Financial Markets and Institutions, 8e (Mishkin)
1) A central bank sale of ________ to purchase ________ in the foreign exchange market results
in an equal rise in its international reserves and the monetary base.
A) foreign assets; domestic currency
B) foreign assets; foreign currency
C) domestic currency; foreign assets
D) domestic currency; domestic currency
2) A central bank sale of ________ to purchase ________ in the foreign exchange market results
in an equal decline in its international reserves and the monetary base.
A) foreign assets; domestic currency
B) foreign assets; foreign currency
C) domestic currency; foreign assets
D) domestic currency; domestic currency
3) A central bank ________ of domestic currency and corresponding ________ of foreign assets
in the foreign exchange market leads to an equal ________ in its international reserves and the
monetary base.
A) sale; purchase; decline
B) sale; sale; increase
C) purchase; sale; increase
D) purchase; sale; decline
4) A central bank ________ of domestic currency and corresponding ________ of foreign assets
in the foreign exchange market leads to an equal ________ in its international reserves and the
monetary base.
A) sale; purchase; increase
B) sale; sale; decline
C) purchase; sale; increase
D) purchase; purchase; decline
5) When the central bank allows the purchase or sale of domestic currency to have an effect on
the monetary base, it is called
A) a sterilized foreign exchange intervention.
B) an unsterilized foreign exchange intervention.
C) an exchange rate feedback rule.
D) a money-neutral foreign exchange intervention.
6) A foreign exchange intervention with an offsetting open market operation that leaves the
monetary base unchanged is called
A) an unsterilized foreign exchange intervention.
B) a sterilized foreign exchange intervention.
C) an exchange rate feedback rule.
D) a money-neutral foreign exchange intervention.
7) An unsterilized intervention in which domestic currency is sold to purchase foreign assets
leads to
A) a gain in international reserves.
B) an increase in the money supply.
C) an appreciation in the domestic currency.
D) all of the above.
E) only A and B of the above.
8) An unsterilized intervention in which domestic currency is sold to purchase foreign assets
leads to
A) a gain in international reserves.
B) a decrease in the money supply.
C) an appreciation in the domestic currency.
D) all of the above.
E) only A and B of the above.
9) A Federal Reserve decision to sell dollars in order to buy foreign assets in the foreign
exchange market has the same effect as an open market ________ of bonds to ________ the
monetary base and the money supply.
A) sale; decrease
B) purchase; decrease
C) sale; increase
D) purchase; increase
10) A Federal Reserve decision to purchase dollars by selling foreign assets in the foreign
exchange market has the same effect as an open market ________ of bonds to ________ the
monetary base and the money supply.
A) sale; decrease
B) purchase; decrease
C) sale; increase
D) purchase; increase
11) 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
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.
12) Because sterilized interventions mean offsetting open market operations,
A) there is no impact on the monetary base.
B) there is no impact on the money supply.
C) there is no effect on the exchange rate.
D) all of the above occur.
E) only A and B of the above occur.
13) The difference between merchandise exports and imports is called the
A) current account balance.
B) capital account balance.
C) balance of payments.
D) trade balance.
14) A current account ________ indicates that the United States is ________ its claims on
foreign wealth.
A) surplus; increasing
B) surplus; decreasing
C) deficit; increasing
D) balance; decreasing
15) A current account ________ indicates that the United States is ________ its claims on
foreign wealth.
A) deficit; decreasing
B) deficit; increasing
C) surplus; decreasing
D) balance; increasing
16) Holding other factors constant, which of the following would decrease the size of the U.S.
current account deficit?
A) An increase in the amount of services purchased from foreigners
B) An increase in the amount of goods purchases from foreigners
C) An increase in the amount of goods sold to foreigners
D) Only A and B of the above
17) Holding other factors constant, which of the following would increase the size of the U.S.
current account deficit?
A) Sales of U.S. farm products in Europe
B) Visits by European tourists to the United States
C) Increasing travel by American college students in Europe
D) Both A and B of the above
18) The current account balance plus the capital account balance equals
A) the amount of unsterilized exchange market intervention.
B) the trade balance.
C) the net change in government international reserves.
D) both A and C of the above.
19) If the current account balance shows a surplus, and capital account receipts exceed capital
account payments, then the net change in government international reserves must be ________,
indicating a(n) ________ in U.S. international reserves.
A) positive; increase
B) negative; increase
C) negative; decrease
D) positive; decrease
20) Which of the following statements is correct?
A) Current account balance = capital account balance
B) Current account balance = capital account balance + net change in government international
reserves
C) Current account balance + capital account balance = net change in government international
reserves
D) Current account balance + net change in government international reserves = capital account
balance
21) The Bretton Woods system was one in which central banks
A) agreed to limit domestic money growth to the average of the seven largest industrial nations.
