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Q:
Assume that two Caribbean countries announce that they will be coordinating monetary policy. This is because their currencies are considered:
a. Substitutes
b. Compliments
c. Inferior
d. Vulnerable
Q:
Which of the following best describe the process of overshooting when money supply increases?
a. Exchange rates depreciate more than necessary due to overreaction in financial markets, but are restored as prices fall in response to the greater money supply.
b. Exchange rates depreciate more than necessary due to overreaction in financial markets, but are restored as prices rise in response to the greater money supply.
c. Exchange rates appreciate more than necessary due to overreaction in financial markets, but are restored as prices rise in response to the greater money supply.
d. Exchange rates appreciate more than necessary due to overreaction in financial markets, but are restored as prices fall in response to the greater money supply.
Q:
The following example supports which extension to the Monetary Approach to Exchange rates: Due to a sudden increase in American productivity, the U.S. dollar depreciated.
a. General equilibrium approach
b. Trade balance approach
c. Overshooting approach
d. Currency substitution approach
Q:
In the ________, changes in exchange rates occur because of changes in tastes or technology and are part of the adjustment to a shock to the world economy.
a. Balance of payments approach
b. Equilibrium approach
c. News approach
d. Exchange rate approach
Q:
The following example supports which extension to the Monetary Approach to Exchange rates: The announcement of a new trade deal between South Korea and Japan, lead investors to predict that Japan may be a path to a trade deficit. Thus, the Japanese yen saw an immediate decline in value.
a. Portfolio balance approach
b. Trade balance approach
c. News approach
d. Currency substitution approach
Q:
The following example supports which extension to the Monetary Approach to Exchange rates: Due to changes in the pricing of risk premiums, investors adjust holdings of foreign assets causing an appreciation of domestic currency.
a. Portfolio balance approach
b. Trade balance approach
c. Overshooting approach
d. Currency substitution approach
Q:
The following example supports which extension to the Monetary Approach to Exchange rates: The cost of holding a U.S. dollar rises relative to the cost of holding U.K. Pounds. The demand shifts away from dollars to Pounds.
a. General equilibrium approach
b. Trade balance approach
c. Overshooting approach
d. Currency substitution approach
Q:
The following example supports which extension to the Monetary Approach to Exchange rates: Suppose the money supply increases. The initial change of the spot price exceeds that of its long-run value.
a. General equilibrium approach
b. Trade balance approach
c. Overshooting approach
d. Currency substitution approach
Q:
The following example supports which extension to the Monetary Approach to Exchange rates: The chairman of a central bank announces a new monetary policy. Immediately, there is a change in the exchange rate.
a. News approach
b. Trade balance approach
c. Equilibrium approach
d. Overshooting approach
Q:
If the portfolio balance approach is true then which of the following will directly lead to changes in the exchange rate?
a. A monetary policy announcement
b. A fiscal policy announcement
c. A shift in the demand for foreign bonds
d. A shift in the relative cost of a substitute currency
Q:
When a high degree of currency substitution exists, in order to prevent currencies from becoming too variable:
a. Central banks must not intervene.
b. Countries need international coordination of monetary policy.
c. Fixed currency rates must be adopted.
d. Exchange markets must be temporarily closed.
Q:
If the currency substitution approach is true, then a change to domestic money supply that causes currency depreciation could mean:
a. Further depreciation as individuals switch the substitute currency.
b. Central banks must intervene to maintain the fixed exchange rate of substitute currencies.
c. The decline in money supply will offset any depreciation.
d. The increase in money supply will cause further depreciation.
Q:
According to the ________, if the cost of holding one currency rises relative to the cost of holding another, then demand will shift to the lower relative cost currency.
a. Overshooting approach
b. Currency substitution approach
c. Portfolio-balance approach
d. Trade balance approach
Q:
According to the _______, high exchange rate volatility is explained by the failure of PPP to hold in the short run.
a. Overshooting approach
b. News approach
c. Portfolio-balance approach
d. Trade balance approach
Q:
According to the ________, the current exchange rate is affected by changes in expectation about future trade flow.
a. Overshooting approach
b. News approach
c. Portfolio-balance approach
d. Trade balance approach
Q:
What approach assumes that assets are imperfect substitutes internationally because investors perceive foreign exchange risk to be attached to foreign assets?
a. Balance of payments approach
b. Equilibrium approach
c. Portfolio-balance approach
d. Trade balance approach
Q:
In general, the basic Monetary Approach to Exchange Rate (MAER) does not capture the short run volatility of:
a. Prices
b. Money supply
c. Exchange rates
d. Foreign currency inflation
Q:
According to the general equilibrium approach of open-economy macroeconomic model, if South Korea had a significant technological progress in the past decade, which allowed them to produce more goods at much lower prices than the rest of the world, then we would expect the Korean won to __________.
a. appreciate
b. depreciate
c. stay the same
d. None of the above is correct, since productivity has nothing to do with exchange rate.
