purchases of foreign assets, and capital ________ are foreign purchases of American assets.
| back 22 Answer: D |
front 23 Which of the following appears in the capital account part of the balance of payments?
| back 23 Answer: B |
front 24 The net amount of international reserves that move between governments to finance international transactions is called the ________ balance.
| back 24 Answer: D |
front 25 If the current account balance shows a surplus, and the capital account also shows a surplus, then the official reserve transactions balance
| back 25 Answer: A |
front 26 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.
| back 26 Answer: C |
front 27 Because it provides some indication of what is happening to U.S. claims on foreign wealth and the demand for imports and exports, the ________ is closely followed by economists wanting information on the future movement of exchange rates.
| back 27 Answer: C |
front 28 Economists closely follow the current account balance because they believe it can provide information on the future movement of
| back 28 Answer: C |
front 29 Under a gold standard in which one dollar could be turned in to the U.S. Treasury and exchanged for 1/20th of an ounce of gold and one German mark could be exchanged for 1/100th of an ounce of gold, an exchange rate of ________ marks to the dollar would stimulate a flow of gold from the United States to Germany.
| back 29 Answer: D |
front 30 When gold production was low in the 1870s and 1880s, the money supply grew ________ causing ________.
| back 30 Answer: C |
front 31 The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been known as the
| back 31 Answer: B |
front 32 Under the Bretton Woods system, the organization assigned the task of making loans to countries that were experiencing balance of payments difficulties is known as the
| back 32 Answer: C |
front 33 The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.
| back 33 Answer: A |
front 34 The World Bank is an international organization that
| back 34 Answer: B |
front 35 Under the Bretton Woods system, the United States was designated as the
| back 35 Answer: A |
front 36 Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets.
| back 36 Answer: D |
front 37 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.
| back 37 Answer: A |
front 38 Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to purchase the domestic currency by selling foreign assets.
| back 38 Answer: A |
front 39 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.
| back 39 Answer: A |
front 40 Under a fixed exchange rate regime, if a central bank must intervene to purchase the ________ currency by selling ________ assets, then, like an open market sale, this action reduces the monetary base and the money supply, causing the interest rate on domestic assets to rise.
| back 40 Answer: A |
front 41 Under a fixed exchange rate regime, if a central bank must intervene to purchase the domestic currency by selling foreign assets, then, like an open market sale, this action ________ the monetary base and the money supply, causing the interest rate on domestic assets to ________.
| back 41 Answer: C |
front 42 When the domestic currency is initially overvalued 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 ________.
| back 42 Answer: A |
front 43 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 ________.
| back 43 Answer: D |
front 44 Under a fixed exchange rate regime, if a country has an overvalued exchange rate, then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves.
| back 44 Answer: B |
front 45 Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bank's attempt to keep its currency from depreciating will result in a ________ of international reserves.
| back 45 Answer: D |
front 46 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.
| back 46 Answer: C |
front 47 Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bank's attempt to keep its currency from appreciating will result in a ________ of international reserves.
| back 47 Answer: A |
front 48 Under a fixed exchange rate regime, if a country's central bank runs out of international reserves, it cannot keep its currency from
| back 48 Answer: A |
front 49 Under a fixed exchange rate regime, a country that depletes its international reserves in an attempt to keep its currency from ________ will be forced to ________ its currency.
| back 49 Answer: B |
front 50 Under a fixed exchange rate regime, a central bank that does not want to acquire international reserves to keep its currency from ________ will decide to ________ its currency.
| back 50 Answer: C |
front 51 A balance of payments deficit is associated with a ________ of international reserves, while a balance of payments surplus is associated with a ________.
| back 51 Answer: B |
front 52 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
| back 52 Answer: C |
front 53 The current international financial system is a managed float exchange rate system because
| back 53 Answer: A |
front 54 Policymakers in a country with a balance of payments surplus may not want to see their country's currency appreciate because this would
| back 54 Answer: B |
front 55 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.
| back 55 Answer: B |
front 56 Countries with surpluses in their balance of payments frequently do not want to see their currencies ________ because it makes their goods ________ expensive abroad.
| back 56 Answer: B |
front 57 Countries with balance of payments deficits do not want to see their currencies ________ because it makes foreign goods ________ expensive for domestic consumers.
