International Macro exam 2 CH 17, 18, 19, 20
Which one of the following statements is the most accurate? Question content area bottom Part 1 A. An increase in disposable income improves the current account. B. An increase in income improves the current account. C. An increase in disposable income does not affect the current account. D. An increase in income worsens the current account. E. An increase in disposable income worsens the current account.
An increase in disposable income worsens the current account.
Disposable income is defined as:
Y−T
Under a floating exchange rate regime, an increase in the demand for a country's exports will lead to
an increase in output that is smaller than would be under a fixed exchange rate regime.
By external balance, most economists mean
avoiding excessive imbalances in international payments.
Some claim that the long and agonizing periods of speculation preceding exchange rate realignments would
become less severe under floating.
Which of the following is one component of the "trilemma" that is faced by policy makers in choosing monetary arrangements? Question content area bottom Part 1 A. restrictions on international capital movements B. exchange rate stability C. tariffs and subsidies D. global inflation E. restrictions on the migration of labor
exchange rate stability
Organizations whose members agree to fix their mutual exchange rates while allowing their currencies to fluctuate in value against the currencies of nonmember countries are called
exchange rate unions.
Because a country with a current account deficit is transferring wealth to foreigners, domestic consumption is ________ over time and foreign consumption is ________.
falling; rising
Under the gold standard, the primary responsibility of a central bank was to
fix the exchange rate between its currency and gold.
The gold standard, like a reserve currency system, results in
fixed exchange rates between all currencies.
In the short run, a permanent increase in the domestic money supply
has stronger effects on the exchange rate and output than an equal temporary increase.
The outcome of the government's expansionary monetary policy that leads to high inflation without average gain in output is called
inflation bias.
By fixing the exchange rate, the central bank gives up its ability to
influence the economy through monetary policy.
If central banks were no longer obliged to intervene in currency markets to fix exchange rates, governments would be able to use monetary policy to reach
internal and external balance.
An increase in the real exchange rate
makes imports more expensive.
A sudden decrease in the U.S. price level
makes those with dollar debts worse off.
A government spending multiplier
measures the size of the increase in output caused by an increase in government spending.
In the short run
monetary expansion causes the CA to increase & fiscal expansion causes the CA to decrease.
A temporary increase in an economy's money supply produces
no change in the long-run expected exchange rate, a depreciation of its currency, and a rise in its output and employment.
A temporary fiscal expansion in an economy produces
no change in the long-run expected exchange rate, an appreciation of its currency, and a rise in its output and employment.
The percent by which import prices rise when the home currency depreciates by 1% is the degree of
pass−through from exchange rates to import prices.
The "rules of the game" under the gold standard can best be described as which of the following:
selling domestic assets in a deficit and buying assets in a surplus.
Inflation targeting is a process where a central bank
sets a specific inflation target to help set inflation expectations.
Under the fixed rate regime foreign countries could hold their dollar exchange rates constant by
setting their domestic interest rate equal to the U.S. interest rate.
In the short run, a tax decrease
shifts the DD-curve to the right, increases output, and appreciates the currency.
A combination of stagnating output and high inflation is called
stagflation.
Central banks sometimes carry out equal foreign and domestic asset transactions in opposite directions to nullify the impact of their foreign exchange operations on the domestic money supply. This type of policy is called
sterilized foreign exchange intervention.
Fiscal expansion
stimulates aggregate demand and causes output to rise.
When countries begin to have trouble meeting their payments on past foreign loans, foreign creditors become reluctant to lend them new funds and may even demand immediate repayment of the earlier loans. Economists refer to such an event as a sudden ________ in foreign lending.
stop
In the short−run, we assume that the money prices of goods and services are
temporarily fixed.
Which currency is not only the key vehicle currency in the global foreign exchange market but also the dominant invoice currency?
the U.S. dollar
In the short run, a country's overall output level depends on ________; in the long run, domestic output depends only on ________.
the aggregate demand for its products; the available domestic supplies of factors of production such as labor and capital
What is a reverse currency?
the currency central banks hold in their international reserves
Under fixed exchange rate, the response of an economy to a temporary fall in foreign demand for its exports is
the currency remains the same, and output decreases.
