econ final- new material
A Japanese television sells for ¥100,000 and a dollar is equal to ¥100. What is the dollar price of the television?
$1000
Suppose the exchange rate is 10 pesos per dollar and you use $1000 to purchase a one-year Mexican bond that pays 10% interest. Next year, the exchange rate is 11 pesos per dollar. Assuming you convert your funds back to U.S. dollars, how much money will you have in one year?
$1000
Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar. How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of
-28%
The primary discount rate is kept ________ the federal funds rate because the Fed prefersthat ________
0.5% above; banks borrow reserves from each other.
According to PPP, the real exchange rate between two countries will always equal
1.0
If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for an American investor the expected rate of return on euro-denominated assets is
11 percent
If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico, the law of one price indicates that you should be able to exchange $1 for
40 pesos
If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on dollar-denominated assets is
9 percent.
The fixed exchange rate regime established at a meetingin New Hampshire in 1944 has been known as the
Bretton Woods system.
if the japanese yen appreciates against the US dollar
Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan.
What was the name of the plan, enacted in 2011, in which the Fed bought $400 billion worth of long-term securities while selling $400 billion worth of short-term securities?
Operation Twist
Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem?
The Fed's liquidity provision
If U.S. inflation is 2%, Japanese inflation is 1%, and Mexican inflation is 3%, which of the following is true according to the theory of purchasing power parity?
The dollar should rise by 1% versus the peso and fall by 1% versus the yen.
Under the theory of purchasing power parity, an increase in the U.S. price level of 10% relative to the Japanese price level will result in
a 10% appreciation of the yen
The exchange rate system followed by the United States is known as
a flexible (floating) exchange rate system.
The policy directive from the FOMC is carried out by
account manager at the Federal Reserve Bank of New York
Foreign-exchange market interventions will always
alter a central bank's holdings of international reserves.
A Federal Reserve repurchase agreement involves
an agreement by a dealer to buy back securities she has sold to the Fed.
A change in the dollar value of the British pound from $1.60 to $1.50 represents
an appreciation of the dollar relative to the pound.
A purchase of foreign assets by a central bank has the same impact on the monetary base as:
an open market purchase of government securities
A sale of foreign assets by a central bank has the same effect on the monetary base as
an open market sale of government bonds.
The process by which identical products that are tradeable converge to the same price is called
arbitrage
Dynamic open market operations
are aimed at achieving changes in monetary policy.
dynamic open market operations
are aimed at achieving changes in monetary policy.
Open market operations
are more flexible than other policy tools.
International reserves are
assets denominated in a foreign currency and used in international transactions.
If a central bank wishes to raise the foreign-exchange value of its currency, it will
buy domestic currency and sell foreign assets.
Why may a central bank intervene in the foreign exchange market when its currency is appreciating?
concerns about the country's exports becoming less competitive
In order to meet the target of higher federal funds rate, the Fed would normally
conduct open market sales.
which of the following is a liability of the fed
currency in circulation
Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant,this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.
decrease; depreciate
Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate in the U.S. than was expected. Everything else held constant, the release of the CPI report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar would ________.
decrease; depreciate
In the market for reserves, a lower interest rate paid on excess reserves
decreases the effective floor for the federal funds rate
Suppose there is an increase in demand of reserves in the federal funds market. If the FederalReserve wishes to keep the effective federal funds rate close to the target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.
defensive; purchase
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
If iPhone 5 costs $600 in US and €550 in France and exchange rate between dollar and euro is $1.2/€, then law of one price
does not hold and exchange rate should go down
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 ________ demand for dollar assets, everything else held constant.
dollar; foreign; higher
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
Which of the following is NOT considered to be a goal of monetary policy?
fair wages
Deliberate actions by a central bank to influence the exchange rate are known as
foreign-exchange market interventions.
John Smith leaves his job in New York to go to California in hopes of finding a better one. If John Smith is unemployed while searching for a job in California, economists would consider him to be
frictionally unemployed.
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, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4%
has no effect on the federal funds rate.
An unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency will result in
higher domestic interest rates
An unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency will result in
higher domestic interest rates.
The law of one price states that
identical goods should have the same price anywhere in the world.
the law of one price states that
identical goods should have the same price anywhere in the world.
