International Economics Chapter 7

Which one of the following statements is most correct? A) Any central bank purchase of assets automatica lly results in an increase in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline. B) Any central bank purchase of assets results in an increase in the domestic money supply, while any central b ank sale of assets causes the money supply to decline. C) Any central bank purchase of assets automatically results in a decrease in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline. D) Any c entral bank purchase of assets automatically results in a decrease in the domestic money supply, while any central bank sale of assets automatically causes the money supply to increase. E) Any central bank purchase of assets automatically results in an inc rease in the domestic money supply, while any central bank sale of assets does not necessarily affect the money supply.

Any central bank purchase of assets automatically results in an increase in the domestic money supply, while any central bank sale of assets automatically causes the money supply to decline.

Which one of the following statements is the MOST accurate? A) Appreciation is a rise in E when the exchange rate floats while revaluation is a fall in E when the exchange rate is fixed. B ) Appreciation is a fall in E when the exchange rate floats while revaluation is a fall in E when the exchange rate is fixed. C) Appreciation is a fall in E when the exchange rate is fixed while revaluation is a fall in E when the exchange rate is flexible . D) Appreciation is a fall in E when the exchange rate floats while revaluation is a rise in E when the exchange rate is fixed. E) Appreciation is a rise in E when the exchange rate floats while revaluation is a rise in E when the exchange rate is fixed.

Appreciation is a fall in E when the exchange rate floats while revaluation is a fall in E when the exchange rate is fixed.

Which one of the following statements is the MOST accurate? A) Depreciation is a rise in E when the exchange rate is fixed while devaluation is a rise in E when the exchange r ate floats. B) Depreciation is a decrease in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed. C) Depreciation is a rise in E when the exchange rate floats while devaluation is a rise in E when the exchange r ate is fixed. D) Depreciation is a rise in E when the exchange rate floats while devaluation is a decrease in E when the exchange rate is fixed. E) Depreciation is a fall in E when the exchange rate is fixed while devaluation is a fall in E when the exchan ge rate floats

Depreciation is a rise in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed

Under fixed exchange rates, which one of the following statements is the MOST accurate? A) Devaluation causes a decrease in output, a decre ase in official reserves, and a contraction of the money supply. B) Devaluation causes a rise in output, a rise in official reserves, and an expansion of the money supply. C) Devaluation causes a rise in output and a rise in official reserves. D) Devaluati on causes a rise in output and an expansion of the money supply. E) Devaluation causes a rise in official reserves, and an expansion of the money supply

Devaluation causes a rise in output, a rise in official reserves, and an expansion of the money supply.

Under fixed exchange rates, which one of the following statements is the MOST accurate? A) Devaluation causes a rise in output. B) Devaluation causes a decrease in output. C) Devaluation has no effect on output. D) Devaluation causes a rise in output and a decrease in official reserves. E) Devaluation cau ses a decrease in output and in official reserves.

Devaluation causes a rise in output.

Under fixed exchange rates, which one of the following statements is the MOST accurate? A) Devaluation causes a reduction of the money supply. B) Devalua tion has no effect on the stock of money. C) Devaluation causes an expansion of the money supply. D) Devaluation causes a reduction in output. E) Devaluation causes a reduction in official reserves

Devaluation causes an expansion of the money supply.

Which one of the following statements is the MOST accurate? A) Devaluation reflects a deliberate government decision. B) Depreciation reflects a deliberate government decision. C) Devaluation reflects a d eliberate government decision while depreciation is an outcome of government actions and market forces acting together. D) Depreciation reflects a deliberate government decision while devaluation is an outcome of government actions and market forces acting together. E) Devaluation and depreciation have the same meaning and the same causes

Devaluation reflects a deliberate government decision while depreciation is an outcome of government actions and market forces acting together.

Which of the following is an example of a regional currency arrangment?

Exchange rate union

Which one of the following statements is the MOST accurate? A) Fiscal policy has the same effect on employment under fixed and flexible exchange rate regimes. B) Fiscal policy affects employment less under fixed than under flexible exchange rate regimes. C) Fiscal policy affects employment more under fixed than under flexible exchange rate regimes. D) Fiscal policy canno t affect employment under fixed exchange rate but does affect output under flexible exchange rate regimes. E) Fiscal policy can affect employment under fixed exchange rate regimes, but does not affect output under flexible exchange rate regimes

Fiscal policy affects employment more under fixed than under flexible exchange rate regimes.

