Homework 12 - Chapter 21

Free capital mobility; an independent monetary policy

The United States chooses to have ________ and ________ and therefore, cannot have a fixed exchange rate at the same time.

Inflow; financial crisis

A capital ________ can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks, which helps trigger a ________.

Outflow; devalue

A capital ________ can promote financial instability in an emerging-market country because it is what forces a country to ________ its currency.

Can cause a lending boom and lead to excessive risk taking

A case for capital inflow controls can be made because capital inflows ______.

Purchase; sale

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant.

Sale; Purchase

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base, everything else held constant.

Purchase; higher; increases

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of foreign currencies leads to ________ international reserves which ________ the monetary base.

Sale; higher; increases

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of its currency leads to ________ international reserves which ________ the monetary base.

Increasing; reducing

A current account surplus indicates that America is ________ its claims on foreign wealth, while a deficit indicates that this country is ________ its claims on foreign wealth.

Sterilized

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called a(n) _______ foreign exchange intervention.

Weak; strong; fixed

A speculative attack involves massive sales of a __________ currency or purchases of a __________ currency that cause a sharp change in the exchange rate under a _________exchange rate system.

Surplus

If the current account balance shows a surplus, and the capital account also shows a surplus, then the balance of payments has a _____.

Deficit; surplus

A balance of payments ________ is associated with a loss of international reserves, while a balance of payments ________ is associated with a gain.

Hybrid of a fixed exchange rate and flexible exchange rate system

Because central banks have not been willing to give up their option of intervening in the foreign exchange market, the current international financial system can best be described as a _______.

Has no effect on the exchange rate

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 ______.

Outflows; inflows

Capital ________ are American purchases of foreign assets, and capital ________ are foreign purchases of American assets.

A fixed exchange rate; an independent monetary policy

China chooses to have ________ and ________ and therefore, cannot have free capital mobility at the same time.

Depreciate; more

Countries with balance of payments deficits do not want to see their currencies ________ because it makes foreign goods ________ expensive for domestic consumers.

Appreciate; more

Countries with surpluses in their balance of payments frequently do not want to see their currencies ________ because it makes their goods ________ expensive abroad.

Not be affected

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

Sale; decrease

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

Purchase; increase

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

Sale; 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 ________.

Purchase; depreciate

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

Increase; appreciate

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 ________.

Decrease; appreciate

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

Free capital mobility, a fixed exchange rate

Hong Kong chooses to have ________ and ________ and therefore, cannot have an independent monetary policy at the same time.

Acquire; increasing

If a central bank does not want to allow the domestic currency to appreciate, it will ________ international reserves by selling its currency, thereby ________ the monetary base and increasing the risk of higher inflation.

Lose; decreasing

If a central bank does not want to allow the domestic currency to depreciate, it will ________ international reserves by purchasing its currency, thereby ________ the monetary base and increasing the risk of higher unemployment.

Rise; Weakening

If a central bank does not want to see its currency ________ in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby ________ its currency.

Rise; weakening

If a central bank does not want to see its currency ________ in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby ________ its currency.

Contractionary; raise

If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency.

Expansionary; lower

If a central bank does not want to see its currency rise in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby weakening its currency.

Gains; rises

If the United States has a current account deficit with England of $1 million, and the Bank of England sells $1 million worth of pounds in the foreign exchange market, then England ________ $1 million of international reserves and its monetary base ________ by $1 million.

Loses; falls

If the United States has a current account surplus with England of $2 million, and the Bank of England buys $2 million worth of pounds in the foreign exchange market, then England ________ $2 million of international reserves and its monetary base ________ by $1 million.

Hurt domestic businesses by making foreign goods cheaper in their country

Policymakers in a country with a balance of payments surplus may not want to see their country's currency appreciate because this would _______.

IMF

The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.

Deficit countries losing international reserves were not willing to devalue their currencies (NOT)

The Bretton Woods system broke down in the early 1970s because______.

