Money and Banking chapter 19

Hyperinflation caused Argentina to do which of the following?

Adopt a currency board

Of the following three, which criteria must a nation meet in order for fixing its exchange rate to be a good (but still difficult) idea, according to the text?a) A bad reputation for controlling past inflationb) An economy well-integrated with the nation with which its currency it will be fixedc) High foreign exchange reserves

All three criteria must be met.

What exchange-rate regimes can be considered hard pegs?

Dollarization Currency boards

When the news reports that the Federal Reserve has bought euro, it would usually be more precise to say that it has bought

German government bonds.

Which of the following is not a potential benefit of a fixed exchange rate system?

Increased control over domestic monetary policy

Which of the following is not a reason a speculative attack may occur?

Insufficient supply of the currency in foreign exchange markets

Which of the following is true about dollarization?

It is a form of fixed exchange rate system.

Which of the following does the text not use as an example of a nation that engages in dollarization?

Japan

Which of the following is not a potential cost of a fixed exchange rate system?

Less credibility of central bank promises to keep inflation low

Which of the following best describes foreign exchange intervention?

The Fed buys Euros from the ECB

Which of the following is true about the Bretton-Woods system?

The dollar could be traded for gold at a fixed rate.

Evaluate each of the following statements and indicate which is true about currency boards?

They provide an example of a hard peg system. With a currency board, the central bank's only function is maintaining the exchange rate. Between 10 and 20 exist today.

Which of the following is not true about currency boards?

They provide an example of dollarization.

Evaluate the following statements and determine which is/are a reason a speculative attack may occur?

Unfounded rumors of currency devaluation A belief that government spending is too high to maintain the current exchange rate An insufficiently capitalized banking system

Which of the following makes domestic monetary policy impossible?

When capital can move freely across national borders

The text describes a spectrum of government involvement in exchange rates. At one extreme is a system of fully-flexible, market-determined exchange rates. The most extreme choice in the opposite direction would be

a hard peg.

When participants in financial markets increase the supply of domestic currency because they anticipate devaluation, it's is called ______

a speculative attack

The central bank

can pursue a fixed exchange rate or independent inflation policy but not both.

Most economists today believe that exchange rate policy must be either

completely flexible or a hard peg.

The difference between a country's exports and imports of goods and services is called the ______.

current account balance

When two bonds that are otherwise identical differ only in their yield,

demand for the higher-yield bond will rise.

When a country formally adopts the currency of the U.S. it is called

dollarization

A central bank that uses capital controls must give up

either fixed exchange rates or control over domestic interest rates.

A sterilized foreign exchange rate intervention consists of a transaction in _______, followed by ________ in the same amount.

foreign currency reserves; open market operations

An institutional mechanism is which the central bank ensures its ability to convert a domestic currency into a foreign currency to which it is pegged is called a

hard peg

Dollarization

has been largely successful in Ecuador.

When a nation maintains an established exchange rate with another nation it

has pegged its currency.

We can imply from the text that a contributing factor to the end of the Bretton-Woods system was

high inflation in the United States during the late 1960s.

Argentina adopted a currency board primarily to fix its

hyperinflation.

When capital can move freely across national borders, a fixed exchange rate makes domestic monetary policy

impossible.

A speculative attack occurs when participants in financial markets _______.

increase the supply of domestic currency because they anticipate devaluation

Restrictions on foreign investment in a nation are called

inflow controls

A foreign exchange rate intervention affects the value of a nation's currency in the short run by affecting

interest rates in that nation.

When a nation pegs its currency to that of another nation, it

maintains an established exchange rate with that nation.

If the Federal Reserve wants to fix the exchange rate between dollars and yen, it

must buy and sell dollars at a fixed rate.

Outflow controls

often include prohibitions on removing currency from a country. include restrictions on the ability of domestic residents to purchase foreign assets.

Large countries generally engage in _________ intervention, which affects __________.

sterilized; the central bank's assets but not the domestic monetary base

In the short run, a nation's exchange rate is based on

supply and demand for its financial assets.

Which of the following tracks the purchase and sale of assets such as stocks, bonds, and real estate across countries?

the current account

The text lists three criteria that a nation must meet for a fixed exchange rate system to be the right choice. If all three criteria are met,

the nation will still find the fixed exchange rate system difficult to maintain.

Purchasing power parity implies that when Japanese inflation is lower than American inflation

the portion of a dollar needed to buy one yen will rise.

If goods can move freely across international borders, a single unit of currency will have _____________ purchasing power in different nations and changes in prices will be met with fluctuations in ____________ rates.

the same; exchange

In the long run, financial investors will be indifferent between domestic and foreign bonds only when _________ are the same

their interest rates

Of the following possible goals of the central bank:a) Fixed exchange ratesb) Control over domestic interest ratesc) Open capital marketsHow many of these can the central bank accomplish at a given time?

two

Because arbitrage exists in the capital market,

two equally risky bonds have the same expected return.

Sterilized exchange rate intervention ________ alter relative asset prices under normal conditions; it changes ______ of the central bank's balance sheet.

will not; the composition