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government.
B. supply of dinar that will cause the dinar to lose value unless dinar are bought by the
government.
C. demand for dinar that will cause the dinar to gain value unless dinar are sold by the
government.
D. demand for dinar that will cause the dinar to gain value unless dinar are bought by the
government.
55. Refer to the graph shown. To maintain the price of euros at $1.20, the European Central
Bank must buy:
A. Q1–Q0 euros.
B. Q1–Q2 euros.
C. Q0–Q2 euros.
D. Q2 euros.
56. Refer to the graph shown. To maintain the price of euros at $1.00 the government must:
A. buy Q1–Q0 euros.
B. buy Q1–Q2 euros.
C. sell Q2–Q0 euros.
D. do nothing.
57. The buying of a currency by a government to maintain its value above its long-run
equilibrium value is called currency:
A. ceiling.
B. management.
C. stabilization.
D. support.
58. A country that fixes a price for its currency that is above the market price will:
A. accumulate official reserves.
B. increase its money supply.
C. lose official reserves.
D. eventually increase the value of its currency.
59. A country that fixes a price for its currency that is below the market price must:
A. accumulate official reserves.
B. decrease its money supply.
C. lose official reserves.
D. eventually increase the value of its currency.
60. Foreign governments are holding fewer dollars as reserves. As a result, the value of the
dollar is declining. If foreign governments want to keep the U.S. dollar from declining, they
could:
A. implement domestic contractionary monetary policies.
B. implement domestic export subsidies to accumulate dollars.
C. buy more U.S. dollars.
D. reduce their U.S. dollar holdings even more.
61. From the late 1990s into the early 2000s, Hong Kong suffered from deflation. Most
economists believed that the period of deflation ended and that inflation would begin to pick up
slowly. Prices, however, were believed to be held in check because the Hong Kong dollar is
pegged to the U.S. dollar. What does the monetary authority in Hong Kong have to do to peg its
dollar to the U.S. dollar?
A. It does not allow free trade in U.S. dollars; the foreign exchange market is illegal.
B. It will sell Hong Kong dollars when the price of the Hong Kong dollar drops and buy them
when the price of the Hong Kong dollar rises.
C. It will sell Hong Kong dollars when the price of the Hong Kong dollar rises and buy them
when the price of the Hong Kong dollar drops.
D. It will raise tariffs when the value of the Hong Kong dollar falls and lower them when the
value of the Hong Kong dollar rises.
62. Monetary policy affects exchange rates in all the following ways except through its effects
on:
A. the interest rate.
B. taxes.
C. price level and inflation.
D. income.
63. Exchange rate fluctuations:
A. do not have economic consequences.
B. have minor economic consequences.
C. have important economic consequences.
D. have as yet undetermined economic consequences.
64. Refer to the graph shown. A purchase of shekels by the Israeli government would shift the:
A. demand curve to the left and reduce the price of shekels.
B. demand curve to the right and raise the price of shekels.
C. supply curve to the right and reduce the price of shekels.
D. supply curve to the left and raise the price of shekels.
65. Refer to the graph shown. A sale of shekels by the Israeli government would shift the:
A. demand curve to the left and reduce the price of shekels.
B. demand curve to the right and raise the price of shekels.
C. supply curve to the right and reduce the price of shekels.
D. supply curve to the left and raise the price of shekels.
66. The government of Crossland wants to influence its exchange rate. It will do so by buying
and selling:
A. currencies in its official reserves.
B. commodities.
C. goods and services from the current account.
D. transfers.
67. A country that wants to increase its exchange rate to a higher level than the market exchange
rate would most likely adopt:
A. expansionary fiscal policy.
B. expansionary monetary policy.
C. contractionary fiscal policy.
D. contractionary monetary policy.
68. A country that wants to fix its exchange rate at a higher level than the market exchange rate
would most likely:
A. raise income taxes.
B. raise government spending.
C. reduce the money supply.
D. increase the money supply.
69. When Turkey tried to preserve its fixed exchange rate in the early 2000s, it was unable to to
do so and its currency depreciated. Which policy would have been most likely to help Turkey
preserve the value of its exchange rate?
A. Tax cut
B. Spending hike
C. Drop in the money supply
D. Drop in central bank lending rates
70. When the euro appreciated significantly against the U.S. dollar, European policymakers
were concerned. To stop the appreciation of the euro, the European Central Bank could have
adopted a macroeconomic policy that:
A. reduced both the supply and demand for euros.
B. reduced the supply of euros but increased the demand.
C. increased both the supply and the demand for euros.
D. reduced the demand for euros but increased the supply.
72. Fiscal policy affects:
A. both the supply and demand for a currency.
B. the demand for a currency but not the supply.
C. the supply of a currency but not the demand.
D. neither the supply of a currency nor the demand.
73. Expansionary monetary policy:
A. reduces the demand for the domestic currency in the foreign exchange market and increases
the supply.