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

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

Current account

The account that shows international transactions involving currently produced goods and services is called the ________.

Capital account

The account that shows international transactions involving financial transactions (stocks, bonds, bank loans, etc.) is called the _________.

Exchange rates fluctuate in response to, but are not determined solely by, market forces

The current international financial system is a managed float exchange rate system because _________.

Contractionary; strengthen

To keep from running out of international reserves under the Bretton Woods system, a country had to implement ________ monetary policy to ________ its currency.

Appreciating; revalue

Under a fixed exchange rate regime, a central bank that does not want to acquire international reserves to keep its currency from ________ will decide to ________ its currency.

Depreciating; devalue

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.

Domestic; foreign

Under a fixed exchange rate regime, if a central bank must intervene to purchase the ________ currency by selling ________ assets, then, like an open market sale, this action reduces the monetary base and the money supply, causing the interest rate on domestic assets to rise.

Reduces; rise

Under a fixed exchange rate regime, if a central bank must intervene to purchase the domestic currency by selling foreign assets, then, like an open market sale, this action ________ the monetary base and the money supply, causing the interest rate on domestic assets to ________.

Undervalued; gain

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

Overvalued; loss

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

Decpreciating; loss

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.

Appreciating; gain

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

Depreciating

Under a fixed exchange rate regime, if a country's central bank runs out of international reserves, it cannot keep its currency from _______.

Overvalued; below

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to purchase the domestic currency by selling foreign assets.

Undervalued; above

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets.

Domestic; foreign

Under a fixed exchange rate regime, if the domestic currency is initially overvalued, that is, below par, the central bank must intervene to purchase the ________ currency by selling ________ assets.

Domestic; foreign

Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is, above par, the central bank must intervene to sell the ________ currency by purchasing ________ assets.

Lose; devaluing

Under a fixed exchange rate system, countries that ran large, persistent balance of payments deficits would ________ international reserves, thereby pressuring them into ________ their exchange rate.

Gain; revaluing

Under a fixed exchange rate system, countries that ran large, persistent balance of payments surpluses would ________ international reserves, thereby pressuring them into ________ their exchange rate.

Depreciation; lower

Under the Bretton Woods system, if IMF loans were insufficient to prevent ________ of a currency, then the country was allowed to devalue its currency by setting a new, ________ exchange rate.

Deficit; contractionary

Under the Bretton Woods system, the IMF could encourage ________ countries to pursue ________ monetary policies that would strengthen their currency or eliminate their balance of payment deficits.

Reserve-currency country

Under the Bretton Woods system, the United States was designated as the ________.

Surpluses; appreicate

Under the current managed float exchange rate regime, countries with ________ in their balance of payments frequently do not want to see their currencies ________ because it makes their goods more expensive abroad and foreign goods cheaper in their countries.

Deficits; depreciate

Under the current managed float exchange rate regime, countries with balance of payments ________ frequently do not want to see their currencies ________ because it makes foreign goods more expensive for domestic consumers and can stimulate inflation.

Undergone dollarization

When a country forgoes its own currency and starts using another country's currency as its own, we say that this country has _______.

Created a currency board

When a domestic currency is completely backed by a foreign currency and the note-issuing authority establishes a fixed exchange rate to this foreign currency, then the country is said to have _______.

Bigger

When the balance of payments has a deficit, private payments made to foreigners are ________ than private payments received from foreigners.

Smaller

When the balance of payments has a surplus, private payments made to foreigners are ________ than private payments received from foreigners.

Unsterilized

When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called a(n) _______ foreign exchange intervention.

Purchase; decline

When the domestic currency is initially overvalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________.

Sell; increase

When the domestic currency is initially undervalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________.

Devaluation

_________ means official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.

Revaluation

_________ of a currency means an official increase of the value of a currency in relation with a foreign currency in a fixed exchange rate.