Under flexible exchange rate, the response of an economy to a temporary fall in foreign demand for its exports is
the currency depreciates, and output falls.
Under a fixed exchange rate, the foreign exchange market is in equilibrium when the interest parity condition holds—that is
the domestic and foreign interest rates are equal, R=R*.
Imperfect asset substitutability assumes:
the returns on foreign and domestic currency differ and are influenced by risk.
The J−curve illustrates which of the following?
the short−term effects of depreciation on the current account
The economy as a whole is in equilibrium only
when both the output market and the asset markets are in equilibrium.
If an economy is in a liquidity trap, then the nominal interest rate is ________ and the only effective policy that can be used to stimulate the economy is ________.
zero or negative; expansionary fiscal policy
Britain returned to the gold standard in ________, then left again in ________ when foreign holders of sterling lost confidence in Britain's promise to maintain the currency's value and began converting their sterling to gold.
1925; 1931
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
The net foreign wealth of an economy with a ________ is ________ over time.
deficit; falling
Given P and P*, a rise in E ________ net exports and ________ the current account.
raises; improves
What is a concern regarding excessive use of lender of last resort facilities?
It creates moral hazard for banks, and they may become too reckless.
Equity Instruments include
stocks
Which of the following is a good description of portfolio diversification? Part 2 A. "Don't count your chickens before they hatch." B. "Don't put all your eggs in one basket." C. "A bird in the hand is better than two in the bush." D. All describe aspects of diversification.
"Don't put all your eggs in one basket."
With imperfect asset substitutability, sterilized purchases of foreign exchange can cause the home currency to ________, and sterilized sales of foreign exchange can cause the home currency to ________.
depreciate; appreciate
A real ________ of the home currency raises aggregate demand for home output, other things equal; a real ________ lowers aggregate demand for home output.
depreciation; appreciation
Why might a country's savings rate have a high positive correlation to its investment rate?
governments' regulation to avoid large current account balances
The ________ a bank's capital, the ________ chance it becomes insolvent due to losses in asset values.
lower; higher
Because each consumer demands ________ goods and services as his or her real income ________, consumption will ________ as disposable income ________ at the aggregate level.
more; rises; increase; increases
Under a gold standard, whenever a country is losing reserves and seeing its money supply ________ as a consequence, foreign countries are gaining reserves and seeing their money supplies ________.
shrink; expand
Alan Auerbach and Yuriy Gorodnichenko of the University of California, Berkeley, analyzed data from mostly wealthy OECD member countries and found that for economies in recession, the multiplier is about
2
Which of the following statements is TRUE?
A rise in EP*/P makes domestic goods and services cheaper relative to foreign goods and services and shifts both domestic and foreign spending from foreign goods to domestic goods.
________ are at the center of the international capital market. They run international payments mechanism and a broad range of financial activities.
Commercial banks
If the economy's output is initially above full employment, which of the following policy combinations could restore full employment and keep the exchange rate at the same level?
Contractionary monetary and fiscal policy.
At the end of the Bretton Woods system, what combination of policies would have maintained the system?
Contractionary monetary policy in the US and expansionary policy abroad.
Which one of the following statements is true? Question content area bottom Part 1 A. Countries with weak investment opportunities should invest more at home. B. Countries with weak investment opportunities should invest little abroad. C. Countries with weak investment opportunities should invest little abroad and channel their savings into more productive investment activity domestically. D. Countries with strong investment opportunities should invest little at home and channel their savings into more productive investment activity abroad. E. Countries with weak investment opportunities should invest little at home and channel their savings into more productive investment activity abroad.
Countries with weak investment opportunities should invest little at home and channel their savings into more productive investment activity abroad.