B. reduces only the demand for the domestic currency in the foreign exchange market.
C. reduces only the supply of domestic currency in the foreign exchange market.
D. increases the demand for domestic currency in the foreign exchange market and reduces the
supply.
74. In the late 1990s Argentina suffered a serious recession but was able, unlike Brazil, to
prevent a sharp devaluation of its currency. This is most likely because:
A. Argentina pursued a contractionary monetary policy but Brazil did not.
B. Argentina pursued an expansionary monetary policy but Brazil did not.
C. Brazil pursued a more contractionary monetary policy than Argentina.
D. Brazil pursued a more expansionary monetary policy than Argentina.
75. Contractionary monetary policy generally:
A. lowers U.S. interest rates.
B. decreases the inflow of financial capital.
C. increases the inflow of financial capital.
D. decreases the U.S. exchange rate.
76. Expansionary monetary policy generally:
A. raises U.S. interest rates.
B. increases the inflow of financial capital.
C. increases the U.S. exchange rate.
D. pushes down the value of the U.S. dollar.
77. Higher U.S. interest rates usually cause:
A. foreign capital to leave the United States.
B. no change in foreign investment in the United States.
C. a drop in the U.S. dollar exchange rate.
D. foreign capital to enter the United States.
78. Expansionary monetary policy tends to:
A. lower the U.S. interest rate and increase the U.S. exchange rate.
B. lower the U.S. interest rate and decrease the U.S. exchange rate.
C. increase the U.S. interest rate and decrease the U.S. exchange rate.
D. increase the U.S. interest rate and increase the U.S. exchange rate.
79. Expansionary monetary policy tends to:
A. reduce both the interest rate and capital inflows.
B. reduce the interest rate and increase capital inflows.
C. increase the interest rate and reduce capital inflows.
D. increase both the interest rate and capital inflows.
80. Contractionary monetary policy tends to:
A. reduce the interest rate, reduce capital inflows, and lower the value of the dollar.
B. reduce the interest rate, increase capital inflows, and lower the value of the dollar.
C. raise the interest rate, reduce capital inflows, and raise the value of the dollar.
D. raise the interest rate, raise capital inflows, and raise the value of the dollar.
81. The direct effect of expansionary monetary policy is to:
A. increase both U.S. imports and the value of the dollar.
B. increase U.S. imports but reduce the value of the dollar.
C. reduce both U.S. imports and the value of the dollar.
D. reduce U.S. imports but increase the value of the dollar.
82. The direct impact of contractionary monetary policy is to:
A. raise U.S. income, increase U.S. imports, and raise the value of the dollar.
B. raise U.S. income, increase U.S. imports, and lower the value of the dollar.
C. lower U.S. income, reduce U.S. imports, and raise the value of the dollar.
D. lower U.S. income, reduce U.S. imports, and lower the value of the dollar.
83. Refer to the graph shown. The shift in the supply curve from S1 to S2 could not be the result
of:
A. an increase in the U.S. inflation rate.
B. a decrease in U.S. interest rates.
C. expansionary monetary policy.
D. contractionary monetary policy.
84. Refer to the graph above. If the supply curve shifts from S1 to S2, the value of the dollar
will:
A. increase in response to excess demand equal to Q4 – Q2.
B. increase in response to excess demand equal to Q3 – Q1.
C. decrease in response to excess supply equal to Q4 – Q2.
D. decrease in response to excess supply equal to Q3 – Q1.
85. Contractionary monetary policy tends to push the U.S. price level:
A. down and lower the exchange rate.
B. up and lower the exchange rate.
C. down and raise the exchange rate.
D. up and raise the exchange rate.
86. Expansionary monetary policy tends to:
A. lower U.S. prices, make exports more expensive relative to imports, and lower the value of
the dollar.
B. lower U.S. prices, make exports cheaper relative to imports, and raise the value of the dollar.
C. raise U.S. prices, make exports cheaper relative to imports, and raise the value of the dollar.
D. raise U.S. prices, make exports more expensive relative to imports, and lower the value of the
dollar.
87. Contractionary monetary policy tends to:
A. lower U.S. prices, make exports more expensive relative to imports, and lower the value of
the dollar.
B. lower U.S. prices, make exports cheaper relative to imports, and raise the value of the dollar.
C. raise U.S. prices, make exports cheaper relative to imports, and raise the value of the dollar.
D. raise U.S. prices, make exports more expensive relative to imports, and lower the value of the
dollar.
