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15) How does an increase in inflation affect the nominal exchange rate?
16) How is the foreign exchange market similar to the stock market?
17.5 Exchange Rates and Aggregate Demand and Supply Analysis
1) An increase in the value of the U.S. dollar will tend to cause, other things the same ________.
A) an increase in the volume of U.S. imports
B) an increase in the volume of U.S. exports
C) an increase in the volume of U.S exports and imports
D) a decrease in the volume o U.S. exports and imports
2) A decrease in the value of the U.S dollar will tend to cause, other things the same ________.
A) an increase in the volume of U.S. imports
B) an increase in the volume of U.S exports and an increase in U.S. income
C) an increase in the volume of U.S. exports and a decrease in U.S. income
D) a decrease in U.S. income
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3) In the short-run, an appreciation in the value of the U.S. dollar will tend to cause ________.
A) a decrease in the level of income and higher inflation
B) an increase in the level of income and higher inflation
C) an increase in the level of income and lower inflation
D) a decrease in the level of income and lower inflation
4) Suppose the U.S. dollar depreciates, and there is no change in monetary policy. Which of the
following is a correct description of the short-run consequences?
A) output, inflation, and the real interest rate have all increased
B) output, inflation, and the real interest rate have returned to their original values
C) output and inflation are higher, while the real interest rate has fallen
D) output and inflation have returned to their original values, while the real interest rate is
increased
5) Suppose the U.S. dollar depreciates, and monetary authorities respond to stabilize both output
and inflation. Which of the following is a correct description of the short-run consequences?
A) output, inflation, and the real interest rate have all increased
B) output, inflation, and the real interest rate have returned to their original values
C) output and inflation are higher, while the real interest rate has fallen
D) output and inflation have returned to their original values, while the real interest rate is
increased
6) In the short run, who tends to benefit from a decrease in the exchange rate?
A) domestic producers
B) owners of domestic-currency assets
C) domestic consumers
D) foreign producers
7) A decline in the value of net exports in the U.S. is most likely to result from an increase in
________.
A) foreign income
B) U.S. exports
C) foreign real interest rates
D) the value of the U.S. dollar
8) Suppose an “emerging market” economy becomes attractive to foreign investors. What are the
likely consequences for the economy’s currency and, thus, the macroeconomy?
17.6 Intervention in the Foreign Exchange Market
1) The international reserves of the Federal Reserve System include its holdings of ________.
A) Treasury securities
B) discount loans to commercial banks
C) foreign currency denominated assets
D) U.S. dollars, British pounds and Euros
2) Central banks intervene directly in foreign exchange markets by buying and selling ________.
A) exports and imports
B) foreign currencies
C) U.S. government debt
D) discount loans
3) A foreign exchange intervention that lowers the exchange rate will also ________.
A) increase the real interest rate
B) decrease the money supply
C) increase investment
D) decrease international reserves
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4) ________ can counteract a currency depreciation.
A) Autonomous monetary policy tightening
B) Purchase of international reserves
C) Autonomous monetary policy easing
D) Capital controls
5) The purchase of foreign currency by a central bank will tend to cause ________.
A) an appreciation of the domestic currency
B) a depreciation of the domestic currency
C) an increase in the value of foreign exchange, but no change in the value of the domestic
currency
D) a decrease in the value of foreign exchange, but no change in the value of the domestic
currency
6) The purchase of foreign currency by a central bank will tend to cause ________.
A) a decrease in the relative expected return on domestic assets
B) an increase in the demand for domestic currency
C) a decrease in the domestic money supply
D) a decrease in the supply of domestic assets
7) A central bank that is buying its own currency might be trying to ________.
A) weaken its currency
B) increase the domestic money supply
C) reduce domestic interest rates
D) reduce inflation
8) If the Chinese government were to begin selling large quantities of its dollar-denominated
assets, how might that affect China’s economy and the U.S. economy?
17.7 Fixed Exchange Rate Regimes
1) In a fixed exchange rate regime, the value of a currency is pegged to ________.
A) an anchor currency
B) a currency board
C) a dirty float
D) an interest rate standard such as the Treasury bill rate in the U.S.
2) A dirty float is an example of ________.
A) a fixed exchange rate system
B) a flexible exchange rate system
C) a revaluation
D) a currency board
3) Under a dirty float, the value of a country’s currency is ________.