Which one of the following statements is the most accurate? Question content area bottom Part 1 A. Depreciation is a decrease in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed. B. Depreciation is a rise in E when the exchange rate floats while devaluation is a decrease in E when the exchange rate is fixed. C. Depreciation is a rise in E when the exchange rate is fixed while devaluation is a rise in E when the exchange rate floats. D. Depreciation is a rise in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed. Your answer is correct. E. None of the above.
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.
Which one of the following statements is the most accurate? Question content area bottom Part 1 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. Your answer is correct. C. Fiscal policy cannot affect output under fixed exchange rate but does affect output under flexible exchange rate regimes. D. Fiscal policy affects output less under fixed than under flexible exchange rate regimes. E. Fiscal 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.
Which one of the following statements is the most accurate? Question content area bottom Part 1 A. For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by a depreciation of domestic currency, all else equal. B. For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of foreign currency, all else equal. C. For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by a depreciation of foreign currency, all else equal. D. For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic currency, all else equal. Your answer is correct. E. For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of domestic currency, all else equal.
For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic currency, all else equal.
Under the price−specie−flow mechanism, what happens when, say, Great Britain's current account surplus is greater than its non−reserve financial account balance?
Gold reserves will flow into Great Britain.
Which of the following statements is TRUE? Question content area bottom Part 1 A. Governments continued with the gold standard during World War I and used gold to finance their massive military expenditures. B. Governments effectively suspended the gold standard during World War I and financed part of their massive military expenditures by borrowing money from other countries. C. Governments continued with the gold standard during World War I and increased gold reserves to finance the reconstruction process. D. Governments effectively suspended the gold standard during World War I and financed part of their massive military expenditures by printing money.
Governments effectively suspended the gold standard during World War I and financed part of their massive military expenditures by printing money.
Which of the following statements is the MOST accurate? Question content area bottom Part 1 A. International trade in assets can make both parties to the trade worse off by allowing them to eliminate all risk by portfolio unification. B. International trade in assets can make both parties to the trade worse off by allowing them to increase the riskiness of return by portfolio diversification. C. International trade in assets can make both parties to the trade better off by allowing them to reduce the riskiness of return by portfolio diversification. D. International trade in assets can make both parties to the trade better off by allowing them to eliminate all risk by portfolio unification.
International trade in assets can make both parties to the trade better off by allowing them to reduce the riskiness of return by portfolio diversification.
What is "too big to fail" policy?
It is a government's policy to protect big banks when they get into trouble because their failures may set off a chain reaction that throws the entire financial system into crisis.
In the short run, with prices fixed, how would an increase in government spending affect the DD−AA equilibrium?
It will increase output and appreciate the currency.
A bank faced with a large and sudden loss of deposits is likely to shut down despite fundamentally sound balance sheet. Why could this be?
Many bank assets are illiquid and cannot be sold quickly to meet deposit obligations without substantial loss to the bank.
Which of the following is TRUE of the current account balance?
Monetary expansion increases the current account balance.
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 of the following statements is true for the U.S.? Question content area bottom Part 1 A. The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against losses up to $250,000. B. The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against losses up to $100,000. C. The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against natural disaster up to $100,000. D. The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against losses up to $10,000. E. The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against floods up to $100,000.
The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against losses up to $250,000.
Which of the following statements is TRUE? Question content area bottom Part 1 A. The gold standard allowed monetary policy to pursue internal policy goals, but did not allow high degrees of exchange rate stability and international financial capital mobility. B. The gold standard did not allow high degrees of exchange rate stability, international financial capital mobility, and monetary policy to pursue internal policy goals. C. The gold standard allowed high degrees of exchange rate stability and international financial capital mobility, but did not allow monetary policy to pursue internal policy goals. D. The gold standard allowed high degrees of exchange rate stability, international financial capital mobility, and monetary policy to pursue internal policy goals.
The gold standard allowed high degrees of exchange rate stability and international financial capital mobility, but did not allow monetary policy to pursue internal policy goals.
Which of the following is an example of an "unconventional monetary policy" by a central bank?
The purchase of specific categories of assets with new money.
Under a reserve currency standard, what would happen if all countries were trying to simultaneously increase their holdings of foreign bonds (assume they all are perfect substitutes) in their official reserves?