Q:
Which of the following is correct about the news approach to exchange rate determination?
a. Government must control the news to prevent excessive exchange rate volatilities.
b. News reduces the information costs and thus stabilizes the exchange rate movements.
c. News make people act irrationally.
d. News affects peoples expectations about the future, causing high swings in exchange rates.
Q:
If people expect the domestic currency to depreciate against foreign currency in the near future, they will immediately shift from _______ currency to ______ currency, causing an immediate _________ of the foreign currency.
a. domestic; foreign; appreciation
b. domestic; foreign; depreciation
c. foreign; domestic; appreciation
d. foreign; domestic; depreciation
Q:
If a country has a trade surplus, the domestic holdings of foreign currency will tend to _______ and the foreign currency will _______.
a. decrease; depreciate
b. decrease; appreciate
c. increase; depreciate
d. increase; appreciate
Q:
___________ assumes that domestic and foreign bonds are imperfect substitutes.
a. The monetary approach to exchange rate
b. The portfolio-balance approach
c. The currency substitution approach
d. The overshooting theory
Q:
Assume that China and the U.S. are in a managed floating exchange rate agreement. Suppose that the Fed decreases the money supply by 50%. Chinas central bank lets the exchange rate partly adjust and also intervenes in foreign exchange market. What would happen to the foreign reserve position for the U.S. and the exchange rate $/yuan?
a. Foreign reserves decrease and exchange rate decreases.
b. Foreign reserves increases and exchange rate increases.
c. Foreign reserves decrease and exchange rate increases.
d. Foreign reserves increase and exchange rate decreases.
Q:
Which of the following equations correctly represents the monetary approach to the exchange rate (MAER)?
a. b. c. d.
Q:
In a perfectly floating exchange rate regime, according to the monetary approach to the exchange rate (MAER), what would be the effect of a decrease in U.S. output growth by 3% on the dollar price of a Swiss franc ($/SFr)?
a. Swiss franc would depreciate against the dollar.
b. Swiss franc would appreciate against the dollar.
c. The exchange rate remains unaffected.
d. The dollar would appreciate against the Swiss Franc.
Q:
Which of the following equations correctly represents the monetary approach to the balance of payments (MABP)?
a. b. c. d.
Q:
According to the monetary approach of the balance of payments (MABP), if the foreign inflation rate decreases 50%, the U.S. foreign reserves will
a. increase because foreign central bank buys U.S. dollars and sells its currency.
b. increase because foreign central bank buys its currency and sells U.S. dollars.
c. decrease because foreign central bank buys U.S. dollars and sells its currency.
d. decrease because foreign central bank buys its currency and sells U.S. dollars.
Q:
According to the monetary approach of the balance of payments (MABP), an increase in U.S. money supply growth will cause the U.S. foreign reserves ():
a. to fall, as foreign central bank selling its currency and buying U.S. dollars.
b. to fall, as foreign central bank selling U.S. dollars and buying its currency.
c. to rise, as foreign central bank selling its currency and buying U.S. dollars.
d. to rise, as foreign central bank selling U.S. dollars and buying its currency.
Q:
To derive the monetary approach, we need money demand equals to money supply and:
a. leakages equal injections.
b. absolute purchasing power parity to hold.
c. covered interest parity to hold.
d. All of the above are correct.
Q:
When the central bank increases the money supply,
a. the money supply curve shifts to the left and interest rate rises.
b. the money supply curve shifts to the left and interest rate falls.
c. the money supply curve shifts to the right and interest rate rises.
d. the money supply curve shifts to the right and interest rate falls.
Q:
When Chinas central bank authorities acquire U.S. dollars faster than the Federal Reserve Bank acquires Chinese yuan, then the percentage change of U.S. international reserves ():
a. decreases
b. increases
c. stays the same
d. increases first and then decreases.
Q:
According to the monetary approach, when a monetary disequilibrium exists, either ____________ or _____________ has to adjust depending on the type of exchange rate system.
a. the balance of payments; domestic production
b. the balance of payments; exchange rate value
c. domestic production; exchange rate value
d. domestic production; foreign inflation rate
Q:
According to Humes Specie Flow Mechanism, during the Gold Standard, if the domestic inflation rises sharply, the domestic country will experience ___________ and the foreign trading partner will experience __________.
a. trade deficit; higher prices.
b. trade deficit; lower prices.
c. trade surplus; higher prices.
d. trade surplus; lower prices.
Q:
The MABP implies that the change in international reserves equals to the foreign inflation rate plus the growth rate of domestic output minus the change in domestic money creation.
Q:
Under MABP, the full effect of the monetary policy is felt on the exchange rate.
Q:
Inflation from one country can be transmitted to another if a floating exchange rate is being used.
