Econ int finance Lecture 7

Which one of the following statements is the MOST accurate?

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?

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?

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?

Devaluation causes a rise in output.

Under fixed exchange rates, which one of the following statements is the MOST accurate?

Devaluation causes an expansion of the money supply.

Which one of the following statements is the MOST accurate?

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

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. A) depreciation; out of; more B) depreciation; into; more C) appreciation; out of; less D) depreciation; out of; less E) appreciation; into; less

E

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

Exchange rate union

Which one of the following statements is the MOST accurate?

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

Which one of the following statements is the MOST accurate?

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?

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

Which one of the following statements is most correct?

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 accurate?

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?

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?

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

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.

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

manage; peg

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 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.

Which one of the following statements is most correct?

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.

Under fixed rates, which one of the following statements is the MOST accurate?

Monetary policy can affect only international reserves.

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.

Which one of the following statements is the most correct?

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.

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

Managed Floating