There will be no problem.
Why was the IMF created?
To manage the system of fixed exchange rates after World War II.
Between the end of World War II and 1973, the main reverse currency that almost every country pegged the exchange rate of its money was the
U.S. dollar.
The top four major currencies in countries' international reserve holdings include
U.S. dollar, euro, British pound, and Japanese yen.
Which of the following statements is TRUE? Question content area bottom Part 1 A. Under a gold standard, countries with limited gold reserves cannot participate. B. Under a gold standard, each country is not responsible for pegging its currency's price in terms of the official international reserve asset, gold. C. Under a gold standard, each country fixes the price of its currency in terms of gold by standing ready to trade domestic currency for gold whenever necessary to defend the official price. Your answer is correct. D. Under a gold standard, all countries set the same price of their currency in terms of gold.
Under a gold standard, each country fixes the price of its currency in terms of gold by standing ready to trade domestic currency for gold whenever necessary to defend the official price.
Why did world central banks need to continue to accumulate dollars in the Bretton Woods system?
World gold was not rising fast enough to satisfy reserves demand.
Until the Civil War, the United States had
a bimetallic monetary standard consisting of silver and gold.
To hold the exchange rate constant,
a central bank must always be willing to trade currencies at the fixed exchange rate with the private actors in the foreign exchange market.
Under a floating exchange rate regime, an increase in money demand will lead to
a decline in output that is larger than would be under a fixed exchange rate regime.
In order to bring about a real depreciation of the dollar, the U.S. can hope for
a rise in foreign price levels or a fall in the dollar's nominal value in terms of foreign currencies.
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.
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.
The purpose of the Basel Committee was to:
achieve a better coordination of the surveillance exercised by national authorities over the international banking system.
A managed floating exchange rate refers to
an exchange rate that is not pegged, but does not float freely.
In long−run equilibrium after a permanent money−supply increase there follows:
an increase in exchange rate, E.
Advocates of flexible exchange rates claim that under flexible exchange rates, the central bank of
an overheated economy could cool down activity by contracting the money supply without worrying that undesired reserve inflow would undermine its stabilization effort.
When the central bank buys an asset from the public, ________ in central bank liabilities associated with the asset purchase causes the money supply to ________. When the central bank sells an asset to the public, ________ in central bank liabilities causes the money supply to ________.
an increase; expand; a decrease; shrink
Under fixed exchange rates, domestic asset transactions by the central bank
can be used to alter the level of foreign reserves but not to affect the state of employment and output.
Trade in assets between countries, like trades involving goods and services,
can yield benefits to all the countries involved.
In a financially integrated world in which funds can move instantly between national financial markets, fixed exchange rates
cannot be credibly maintained over the long run unless countries are willing to maintain controls over capital movements (as China does).
Main actors in the international capital markets do NOT include
casinos and gamblers.
Which type of main institution in the international capital market most often is involved in foreign exchange intervention?
central banks
In a system of floating exchange rates,
central banks do not intervene in the foreign exchange market to fix rates.
What structures make up the international capital markets?
commercial banks, corporations, non−bank financial institutions, the central banks, and other government agencies
Aggregate demand for an open economy's output is the sum of
consumption demand, investment demand, government demand, and net export demand.
The Basel committee
continues to be the major forum for cooperation in the regulation of international banking.
Eurodollars are
dollar deposits located outside the USA.
Banks in the U.S.
face rules against lending too large a fraction of their assets to a single private customer or to a single foreign government borrower.
A financial trilemma constrains what policy makers in an open economy can achieve. At most, two goals from the following list of three are simultaneously feasible
financial stability, national control over financial safeguard policy, freedom of international capital movements.
U.S. reserve requirements
force banks to hold a portion of its assets in a liquid form easily mobilized to meet sudden deposit outflows.
A central bank's international reserves consists of its holdings of
foreign assets and gold.
International currency trades take place in the ________ market, which is an important part of the international market.
foreign exchange
By internal balance, most economists mean
full employment and domestic price level stability.