Which one of the following statements is the MOST accurate? A) Fiscal policy has the same effect on output under fixed and flexible exchange rate regimes. B) Fiscal policy affects output more under fixed than under flexible exchange rate regimes. C) Fiscal policy affects output less under fixed than under flexible exchange rate regimes. D) Fiscal policy cannot affect output under fixed exchange rate but does affect output under flexible exchange rate regimes. E) Fisc al policy can affect output under fixed exchange rate but does not affect output under flexible exchange rate regimes

Fiscal policy affects output more under fixed than under flexible exchange rate regimes

Under fixed rates, which one of the following statements is the MOST accurate? A) Fiscal policy can affect output, employment and international reserves at the same time. B) Fiscal policy can affect only employment. C) Fiscal policy can affect only international reserves. D) Fiscal policy can affect only output and employment. E) Fiscal employment can affect only output and international reserves

Fiscal policy can affect output, employment and international reserves at the same time

Which one of the following statements is the MOST accurate? A) Revaluation reflects an outcome of government actions a nd market forces acting together while appreciation reflects a deliberate government decision. B) Revaluation reflects a deliberate government decision while appreciation is an outcome of government actions and market forces acting together. C) Revaluation reflects a deliberate government decision while appreciation is an outcome of government actions. D) Revaluation and appreciation have the same meaning and the same causes. E) Appreciation reflects a deliberate government decision while revaluation is an outcome of government actions and market forces acting together.

Revaluation reflects a deliberate government decision while appreciation is an outcome of government actions and market forces acting together.

Under fixed exchange rate, in general which one of the following statements is the MOST accurate? A) The following condition should hold for domestic money market equilibrium: M s /P = L(R , Y). B) The following condition should hold for domestic money market equilibriu m: M d /P = L(R , Y). C) The following condition should hold for domestic money market equilibrium: M s = L(R , Y). D) The following condition should hold for domestic money market equilibrium: P = L(R , Y). E) The following condition should hold for domestic money market equilibrium: R*M d /P = L(Y).

The following condition should hold for domestic money market equilibrium: Ms/P = L(R, Y).

Which one of the following statements is the MOST accurate? A) Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply. B) Under a flexible exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output. C) Under a fixed exchange rate, fiscal policy tools are powerless to affect the economy's money supply or its output. D ) Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output. E) Under a dirty float exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output.

Under a fixed exchange rate, central bank monetary tools are powerless to affect the economy's money supply or its output

A balance of payments crises under fixed exchange rates occurs when

a country runs out of foreign reserves.

A balance of payments crisis is best described as

a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate

The expectation of future devaluation causes a balance of payments crisis marked by

a sharp fall in reserves and a rise in the home interest rate above the world interest rate.

The expectation of future revaluation causes a balance of payments crisis marked by

a sharp rise in reserves and a fall in the home interest rate below the world interest rate.

A system of managed floating exchange rates is

a system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed

In the interest rate parity condition with imperfect substitutes and a risk premium of ρ

an increased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds.

The global financial crisis of 2007-2008 resulted in a(n) ________ of the Swiss franc. In 2011, the Swiss central bank intervened in order to cause a(n) ________ of the franc

appreciation; depreciation

The global financial crisis of 2007-2008 resulted in a(n) ________ of the Swiss franc as foreign currency flowed ________ the country. As result, Swiss products became ________ competitive in world markets.

appreciation; into; less

From 1837 and up until the Civil War, the United States adhered to a

bimetallic standard.

When a country's currency is devalued

both the output and the money supply increases.

The signaling effect of foreign exchange intervention

can alter the market's view of future monetary policies and cause an immediate exchange rate change.

If assets are imperfect substitutes, then a decrease in the amount of domestic currency bonds held by the public will ________ the risk premium and ________ the amount of domestic currency bonds held by the central bank.

decrease; leave unchanged

Capital flight

decreases reserves and may induce devaluation.