| back 57 Answer: D |
front 58 Under the current managed float exchange rate regime, countries with ________ in their balance of payments frequently do not want to see their currencies ________ because it makes their goods more expensive abroad and foreign goods cheaper in their countries.
| back 58 Answer: C |
front 59 Under the current managed float exchange rate regime; countries with surpluses in their balance of payments frequently do not want to see their currencies appreciate because it makes their goods ________ expensive abroad and foreign goods ________ in their countries.
| back 59 Answer: A |
front 60 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.
| back 60 Answer: B |
front 61 A speculative attack involves massive sales of a currency or purchases of a currency that cause a sharp change in the exchange rate under a exchange rate system.
| back 61 Answer: A |
front 62 Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves.
| back 62 Answer: A |
front 63 Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves.
| back 63 Answer: B |
front 64 Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves.
| back 64 Answer: C |
front 65 Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves.
| back 65 Answer: D |
front 66 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
| back 66 Answer: A |
front 67 The Policy Trilemma states that a country or a monetary union can't pursue the following three policies at the same time
| back 67 Answer: B |
front 68 China chooses to have ________ and ________ and therefore, cannot have free capital mobility at the same time.
| back 68 Answer: B |
front 69 The United States chooses to have ________ and ________ and therefore, cannot have a fixed exchange rate at the same time.
| back 69 Answer: B |
front 70 Hong Kong chooses to have ________ and ________ and therefore, cannot have an independent monetary policy at the same time.
| back 70 Answer: B |
front 71  Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system. What alternative policies are available to eliminate the overvaluation of the exchange rate? | back 71 Answer: See Chapt. 18 number 71 The par value is above the equilibrium value, resulting in overvaluation of the exchange rate. One approach is to pursue contractionary monetary policies, raising interest rates and increasing the demand for domestic assets. This process continues until equilibrium at par value is restored. Another alternative is for the central bank to purchase domestic currency by selling foreign assets. |
front 72 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? | back 72 Answer: When the speculative attack begins, the expected depreciation of the domestic currency increases substantially, decreasing the demand for domestic assets. Contractionary monetary policy is needed to increase domestic interest rates enough to defend the currency. The cost to the central bank in terms of the costs of intervention and the contractionary effect on the economy may make devaluation preferable. |
front 73 A capital ________ can promote financial instability in an emerging-market country because it is what forces a country to ________ its currency.
| back 73 Answer: C |
front 74 A capital ________ can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks, which helps trigger a ________.
| back 74 Answer: A |
front 75 A case for capital inflow controls can be made because capital inflows
| back 75 Answer: A |
front 76 Which of the following is NOT a disadvantage of controls on capital outflows?
| back 76 Answer: A |
front 77 This agency acts like an international lender of last resort to cope with financial instability.
| back 77 Answer: C |
front 78 An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.
| back 78 Answer: A |
front 79 An international lender of last resort creates a serious moral hazard problem because ________ and other ________ of banking institutions expect that they will be protected if a crisis occurs.
| back 79 Answer: B |
front 80 In the early 1970s, the U.S. ran large balance of payments ________, causing an ________ dollar and an ________ German mark.
| back 80 Answer: B |
front 81 In response to the overvalued dollar in the early 1970s, the German Bundesbank bought ________ and sold ________ to keep the exchange rate fixed, gaining international reserves.
| back 81 Answer: C |
front 82 In response to the overvalued dollar in the early 1970s, the German Bundesbank bought dollars and sold marks to keep the exchange rate fixed, gaining international reserves. The huge purchase of international reserves meant that the German monetary base began to ________, leading to ________ growth in the German money supply.
| back 82 Answer: D |
front 83 The German central bank gained international reserves in the early 1970s because it sold ________ to prevent mark ________.
| back 83 Answer: A |
front 84 Since the abandonment of the Bretton Woods system, balance of payments considerations have become ________ important, and exchange rate considerations ________ important in the conduct of monetary policy.
| back 84 Answer: D |
front 85 If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency.
| back 85 Answer: B |
front 86 If a central bank does not want to see its currency ________ in value, it may pursue contractionary monetary policy to raise the domestic interest rate, thereby ________ its currency.
| back 86 Answer: A |
front 87 If a central bank does not want to see its currency rise in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby weakening its currency.