Q:
The MAER emphasizes money demand and money supply as determinants of exchange rate movements.
Q:
The monetary approach states that, under a fixed exchange rate system, an excess demand for money leads to a trade deficit.
Q:
The official holdings of gold and foreign exchange, special drawing rights (SDRs), and changes in reserves at the International Monetary Fund are known as:
a. Official settlements balance
b. Central bank holdings
c. Current account balance
d. Capital account balance
Q:
Suppose the Bank of England is using a managed floating exchange regime. In order to keep money supply constant the Bank of England exchanges domestic bonds for foreign bonds to slow any appreciation of the pound while keeping the British money supply unchanged. This process is known as:
a. Sterilized intervention
b. The monetary approach
c. Exchange rate intervention
d. Balancing official settlements.
Q:
Action by a central bank to offset the effect of a foreign exchange intervention, on the domestic money supply, by using the open-market operations is known as:
a. Monetary protectionism
b. Sterilized intervention
c. Currency creation
d. Injecting money supply
Q:
The offsetting of international reserve flows by central banks that wish to follow an independent monetary policy is known as:
a. Printing money
b. Balancing the official settlements
c. The monetary approach
d. Sterilization
Q:
The monetary approach in the case of a managed floating exchange rate:
a. Is like that of currency boards.
b. Introduces variables to represent changes in fiscal policy.
c. Is a combination of MABP and MAER.
d. Is not possible to model.
Q:
Assume floating exchange rates. Suppose there are a 5% growth in U.S output and the Fed increases in U.S. money supply by 5%. Then, which of the following will offset these changes?
a. 10% increase in exchange rate.
b. 10% decrease in exchange rate.
c. 10% increase in the foreign inflation.
d. The two changes offset each other.
Q:
Assume floating exchange rates. Suppose there are a 5% growth in U.S output and a 5% increase in foreign inflation. Then, which of the following will offset these changes?
a. 10% increase in money supply.
b. 10% decrease in money supply.
c. 10% increase in the exchange rate.
d. The two changes offset each other.
Q:
Assume there is a reduction in U.S. output. Then under MAER there will be a(n):
a. Increase in domestic money supply
b. Decrease in domestic money supply
c. Increase in the exchange rate (dollar/foreign currency)
d. Decrease in the exchange rate (dollar/foreign currency)
Q:
Suppose that the U.S. Fed increases the money supply by 10%. Then under MAER:
a. The exchange rate (dollar/foreign currency) rises by 10%
b. The exchange rate (dollar/foreign currency) falls by 10%
c. Foreign inflation rises by 10%
d. Foreign inflation falls by 10%
Q:
Which of the following statements are true?
I. Under MAER, central bank intervention is used to restore equilibrium.
II. Under MAER, monetary policy in one country does not affect other countries.
a. I only
b. II only
c. I and II
d. Neither I nor II
Q:
One key implication of the MABR is that expansionary monetary policy:
a. Always increases output.
b. Always decreases output.
c. Alters output in the short run, but not in the long run.
d. Does not alter output in the short run or the long run.
Q:
Suppose the U.S. income grows by 4 percent. Under the MABR, which of the following percentage changes could offset this growth?
a. International reserves increase by 2 percent and foreign inflation rises by 2 percent
b. International reserves increase by 2 percent and foreign inflation falls by 2 percent
c. International reserves decrease by 2 percent and foreign inflation rises by 2 percent
d. International reserves decrease by 2 percent and foreign inflation falls by 2 percent
Q:
If the U.S. income grows, then
a. U.S. money supply decreases
b. U.S. money supply increases
c. U.S. money demand decreases
d. U.S. money demand increases
Q:
Suppose that the Fed increases the U.S. money supply and the Bretton Woods system of fixed exchange rates is still in place. Then to maintain the fixed exchange rate, foreign central banks intervene by:
a. Raising the interest rate on dollars.
b. Buying dollars and selling its currency.
c. Raising the interest rate on its currency.
d. Selling dollars and buying its currency.
Q:
The MABP implies that the ________ equals to the foreign inflation rate plus the growth rate of domestic output minus the change in domestic money creation.
a. National interest rate
b. Holdings of gold
c. Change in exchange rates
d. Change in international reserves
Q:
The MAER emphasizes money demand and money supply as determinants of:
a. The balance of payments under the fixed exchange rate.
b. The balance of payments under the floating exchange rate.
c. Exchange rate movements
d. Capital flows
Q:
The MABP emphasizes money demand and money supply as determinants of:
a. The balance of payments under the fixed exchange rate.
b. The balance of payments under the floating exchange rate.
c. Exchange rate movements
d. Capital flows
Q:
Currency plus commercial bank reserves held against deposits:
a. Base money
b. Temporary money
c. International credit
d. Domestic reserves
Q:
The basic premise of the monetary approach is that:
a. Exchange rate movements change according to uncontrolled shocks.
b. Holdings of international reserves should be minimized.
c. Any balance of payments disequilibrium is based on a monetary disequilibrium.
d. Peoples willingness to hold money can alter exchange rates but not the balance of payments.