The liabilities side of a central bank's accounts consists of

deposits held by private banks and currency in circulation

The main reason(s) why governments sometimes chose to devalue their currencies is (are)

devaluation improves the current account and increases foreign reserves held by the central bank.

A central bank's international reserves consists of its holdings of

foreign assets and gold

From the Civil War up to 1914, the United States adhered to a

gold standard

Balance of payments crises under fixed exchange rates occur because of

government policies that are inconsistent with fixed exchange rates.

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will ________ the risk premium and ________ the amount of domestic currency bonds held by the central bank.

increase; leave unchanged

By fixing the exchange rate, the central bank gives up its ability to

influence the economy through monetary policy

Which of the following best describes a deliberate government decision to lower the exchange rate, E?

revaluation

Currency crises may result from

speculative attacks on the currency or central banks purchasing excessive amounts of government bonds.

Under fixed exchange rate, in general

the domestic and foreign interest rates are equal, R = R*

Fiscal expansion under fixed exchange rates will have what temporary effect?

the exchange rate will decrease.

Perfect asset substitutability is the assumption that

the foreign exchange market is in equilibrium only when expected returns on domestic assets are equal to returns on foreign currency bonds.

Imperfect asset substitutability assumes

the returns on foreign and domestic currency differ and are influenced by risk

Imperfect asset substitutability exists

when there is risk in the foreign exchange market.

What is the expected dollar rate of return on dollar deposits if today's exchange rate is $1.10 per euro, next year's expected exchange rate is $1.165 per euro, the dollar interest rate is 10%, and the euro interest rate is 5%?

10%

Which one of the following statements is the MOST accurate? A) A devaluation occurs wh en the central bank lowers the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank raises E. B) A devaluation occurs when the central bank raises the domestic currency price of foreign currency, E, and a revaluati on occurs when the central bank lowers E. C) Devaluation occurs when the domestic currency price of foreign currency, E, raises and a revaluation occurs when E is lowered. D) A devaluation occurs when the central bank of the foreign country raises the dome stic currency price of foreign currency, E, and a revaluation occurs when the central bank of the foreign country lowers E. E) A devaluation occurs when the central bank raises the foreign currency price of domestic currency, E, and a revaluation occurs wh en the central bank lowers E.

A devaluation occurs when the central bank raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank lowers E.

When domestic and foreign currency bonds are imperfect substitutes, the domestic interest rate (R) can be written as

R = R* + (Ee - E)/E + ρ.

The interest parity condition can be written as

R = R* + (Ee - E)/E.

Under fixed rates, which one of the following statements is the MOST accurate? A) Monetary policy can affect only output. B) Monetary policy can affect only employment. C) Monetary policy can affect only international reserves. D) Monetary policy can not affect international reserves. E) Monetary policy can only affect money supply.

Monetary policy can affect only international reserves.

Which one of the following statements is most correct? A) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in a foreign central bank's claims on the home country implies a decreased foreign money supply. B) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money demand. C) If central ban ks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply. D) If central banks are not sterilizing and the home cou ntry has a balance of payments shortage, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply. E) If central banks are not sterilizing and the home country has a balance of payments shortag e, any associated decrease in a foreign central bank's claims on the home country implies an increased domestic money supply.

If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in a foreign central bank's claims on the home country implies a decreased foreign money supply.

Which one of the following statements is the most correct? A) If central banks are no t sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign asset implies an increased home money supply. B) If central banks are not sterilizing and the home country has a balance of pay ments surplus, any associated increase in the home central bank's foreign asset implies a decreased home money supply. C) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home centr al bank's foreign asset implies an increased home money demand. D) If central banks are not sterilizing and the home country has a balance of payments surplus, any associated decrease in the home central bank's foreign asset implies an increased home money supply. E) If central banks are not sterilizing and the home country has a balance of payments shortage, any associated decrease in the home central bank's foreign asset implies an increased home money supply

If central banks are not sterilizing and the home country has a balance of payments surplus, any associated increase in the home central bank's foreign asset implies an increased home money supply.

Industrialized countries typically ________ their floating exchange rates. Developing countries often ________ their floating exchange rates.

Manage; peg

Central banks often intervene in currency market. This activity is called

Managed floating