Under which circumstance is the Fed most likely to carry out a defensive open market operation?
if a snowstorm results in a delay in check clearing, resulting in an increase in the Federal Reserve float
An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.
increase; appreciate
An increase in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.
increase; appreciate
Everything else held constant, if a central bank makes an unsterilized purchase of foreign assets, then the domestic monetary base will ________ and the domestic currency will ________
increase; depreciate
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant.
increases; raising
Most economists believe that a zero rate of unemployment
is inconsistent with a well-functioning economy.
if the fed desired to reduce the federal funds rate
it would conduct an open market purchase, increasing reserve supply.
When the Fed sells foreign assets and buy domestic assets at the same time
its assets and liabilities fall by the same amount.
When the Fed sells foreign assets and buy domestic assets at the same time,
its assets and liabilities fall by the same amount.
If the Fed buys $2 billion of short-term securities issued by the government of Japan and pays for them by writing a check for $2 billion,
its assets will rise by $2 billion and the monetary base will rise by $2 billion. AND its assets and liabilities will both rise by $2 billion
When a centralbank buys foreign assets
its holdings of foreign assets and the monetary base rise by the amount of the purchase.
Reserve requirements are changed
less frequently than open market operations are conducted and less frequently than the discount rate is changed
A substantial appreciation of the U.S. dollar will likely result in, all else equal,
lower demand for U.S. products and layoffs of U.S. workers.
If Sony keeps the price of PlayStation 3 constant in terms of dollars, what is the impact on Sony of a stronger yen?
lower profit
Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve, lowering the interest rate paid on excess reserves
lowers the federal funds rate.
Inflation is an economic problem because it
makes prices less useful as signals for resource allocation.
The theory of purchasing power parity assumes that
movements in nominal exchange rates are the result of movements in relative price levels
Expansionary monetary policy consists of all of the following EXCEPT
open market sales.
How does the Open Market Trading Desk conduct its operations?
over-the-counter electronically with private securities dealers
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.
overvalued; loss
How can the Fed reduce the implicit tax on banks resulting from reserve requirements?
paying interest on reserves
nder the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves.
pounds; marks; losing
Discount loans available to health banks which can be used for any purpose are called
primary credit
Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic monetary base will ________ and the domestic currency will depreciate.
purchase; increase
the fed pledges to continue QE3 until
real GDP and employment returned to more normal levels
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 ________.
reduces; rise
If the Fed wants to reduce the value of the dollar, it will
sell dollars and buy foreign assets.
If the Fed wants to increase the value of the dollar, it will
sell foreign securities and buy dollars in international currency markets
In the federal funds market diagram, an open market sale by the Fed
shifts the reserve supply curve to the left.
In the federal funds market diagram, an open market sale by the Fed
shifts the reserve supply curve to the right
The main reason central banks engage in foreign-exchange interventions is to
stabilize the exchange rate
Sally Jones lost her job at a steel company because of a permanent decline in the demand for steel. Sally Jones is considered by economists to be
structurally unemployed
When a country's nominal exchange rate depreciates, the price of
that country's goods abroad decreases.
If the price level in the United States increases more slowly than the price level in Canada, we would expect
the Canadian dollar to depreciate against the U.S. dollar.
If the Fed sells $1 billion of short-term securities issued by the Bank of Japan and at the same time purchases $1 billion of short-term securities issued by the U.S. Treasury,
the Fed has conducted a sterilized foreign-exchange intervention.
If the inflation rate in the United States is higher than that in Mexico then in the long run ________, everything else held constant.
the Mexican peso will appreciate relative to the U.S. dollar
the default risk premium is
the additional yield a saver requires for holding a bond with some default risk
When the Fed sells foreign assets and buy domestic assets at the same time,
the composition of its assets changes, but its liabilities are unaffected
central bank may be reluctant to see its currency appreciate becuase
the country's goods may become uncompetitive in world markets
the demand for us dollars represents
the demand for U.S. goods and financial assets by households and firms outside the United States.
If the Fed sterilizes the purchase of foreign assets,
the monetary base is left unchanged AND the composition of its assets changes, but its liabilities are unaffected
If the Fed sterilizes the purchase of foreign assets
the monetary base is left unchanged.
When Ben Bernanke referred to the exit strategy of the Fed, he was referring to:
the process by which the Fed would shrink its balance sheet
If pepperoni pizzas sell for $10 in Berkeley, California, and £10 in London, England, and the exchange rate is $1.35 = £1,
there is no contradiction in the information given because pizza is not a tradeable good.
What is one of the goals of Fed's asset purchase program
to reduce long-term interest rates
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.
undervalued; above
When the Fed allows the monetary base to respond to the purchase or sale of domestic currency in the foreign exchange market, the process is called
unsterilized intervention
Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate
when the funds rate equals the interest rate paid on excess reserves
