Chapter 19 – Exchange-Rate Policy and the Central Bank
60. All of the following are costs of a fixed exchange rate policy except:
D. It means importing monetary policy
61. A country with a fixed exchange rate policy that is experiencing an economic slowdown
will find:
A. Their central bank will reduce the domestic interest rate in order to fend off the slowdown
62. A speculative attack on a country with a fixed exchange rate occurs when:
D. The country is running out of gold reserves
Chapter 19 – Exchange-Rate Policy and the Central Bank
63. In 1997, there was a speculative attack on the Thai baht. This resulted from the:
D. Overthrow of the Thai president and the central bank
64. Speculative attacks:
A. Can only result from irresponsible fiscal policy
65. Which of the following statements is most correct?
A. A fixed exchange rate policy is a lack of a monetary policy
Chapter 19 – Exchange-Rate Policy and the Central Bank
66. One reason a country would be better off fixing its exchange rate is if:
A. It has a strong reputation for controlling inflation on its own
67. A country that suffers from bouts of high inflation and wants to fix its exchange rate
should tie its currency to the currency of a:
D. Country that is still on the gold standard
68. 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″?
D. Averaged 3.5 percent per year and was stable
Chapter 19 – Exchange-Rate Policy and the Central Bank
69. Most economists do not advocate a return to the gold standard because:
A. It forces the central bank to fix the price of something we don’t really care about while
other prices can fluctuate a lot
70. If the U.S. were to revert to a gold standard, trade deficits would:
D. Result in high inflation
71. If the U.S. were to revert to a gold standard, trade deficits would:
D. Result in high inflation
Chapter 19 – Exchange-Rate Policy and the Central Bank
72. Which of the following best completes the sentence; “Under a gold standard a central
bank ¼”?
D. Will have gold reserves depleted when exports exceed imports
73. Most economic historians believe that:
A. If more countries would have been on the gold standard the Great Depression would have
been averted
74. Fixed exchange rate regimes include each of the following, except:
A. Conference boards
Chapter 19 – Exchange-Rate Policy and the Central Bank
75. The Breton Woods System was an agreement that:
D. Standardized tariffs across all participating countries
76. Under the Bretton Woods System each participating country had to:
A. Be willing to exchange their own currency for gold
77. The Bretton Woods System failed in 1971 due to:
A. High rates of inflation in the U.S
Chapter 19 – Exchange-Rate Policy and the Central Bank
78. The International Monetary Fund was created as a part of:
D. The Federal Reserve System
79. The International Monetary Fund’s primary role under the Bretton Woods System was to
be:
A. The issuer of gold
C. Gold can deteriorate
D. The price of gold rarely changes
Chapter 19 – Exchange-Rate Policy and the Central Bank
81. In the spring of 2005, people in business and government were calling for China to move
away from its fixed-exchange rate regime because:
C. It was adding to China’s current account deficit
D. It was exporting its inflation to the United States
82. In the spring of 2005, people in business and government were calling for China to move
away from its fixed-exchange rate regime because by pegging its currency China was:
D. Exporting its inflation to the United States
83. China has used its current account surplus to:
A. buy stocks on the New York Stock Exchange
Chapter 19 – Exchange-Rate Policy and the Central Bank
84. Only two exchange rate regimes can be considered hard pegs. These are:
D. The gold standard and currency boards
85. In Hong Kong, the monetary authority can only increase the monetary base if they
accumulate more U.S. dollars because:
D. Hong Kong has received substantial funding from the U.S. Treasury and the loans were
conditional on maintaining the value of the Hong Kong currency
86. When a country operates with a currency board, the central bank’s sole objective is to
Chapter 19 – Exchange-Rate Policy and the Central Bank
87. In April 1991, Argentina adopted a currency board primarily to address the problem of:
A. Slow growth
88. The failure of the Argentinean currency board can be attributed to many factors, including
the:
A. Failure right from the start to lower inflation
89. A lesson that policymakers should learn from the Argentinean experience with currency
boards is:
D. They never work
Chapter 19 – Exchange-Rate Policy and the Central Bank
90. A problem with currency boards is that the central bank loses:
A. Ability to control inflation
91. Which of the following best defines dollarization?
D. The central bank of a country agrees to exchange its own currency for U.S. dollars at a
fixed exchange rate
92. The benefits to a country from dollarization include each of the following, except:
A. A lower risk premium since inflationary finance is no longer a possibility
Chapter 19 – Exchange-Rate Policy and the Central Bank
93. The costs to a country that dollarizes include each of the following, except:
D. The loss of revenue from printing currency
94. Monetary union, in comparison to dollarization, means that:
C. The central bank no longer has the ability to be the lender of last resort
D. All of the answers given are correct
Short Answer Questions
95. While it is true that central banks of many countries intervene in the foreign exchange
market, why wouldn’t it be correct to say that central banks of these countries fix the
exchange rates?
Chapter 19 – Exchange-Rate Policy and the Central Bank
96. 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?
97. Consider the current peso/dollar exchange rate is 100 pesos per dollar and the current
inflation rate in Mexico and the U.S. is 3 percent in each country. What will the exchange rate
be if the inflation rate increases to 5 percent in Mexico and falls to 2 percent in the U.S.?
98. Explain why the central bank of a country that has fixed its exchange rate would not find
discussions of inflation on the agenda of its policy meetings?
99. 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?
100. If the exchange rate between the Canadian dollar and the American dollar was fixed at
1.30 Canadian dollars per U.S. dollar and investors perceived Canadian bonds to be equal in
risk to U.S. bonds, if the U.S. bonds are selling for $1,000 and have a 5 percent interest rate,
assuming capital flows freely between the two countries what will be the price and the interest
rate of the Canadian bonds?