B) agreed not to intervene in the foreign exchange market to maintain a fixed exchange rate
regime that had existed prior to World War I.
C) agreed to limit domestic money growth to the average of the five largest industrial nations.
D) bought and sold their own currencies to keep their exchange rates fixed.
22) 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.
A) IMF
B) World Bank
C) Central Settlements Bank
D) Bank of International Settlements
E) European Exchange Rate Mechanism (ERM)
23) The Bretton Woods agreement set up the ________, which currently provides long-term
loans to assist developing countries to build dams, roads, and other physical capital that
contributes to economic development.
A) International Monetary Fund
B) World Bank
C) Central Settlements Bank
D) Bank of International Settlements
E) European Exchange Rate Mechanism (ERM)
24) What kind of exchange rate system did the Bretton Woods agreement establish?
A) Floating
B) Managed float
C) Dirty float
D) Fixed
25) In the Bretton Woods system, the anchor currency was the
A) euro.
B) British pound.
C) German mark.
D) U.S. dollar.
26) Which of the following are true statements about the Bretton Woods system?
A) The Bretton Woods system was a fixed exchange rate regime, in which central banks bought
and sold their own currencies to keep their exchange rates fixed.
B) To maintain fixed exchange rates when countries had balance of payments deficits and were
losing international reserves, the IMF would loan deficit countries international reserves
contributed by other members.
C) The German mark was called a reserve currency because it was used to denominate the
securities central banks held as international reserves.
D) All of the above are true.
E) Only A and B of the above are true.
27) Which of the following are true statements about the Bretton Woods system?
A) The Bretton Woods system was a flexible exchange rate regime, in which central banks
allowed their currencies to float within a wide trading band.
B) The U.S. dollar was called a reserve currency because it was used to denominate the securities
central banks held as international reserves.
C) The Bretton Woods agreement broke down in 1945.
D) Only A and B of the above are true.
28) Under a fixed exchange rate regime, when the domestic currency is undervalued, the central
bank must ________ the domestic currency to keep the exchange rate fixed; as a result, it
________ international reserves.
A) purchase; gains
B) sell; gains
C) purchase; loses
D) sell; loses
29) Under a fixed exchange rate regime, when the domestic currency is overvalued, the central
bank must ________ the domestic currency to keep the exchange rate fixed; as a result, it
________ international reserves.
A) purchase; loses
B) sell; loses
C) purchase; gains
D) sell; gains
30) 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.
A) overvalued; below
B) overvalued; above
C) undervalued; below
D) undervalued; above
31) Under a fixed exchange rate regime, if the domestic currency is initially ________, that is
________ par, the central bank must intervene to buy the domestic currency by selling foreign
assets.
A) overvalued; below
B) overvalued; above
C) undervalued; below
D) undervalued; above
32) If the domestic currency is initially undervalued, that is below par, the central bank must
intervene to sell the ________ currency by purchasing ________ assets.
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
33) 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.
A) expansionary; raise
B) contractionary; raise
C) expansionary; lower
D) contractionary; lower
34) 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.
A) expansionary; raise
B) contractionary; raise
C) expansionary; lower
D) contractionary; lower
35) If a country’s central bank eventually runs out of international reserves, it cannot keep its
currency from ________ and a ________ must occur in which the par exchange value is reset at
a ________ level.
A) appreciating; revaluation; higher
B) depreciating; revaluation; higher
C) depreciating; devaluation; lower
D) appreciating; devaluation; lower
36) Depreciation of a currency occurs when
A) a floating exchange rate adjusts upward.
B) a floating exchange rate adjusts downward.
C) a fixed exchange rate is adjusted upward.
D) a fixed exchange rate is adjusted downward.
37) Policymakers may not want to see their country’s currency appreciate because
A) this would hurt consumers in their country by making foreign goods more expensive.
B) this would hurt domestic businesses by making foreign goods cheaper in their country.
C) this would increase inflation in their country.
D) this would decrease the wealth of the country.
38) Under a managed float exchange rate regime, policymakers frequently do not want to see
their currencies depreciate because it makes ________ goods more expensive for ________
consumers and contributes to inflation.
A) foreign; foreign
B) foreign; domestic
C) domestic; foreign
D) domestic; domestic
39) Revaluation of a currency’s value occurs when
A) a floating exchange rate adjusts upward.
B) a floating exchange rate adjusts downward.
C) a fixed exchange rate is adjusted upward.
D) a fixed exchange rate is adjusted downward.
40) Which of the following policies is not part of the “policy trilemma”?
A) Dollarization
B) Free capital mobility
C) Fixed exchange rate
D) Independent monetary policy