As a country begins to liberalize its capital account, what would you expect to happen to the difference between the interest rates for similar assets in this country and another country with open capital markets?
get smaller
Government supervisors such as a central bank or a separate financial supervision authority
have the right to examine a bank's books to ensure compliance with bank capital standards and other regulations.
Which of the following is NOT among the quantitative indicators for the U.S. Department of the Treasury to judge whether it should name a country a currency manipulator? Question content area bottom Part 1 A. official net intervention purchases of foreign currency totaling more than 2 percent of GDP, taking place in at least six of the past twelve months B. having an inflation rate of more than 10 percent a year C. having an overall (multilateral) current account surplus of more than 2 percent of GDP D. having a bilateral trade surplus of more than $20 billion with the United States
having an inflation rate of more than 10 percent a year
If one compares low-inflation economies with economies in which inflation is high and very volatile, the degree of exchange rate pass-through is likely to be The reasoning behind the correct response given above centers on the
higher in the high-inflation economies. ability and willingness of foreign sellers to alter their foreign currency prices.
Investors much prefer to invest in domestic stocks rather than diversifying abroad. This situation is called
home bias.
The Current Account may fall after a real depreciation because
import orders are placed in advance and a depreciation raises the domestic price.
A temporary fiscal expansion (with full employment) will
increase GDP.
What is the basic motive for asset trade?
increase expected returns and reduced risk
When a central bank lends to banks facing massive deposit outflows as much as they need to satisfy their depositors' claims, it is acting as a ________ to safeguard against financial panic conditional on the bank's sound management.
lender of last resort
In the U.S., banks
may be forced by bank examiner to adjust their balance sheets by writing off loans the examiner thinks will not be repaid.
When an economy is in a liquidity trap,
monetary policy cannot be used to influence the exchange rate.
To avoid procedural delays, governments are likely to respond to disturbances by changing ________ even when a shift in ________ would be more appropriate.
monetary policy; fiscal policy
The case where people purposely act in a careless way, for example, driving recklessly because they are insured, is called:
moral hazard.
The international capital market is:
not really a single market, but a group of closely interconnected markets in which asset exchanges with some international dimension take place.
A business's use of a bank located outside of the home country is called
offshore banking.
International trade reduces the risk by allowing both parties to trade to divide their wealth among a wide spectrum of assets. This is described as
portfolio diversification.
When selecting assets, people make decisions based on the riskiness of each asset's return. People dislike risk and economists call this property of people's preferences
risk averse.
Suppose one is offered a gamble in which you win $1,000 half the time but lose $1,000 half the time. Since in this case one is as likely to win as to lose the $1,000, the average payoff on this gamble—its expected value—is: 0.5 * $1,000 + 0.5 * (−$1,000) = 0. Under such circumstances:
risk lovers and risk neutral individuals may take the gamble.
Corporations routinely finance their investments to obtain foreign sources of funds in the international capital market including
selling shares of stocks and debt financing.
Examining onshore-offshore interest differentials
shows little unexploited gain, suggesting international markets are somewhat unified.
The Basel Committee was set up in 1974 to
strengthen the regulation, supervision, and practices of banks worldwide with the purpose of enhancing financial stability.
National financial regulators often face fierce lobbying from their home financial institutions, which argue that
stricter rules would put them at a disadvantage relative to foreign rivals.
The global financial crisis in 2007 started as a result of
the U.S. subprime mortgage crisis.
The collapse of the Bretton Woods system marked
the end of fixed exchange rates and a move to floating exchange rates.
Intertemporal trade is
the exchange of good and services for claims to future goods and services.
A J-curve describes
the gradual effect of real depreciation on the current account.
What is an appropriate definition for "securitization"?
the repackaging of bank assets into readily marketable forms
If a country's nominal interest rate is zero, then
the country's economy is in a liquidity trap.
The macroprudential perspective on financial regulation seeks
to ensure the financial system as a whole is sound.
A. Central banks that were persistently losing gold
took actions that resulted in pushing domestic interest rates upward.
