Money and Banking QUIZ 4

If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar, the real depreciates from ________ per real to ________ per real.

$0.67; $0.50

If one U.S. dollar is traded on the foreign exchange market for about 1.15 Swiss francs, then one Swiss franc can purchase about ________ U.S. dollars

0.87

If the exchange at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an interest of 8%. When the asset expires at t+1, you get paid €________. If Et+1 = €1.02/$, then you can buy back $________

1.08; 1.06

According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign currency is expected to depreciate by 2% against domestic currency. Then the foreign asset must offer an interest rate of ________%

14

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is

17 percent

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is

17 percent.

Under a gold standard in which one dollar could be turned in to the U.S. Treasury and exchanged for 1/20th of an ounce of gold and one Swiss Franc could be exchanged for 1/100th of an ounce of gold, an exchange rate of ________ francs to the dollar would stimulate a flow of gold from the United States to Switzerland

4

________ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant

A decrease; appreciate

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

A decrease; decrease

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.

A decrease; depreciate

________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

A decrease; increase

________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant

A decrease; left

Which of the following is NOT a disadvantage of exchange-rate targeting?

It relies on a stable money-inflation relationship

According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected ________ of the foreign currency must be ________ percent

appreciation; 2

When the value of the dollar changes from £0.5 to £0.75, then the British pound has ________ and the U.S. dollar has ________.

depreciated; appreciated

Under a fixed exchange rate regime, a country that depletes its international reserves in an attempt to keep its currency from ________ will be forced to ________ its currency.

depreciating; devalue

Under a fixed exchange rate regime, if a country has an overvalued exchange rate, then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves

depreciating; loss

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent

depreciation; 2

Under exchange-rate targeting, the central bank in the targeting country ________ lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is ________ transmitted to the targeting country

does; directly

As the relative expected return on dollar assets increases, foreigners will want to hold more ________ assets and less ________ assets, everything else held constant.

dollar; foreign

When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets

dollar; foreign

A country that dollarizes

eliminates its seignorage.

In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the

forward exchange rate.

The Policy Trilemma states that a country or a monetary union can't pursue the following three policies at the same time

free capital mobility, a fixed exchange rate, and an independent monetary policy.

Because sterilized interventions mean offsetting open market operations, there is no impact on the monetary base and the money supply, and therefore a sterilized intervention

has no effect on the exchange rate

Everything else held constant, if a central bank makes an unsterilized purchase of foreign assets, then the domestic money supply will ________ and the domestic currency will ________

increase; depreciate

A decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant

left; depreciate

Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves

marks; pounds; gaining

Everything else held constant, if a central bank makes a sterilized purchase of foreign assets, then the domestic currency will

not be affected

A decrease in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant

right; appreciate

An increase in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant

right; appreciate

Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will decrease and the domestic currency will ________.

sale; appreciate