| back 87 Answer: C |
front 88 If a central bank does not want to see its currency ________ in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby ________ its currency.
| back 88 Answer: D |
front 89 If a central bank does not want to allow the domestic currency to appreciate, it will ________ international reserves by selling its currency, thereby ________ the monetary base and increasing the risk of higher inflation.
| back 89 Answer: D |
front 90 If a central bank does not want to allow the domestic currency to depreciate, it will ________ international reserves by purchasing its currency, thereby ________ the monetary base and increasing the risk of higher unemployment.
| back 90 Answer: A |
front 91 A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of its currency leads to ________ international reserves which ________ the monetary base.
| back 91 Answer: D |
front 92 A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of foreign currencies leads to ________ international reserves which ________ the monetary base.
| back 92 Answer: A |
front 93 To keep from running out of international reserves under the Bretton Woods system, a country had to implement ________ monetary policy to ________ its currency.
| back 93 Answer: C |
front 94 Under the Bretton Woods system, when a country adopted an expansionary monetary policy, thereby causing a balance of payments ________, the country would eventually be forced to implement ________ monetary policy.
| back 94 Answer: B |
front 95 Because the United States was the reserve-currency country under the Bretton Woods system, it could run large balance of payments ________ without ________ significant amounts of international reserves.
| back 95 Answer: A |
front 96 A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting.
| back 96 Answer: A |
front 97 Under an exchange-rate targeting rule for monetary policy, a crawling peg
| back 97 Answer: C |
front 98 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.
| back 98 Answer: C |
front 99 Exchange-rate targeting allows a central bank to ________, thus this will ________ the probability of policy developing a time-inconsistency problem.
| back 99 Answer: A |
front 100 Which of the following is NOT an advantage to exchange-rate targeting?
| back 100 Answer: D |
front 101 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.
| back 101 Answer: A |
front 102 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
| back 102 Answer: B |
front 103 Which of the following is NOT a disadvantage of exchange-rate targeting?
| back 103 Answer: A |
front 104 Two reasons for an industrialized country to adopt an exchange-rate targeting regime are if the country ________ conduct successful monetary policy on its own, and if the country wants to ________ integration of the domestic economy with its neighbors.
| back 104 Answer: A |
front 105 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
| back 105 Answer: B |
front 106 Because many emerging market countries have not developed the political or monetary institutions that allow the successful use of discretionary monetary policy
| back 106 Answer: C |
front 107 When a domestic currency is completely backed by a foreign currency and the note-issuing authority establishes a fixed exchange rate to this foreign currency, then the country is said to have
| back 107 Answer: A |
front 108 When a country forgoes its own currency and starts using another country's currency as its own, we say that this country has
| back 108 Answer: B |
front 109 The revenue a government gains from issuing money is
| back 109 Answer: C |
front 110 A country that dollarizes
| back 110 Answer: D |
front 111 The seignorage for a government is greater for ________ than for ________.
| back 111 Answer: E |
front 112 The monetary policy strategy that provides an automatic rule for the conduct of monetary policy is
| back 112 Answer: A |
front 113 The monetary policy strategy that does NOT allow the policy to focus on domestic considerations is
| back 113 Answer: A |
front 114 The monetary policy strategy that results in the loss of an independent monetary policy is
| back 114 Answer: A |
front 115 The monetary policy strategy that directly ties down the price of internationally traded goods is
| back 115 Answer: A |
front 116 Explain an additional disadvantage for a country undergoing dollarization compared to a currency board or other exchange-rate targeting regimes. | back 116 Answer: The additional disadvantage to dollarization is that the government loses seignorage. Seignorage is the income that a government earns by issuing its own currency. |
front 117 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? | back 117 Answer: The 1992 crisis began with Germany raising interest rates in 1990 to stem inflationary pressures from reunification. This demand shock was immediately transmitted to the other nations in the exchange-rate mechanism. Thus, these countries did not have independent monetary policies and were subject to shocks from the anchor country. This gave rise to the second problem. Speculators bet that these other countries would not want the increased unemployment resulting from the tight monetary policy. Betting that their commitment was weak, speculators bet against these currencies, and a number were forced to devalue or drop out of the ERM. The disadvantages illustrated by this are the lack of independent policy subjecting member nations to shocks from the anchor nation, and the possibility of speculative attacks when commitment is felt to be weak. |