Q:
Suppose that a central bank sells domestic currency to buy foreign assets to fix the exchange rate. To sterilize this intervention, the central bank will have to:
a. buy bonds in the open market operations to increase domestic money supply.
b. buy bonds in the open market operations to decrease domestic money supply.
c. sell bonds in the open market operations to increase domestic money supply.
d. sell bonds in the open market operations to decrease domestic money supply.
Q:
An unsterilized intervention in which a central bank sells domestic currency to buy foreign assets will lead to:
a. an increase in foreign reserves
b. a decrease in domestic money supply
c. an appreciation of domestic currency
d. All of the above are correct.
Q:
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. a balance-of-payment exchange rate rule.
d. monetary neutrality.
Q:
A central bank sale of _____ to purchase ______ in the foreign exchange market results in a rise in its international reserves and the money base.
a. foreign assets; domestic currency
b. foreign assets; foreign currency
c. domestic currency; foreign assets
d. domestic currency; domestic currency
Q:
In the Bretton Woods system, if the U.S. increases its money supply, foreign central banks will have to intervene by ______ dollars and ______ foreign currencies to maintain a fixed exchange rate.
a. selling; selling
b. selling: buying
c. buying; selling
d. buying; buying
Q:
Sterilized intervention is the policy that:
a. targets a domestic inflation rate within a certain range of values.
b. attempts to influence exchange rate movements with official statements on the governments preferred rate, without taking any direct action in the financial markets.
c. coordinates monetary and fiscal policies with ones trading partners so as to achieve particular international economic outcomes.
d. offsets private capital movements with changes in the asset portfolio of the central bank.
Q:
Under the flexible exchange rate, an increase in the foreign price level leads to a domestic currency __________.
a. appreciation
b. depreciation
c. devaluation
d. overshooting
Q:
Starting from a position where a countrys money demand equals the money supply and its balance of payments is in equilibrium. According to the monetary approach, an expansionary monetary policy will lead to a(n) ______ of the home currency under flexible exchange rate regime; whereas it will cause trade _______ under fixed exchange rate.
a. depreciation; deficit
b. depreciation; surplus
c. appreciation; deficit
d. appreciation; surplus
Q:
The monetary approach is derived from the assumption(s) that:
a. money demand equals money supply.
b. money demand is a fixed proportion of the domestic price level times real income.
c. the law of one price holds.
d. All of the above are correct.
Q:
True or false: Under the fixed exchange rate, inflation from one country can be transmitted to the other country.
Q:
True or false: According to the monetary approach, a balance-of-payments disequilibrium is the result of an imbalance in a countrys money supply and money demand.
Q:
True or false: Under the specie flow mechanism, a trade-surplus nation would realize gold inflows, an increase in its money supply, and a rise of domestic inflation.
Q:
True or false: Under the monetary approach to exchange rate, a rise in domestic income will cause a depreciation of domestic currency.
Q:
True or false: Under the monetary approach to exchange rate, a rise in domestic money supply will cause a depreciation of domestic currency.
Q:
Under the flexible exchange rate regime, which of the following variables in the monetary approach becomes zero and is dropped out of the equation?
a. Percentage change in domestic credit
b. Percentage change in spot exchange rate
c. Percentage change in foreign reserves
d. Percentage change in money demand
Q:
Base money equals to:
a. domestic credit plus domestic bonds
b. domestic credit plus international reserves
c. domestic credit minus international reserves
d. domestic bonds plus foreign bonds
Q:
Starting from a position where a nations money demand equals the money supply and its balance of payments is in equilibrium. According to the monetary approach to the balance of payments, when the nations central bank increases money supply, the balance of trade moves into ________ position and net official holding of foreign reserves ________.
a. surplus; increases
b. surplus; decreases
c. deficit; increases
d. deficit; decreases
Q:
According to the monetary approach to the balance of payments, which of the following economic events would help a country to resolve its balance of trade deficit?
a. An increase in money supply
b. A decrease in money supply
c. A fall of foreign price level
d. A fall of domestic income
Q:
True or false: The balance of payment equilibrium implies that current account equals to zero.
Q:
True or false: Under flexible exchange rate system, fiscal policy is ineffective, but monetary policy is effective in changing domestic income.
Q:
True or false: An expansionary monetary policy shifts the LM curve to the right and causes the domestic interest rate to rise.
Q:
True or false: The BP curve could be vertical, if capital is perfectly mobile.
Q:
True or false: The assumptions of perfect substitutability of assets and perfect capital mobility mean that interest rates on domestic assets and comparable foreign assets will be equalized.