88. Expansionary monetary policy affects domestic income in a way that causes:
A. imports to rise.
B. imports to fall.
C. exports to rise.
D. exports to fall.
89. Contractionary monetary policy affects domestic income in a way that causes:
A. exports to fall.
B. output to rise.
C. a fall in the value of the dollar.
D. imports to fall.
90. Contractionary monetary policy generally:
A. pushes a country's exchange rate down.
B. has no effect upon the exchange rate.
C. pushes a country's exchange rate up.
D. only affects the value of a country's exports.
91. Contractionary monetary policy:
A. lowers the U.S. interest rate and increases the U.S. exchange rate.
B. lowers the U.S. interest rate and decreases the U.S. exchange rate.
C. increases the U.S. interest rate and decreases the U.S. exchange rate.
D. increases the U.S. interest rate and increases the U.S. exchange rate.
92. In a single month, the Russian ruble declined some 90 percent against the dollar. In Russia,
which of the following policies could have slowed this decline?
A. An increase in income tax rates
B. A reduction in income tax rates
C. An increase in the money supply
D. Areduction in the money supply
93. If the United States wants to strengthen the value of the dollar, it should use:
A. contractionary fiscal policy.
B. expansionary fiscal policy.
C. contractionary monetary policy.
D. expansionary monetary policy.
94. Monetary policy has an:
A. unambiguous effect on exchange rates because the income, price, and interest rate effects
offset one another.
B. unambiguous effect on exchange rates because the income, price, and interest rate effects
reinforce one another.
C. ambiguous effect on exchange rates because the income, price, and interest rate effects offset
one another.
D. ambiguous effect on exchange rates because the income, price, and interest rate effects
reinforce one another.
95. Foreign exchange market intervention is most likely to stabilize exchange rates if:
A. exchange rate changes reflect changes in long-term economic fundamentals.
B. exchange rate changes reflect short-term fluctuations around the long-term equilibrium
exchange rate.
C. governments overestimate the long-term equilibrium exchange rate.
D. governments underestimate the long-term equilibrium exchange rate.
96. Direct exchange rate intervention:
A. gives government the ability to fix exchange rates at any level they choose.
B. gives government greater power over exchange rates than the market.
C. gives government limited control over exchange rates.
D. has no effect on exchange rates.
97. A currency support policy consists of the:
A. selling of a currency to offset fluctuation in supply and demand for the currency.
B. buying of a currency to maintain its value above its long-term equilibrium value.
C. buying of a currency to maintain its value below its long-term equilibrium value.
D. selling of a currency to maintain its value above its short-term equilibrium value.
98. In theory, a direct exchange rate policy can succeed if the objective is exchange rate
stabilization. However, in practice, this success also depends on the:
A. level of the official reserves that the central bank holds.
B. right estimation of the long-term equilibrium exchange rate.
C. right estimation of the short-term equilibrium exchange rate.
D. level of deviation between the official and the short-term exchange rate.
99. A currency stabilization policy:
A. tries to keep the value of a currency above its equilibrium value.
B. is more effective in the long run than a currency support policy.
C. is less effective in the long run than a currency support policy.
D. is one form of a currency support policy.
100. Currency stabilization policy is:
A. always successful.
B. successful only if the government can identify the long-run equilibrium value of the exchange
rate.
C. successful only if the government does not attempt to affect market expectations.
D. never successful.
101. Strategic currency stabilization:
A. involves frequent exchange rate intervention.
B. involves carefully timed exchange rate intervention.
C. is successful only if the government does not attempt to affect market expectations.
D. can be successful only if governments possess large amounts of official reserves.
102. Which of the following would most likely cause an increase in the supply of dollars?
A. An expansionary fiscal policy that raised U.S. income and increased U.S. imports
B. An expansionary fiscal policy that raised U.S. income and reduced U.S. imports
C. A contractionary fiscal policy that reduced U.S. income and lowered U.S. imports
D. A contractionary fiscal policy that reduced U.S. income and increased U.S. imports
103. In late 1994 and early 1995, the Mexican peso fell by more than 40 percent. In an effort to
strengthen the peso, the then President of Mexico Zedillo concentrated on the effects of inflation
on the value of the peso. His plan most likely included:
A. increasing government spending.
B. increasing the money supply.
C. increasing domestic taxes.
D. decreasing domestic taxes.
104. Considering its effects through income, the price level, and interest rates only,
contractionary fiscal policy causes the value of a country's currency to:
A. fall.
B. rise.
C. remain unchanged.
D. move unpredictably.
105. Expansionary fiscal policy tends to:
A. reduce both U.S. interest rates and U.S. capital inflows.
B. reduce U.S. interest rates but increase U.S. capital inflows.
C. increase U.S. interest rates but reduce U.S. capital inflows.
D. increase both U.S. interest rates and U.S. capital inflows.
106. Considering its effects through income, the price level, and interest rates only,
expansionary fiscal policy causes the value of a country's currency to:
A. fall.
B. rise.
C. remain unchanged.
D. move unpredictably.