A) fixed
B) determined by the relevant currency board
C) influenced by the monetary authorities
D) unmanageable
4) Under a fixed exchange rate system, if an appreciation in the value of a country’s currency
develops, the monetary authorities must intervene by ________.
A) selling foreign exchange
B) buying and selling the domestic currency
C) raising the foreign interest rate
D) buying foreign exchange
5) Under a fixed exchange rate system, if an appreciation in the value of a country’s currency
develops, the monetary authorities ________.
A) will gain international reserves
B) buy the domestic currency in foreign exchange markets
C) sell foreign exchange in foreign exchange markets
D) will lose international reserves
6) The devaluation of a currency develops once ________.
A) an increase in the value of a country’s currency develops
B) a monetary authority runs out of international reserves
C) the level of domestic income falls
D) an increase in the domestic price level develops
7) A central bank with a fixed exchange rate must, in response to an interest rate decline in the
anchor-currency economy, ________.
A) purchase the anchor currency
B) sell the anchor currency
C) convene a currency board
D) revalue its currency
8) The impossible trinity includes ________.
A) capital controls, a fixed exchange rate and an independent monetary policy
B) free capital mobility, a flexible exchange rate and an independent monetary policy
C) free capital mobility, a fixed exchange rate and an independent monetary policy
D) free capital mobility, a flexible exchange rate and constraints on monetary policy
9) If a country chooses to establish fixed exchange rates and an independent monetary policy, it
gives up the ability to have ________.
A) free capital mobility
B) an independent fiscal policy
C) capital controls
D) an independent physical policy
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10) The individual countries of the Eurozone are on which side of the “policy trilemma”?
A) free capital mobility and independent monetary policy
B) free capital mobility and fixed exchange rate
C) fixed exchange rate and independent monetary policy
D) fixed exchange rate and capital controls
11) Consequences of the European Monetary Union include ________.
A) a global financial crisis in 2007-2008
B) tightening of capital controls in several economies
C) convergence of unemployment rates across the member economies
D) consistent monetary policy across the member economies
12) If any country decides to exit from the Eurozone, it will gain ________.
A) free capital mobility
B) a fixed exchange rate
C) reduced transactions costs
D) monetary policy independence
13) How might China benefit from adopting a flexible exchange rate policy?
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17.8 To Peg or Not to Peg
1) One of the chief advantages of exchange rate pegging is that ________.
A) a country is able to pursue an independent monetary policy over the course of the business
cycle
B) it can be an effective means of reducing inflation
C) the currency can be used to promote export growth
D) it allows the monetary authorities to actively respond to the problems of inflation and
unemployment
2) In many countries, an exchange-rate peg substitutes for ________.
A) speculative attacks
B) an export-oriented sector
C) discretionary monetary policy
D) capital controls
3) When the real interest rate rises in the anchor country, ________.
A) expansionary monetary policy will be used to maintain the interest rate peg
B) an economic stimulus is transmitted to pegged economies
C) there will be downward pressure on the value of pegged currencies
D) the anchor currency becomes vulnerable to a speculative attack
4) In a “crawling peg” regime, ________.
A) the value of the currency is fixed to a basket of commodities
B) higher inflation is permitted
C) several anchor currencies are used in succession
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5) One purpose of the currency board adopted in Argentina in 1991 was to ________.
A) encourage capital mobility
B) make monetary policy more effective
C) stabilize the exchange rate between the Argentine peso and the currencies of Argentina’s
major trading partners
D) put an end to speculative attacks on the Argentine peso
6) If the nominal expected return on foreign assets is higher than on dollar assets ________.
A) foreigners will want to hold additional dollar assets
B) Americans will want to hold additional dollar assets
C) foreigners will want to hold fewer foreign assets
D) foreigners will want to hold additional foreign assets
7) The key danger facing a country with an exchange rate peg is ________.
A) loss of credibility
B) loss of export markets
C) monetary policy mistakes
D) capital controls
8) When an exchange-rate crisis befalls a pegged currency, experience suggests that damage to
the economy may be minimized by ________.
A) appealing to creditors to provide more liquidity
B) rapid adoption of a currency board
C) abandoning the peg
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9) What are some reasons that an “emerging market” country may choose a fixed exchange rate
regime?
10) How does the policy trilemma help to explain the failure of Argentina’s currency board?