Chapter 19 – Exchange-Rate Policy and the Central Bank
1. Within the United States, every city has:
D. Their own currency board
2. If capital flows freely between countries and a country has a fixed exchange rate, one thing
you know is that the country:
A. Exports more than it imports
Chapter 19 – Exchange-Rate Policy and the Central Bank
3. Purchasing power parity implies:
A. A basket of goods should sell for the same price in all countries, even if trade barriers exist
4. If inflation in country A exceeds inflation in country B, purchasing power parity implies
that:
A. The currency of country B should depreciate relative to the currency of country A
5. If inflation in country A exceeds inflation in country B, we can express the percentage
change in the units of currency of country A per unit of currency of country B as:
D. The inflation rate in country A ¸ the inflation rate in country B
Chapter 19 – Exchange-Rate Policy and the Central Bank
6. If the inflation rate in country A is 3.5% and the inflation rate in country B is 3.0%, we
should expect the percentage change in the number of units of country A‘s currency per unit
of country B’s currency to be:
D. +6.5%
7. If a U.S. dollar currently purchases 1.3 Canadian dollars and the inflation rate in Canada
over the next year is 5 percent while it is 2 percent in the U.S., we should expect a U.S. dollar
to purchase:
8. If country A wants to fix its exchange rate with country B, then:
A. Country A’s inflation rate will have to match country B’s
Chapter 19 – Exchange-Rate Policy and the Central Bank
9. Which of the following statements is most correct?
D. While most central banks of industrialized countries favor fixing exchange rates, their
primary concern is on domestic inflation
10. Purchasing power parity is a good theory of explaining exchange rate behavior:
A. Over very short periods
11. In the short run, a country’s exchange rate is determined by:
A. Monetary policy
Chapter 19 – Exchange-Rate Policy and the Central Bank
12. International capital mobility:
D. Makes interest rates equal across countries
13. If the bonds of two different countries are identical, their expected returns will:
D. Be equal only if the inflation rate is the same in each country
14. When arbitrage occurs across countries with flexible exchange rates and when the bonds
in each country are identical and there are no barriers to capital flows:
A. The interest rates on the bonds will be identical
Chapter 19 – Exchange-Rate Policy and the Central Bank
15. When arbitrage occurs across countries with a flexible exchange rate and when the bonds
in each country are identical and there are no barriers to capital flows then the:
D. Prices of the bonds will be identical
16. 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:
A. if = i
17. 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 () that pays an interest rate of if. The current
exchange rate is $1.50/. She considers the bonds to be of equal risk. i ¹ if. What do you
know?
A. The exchange rate is fixed between the U.S. and Britain
Chapter 19 – Exchange-Rate Policy and the Central Bank
18. 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 () that pays an interest rate of if. The current
exchange rate is $1.50/. She considers the bonds to be of equal risk. If i = if, the expected
returns are not equal. What do you know?
A. The exchange rate is fixed between the U.S. and Britain
19. Which of the following statements is incorrect?
A. A country cannot be open to international capital flows, control its domestic interest rate
and fix its exchange rate
20. The United States would be characterized as having:
D. A controlled domestic interest rate, an open capital market and a fixed exchange rate
Chapter 19 – Exchange-Rate Policy and the Central Bank
21. Most economists view capital controls:
D. Favorably, since having them makes capital markets more efficient
22. Capital controls:
A. Can be controls on capital inflows
23. During the 1990s, the country of Chile required foreigners wishing to invest in the country
to make a one-year, zero-interest deposit in the Chilean central bank equal to at least 20
percent of the investment. This is an example of:
D. A currency board
Chapter 19 – Exchange-Rate Policy and the Central Bank
24. Which of the following would be an example of a capital outflow control?
A. Mexico limiting the number of U.S. dollars an American can bring into the country
25. If domestic residents are restricted in their ability to purchase foreign assets then their
government is imposing:
D. Fixed exchange rates
26. If foreigners are restricted in their ability to sell investments in a country then that
D. Fixed exchange rates
Chapter 19 – Exchange-Rate Policy and the Central Bank
27. If foreigners are restricted in their ability to buy investments in a country then that
government is imposing:
D. Fixed exchange rates
28. A country announces capital outflow controls that will take effect in three months. This
announcement will likely:
A. Stabilize the country’s exchange rate
29. A country that frequently uses capital controls:
D. Will attract more investment
Chapter 19 – Exchange-Rate Policy and the Central Bank
30. If the Fed desired to fix the euro/dollar exchange rate, they would have to:
A. Get the European Central Bank to also agree to fixed exchange rates
31. Adding international reserves for a central bank:
D. Increases the central bank’s liabilities and decreases its assets.
32. If the Fed decides to maintain a fixed euro/dollar exchange rate when they purchase
euros:
A. They increase the number of dollars
Chapter 19 – Exchange-Rate Policy and the Central Bank
D. They will have to impose capital controls
34. If the Fed decides to control the euro/dollar exchange rate:
A. They will also have to control the domestic interest rate
35. Reserves in the banking system will increase if the Fed:
D. Sells both euros and dollars at the same time
Chapter 19 – Exchange-Rate Policy and the Central Bank
36. Reserves in the banking system will decrease if the Fed:
D. Sells both euros and dollars at the same time
37. The Fed holds its euro reserves primarily in the form of:
38. If the Fed were to enter the foreign exchange market and purchase euros, the impact on
domestic banking reserves would be:
A. The opposite of what it would be with an open market purchase
Chapter 19 – Exchange-Rate Policy and the Central Bank
39. The impact on the foreign exchange market for dollars resulting from the Fed purchasing
euros will be:
D. An increase in the demand for dollars and an increase in the supply of euros
40. The impact on the foreign exchange market for dollars resulting from the Fed purchasing
euros will be:
A. A decrease in the demand for dollars
41. The impact on the foreign exchange market for dollars resulting from the Fed selling
euros will be:
D. A decrease in the interest rate in the U.S.
Chapter 19 – Exchange-Rate Policy and the Central Bank
42. If interest rates in the U.S. increases relative to interest rates in Europe:
A. The demand for dollars on the foreign exchange market would increase
43. A foreign exchange intervention by a central bank affects the value of a country’s currency
because it:
A. Alters banking system reserves
44. Any central bank policy that influences the domestic interest rate will:
D. Have to fix exchange rates
Chapter 19 – Exchange-Rate Policy and the Central Bank
45. Assume that the Fed performs a foreign exchange intervention in which it does nothing
except buy German government bonds. One result of this will be that:
D. The dollar appreciates and the euro depreciates
46. Assume that the Fed performs a foreign exchange intervention in which it does nothing
except buy German government bonds. The dollar will depreciate as a result due to:
A. A decrease in the demand for dollars, but no change in the supply of dollars
47. Which of the following statements is incorrect?
A. A foreign exchange intervention affects the value of a country’s currency by changing
Chapter 19 – Exchange-Rate Policy and the Central Bank
48. A sterilized foreign exchange intervention would:
D. Not alter the central bank’s holdings of international reserves
49. If the Fed were to purchase euros for dollars and at the same time sell U.S. Treasury
securities in the open market, this would be an example of:
A. An unsterilized foreign exchange intervention
50. A foreign exchange intervention that alters the domestic monetary base is:
D. Impossible
Chapter 19 – Exchange-Rate Policy and the Central Bank
51. A foreign exchange intervention that does not alter the domestic monetary base is:
D. Impossible
52. Which of the following statements is most correct?
A. A sterilized foreign exchange intervention will alter the composition of a central bank’s
assets and alter commercial bank reserves
53. In September of 2000, the Federal Reserve Bank of New York sold dollars in exchange
for euro. To keep the federal funds rate on target, the Open Market desk:
D. Sold dollars
Chapter 19 – Exchange-Rate Policy and the Central Bank
54. Suppose that you purchase a Korean government bond and the number of won needed to
purchase one dollar increases. Your return on the bond:
D. Increases by the amount of the dollar’s appreciation
55. A U.S. resident purchases a bond issued by the Canadian government. If the Canadian
dollar appreciates relative to the U.S. dollar over the term of the bond, the U.S. investor will:
D. None of the answers provided is correct
56. An advantage of fixed exchange rates for a country that suffers from bouts of high
D. Policymakers will have increased control over domestic interest rates
Chapter 19 – Exchange-Rate Policy and the Central Bank
57. A fixed exchange rate policy:
A. Decreases central bank policy accountability and transparency
58. When Argentina fixed the exchange rate of their peso to the U.S. dollar, one outcome
was:
A. Argentinean central bankers regained control of their domestic interest rate
59. Fixing an exchange rate between two countries makes the most sense when:
D. One country has a lot of international reserves and the other doesn’t