Question 1

A balance of payments crises under fixed exchange rates occurs when
A) marginal returns on foreign exchange investments approach zero.
B) a country runs out of foreign reserves.
C) a country is in a liquidity trap.
D) forward currency markets undergo high volatility.
E) exports and imports expand beyond some point.

Accepted Answer

A balance of payments crisis under fixed exchange rates occurs when a country runs out of foreign reserves. In a fixed exchange rate system, a country's central bank must balance the demand and supply of its currency at the fixed exchange rate. If the demand for the country's currency exceeds the supply, the central bank must sell its foreign reserves to meet the demand. If the demand for the currency continues to exceed the supply, the central bank's foreign reserves will eventually run out, leading to a balance of payments crisis.

Question 2

Under the gold standard, if the dollar price of gold is pegged at $35 per ounce and the dollar/euro exchange rate is set at $2.40 per euro, what must the euro price of gold be pegged at?

Accepted Answer

The answer of Under the gold standard, if the dollar...

Question 3

List the drawbacks of the gold standard.

Accepted Answer

The answer of List the drawbacks of the gold standard....

Question 4

Explain how a country whose currency is the reserve currency can use monetary policy for macroeconomic stabilization. In particular, explain the result if that country doubled its domestic money supply.

Accepted Answer

The answer of Explain how a country whose currency is...

Question 5

From the figure below, please provide an explanation for the large decline in the growth rate of international reserves held by developing countries in the 2008-2009 period.

Accepted Answer

The answer of From the figure below, please provide an...

Question 6

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.
A) decrease; leave unchanged
B) increase; decrease
C) increase; increase
D) decrease; decrease
E) leave unchanged; decrease

Accepted Answer

The answer of If assets are imperfect substitutes, then a...

Question 7

Balance of payments crises under fixed exchange rates occur because of
A) government policies that are inconsistent with fixed exchange rates.
B) punitive currency wars.
C) global inflation and trade imbalances due to war.
D) excessive exports and imports that overload the global system.
E) monotonic expansion in global currency volume.

Accepted Answer

Balance of payments crises under fixed exchange rates occur when government policies are inconsistent with the fixed exchange rates. For example, if a country pursues expansionary fiscal policies that lead to excessive imports, this can lead to a depletion of foreign reserves, making it difficult to maintain the fixed exchange rate. Similarly, if a country pursues an overly restrictive monetary policy, this can lead to a recession, causing a decline in exports and a depletion of foreign reserves. In both cases, the government's policies are inconsistent with the fixed exchange rate regime, leading to a balance of payments crisis.

Question 8

Assume that initially, the risk premium, ρ = 0 and that the domestic and foreign interest rates are given by R = .06, R* = .05. Suppose that the risk premium depends linearly on the difference between domestic government debt, B, and domestic assets of the central bank, A, i.e.,
ρ =  How much will the central bank have to reduce domestic assets A s.t. the domestic interest rate will increase by (a) 1% (b) 4%?

Accepted Answer

The answer of Assume that initially, the risk premium, ρ...

Question 9

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.
A) increase; leave unchanged
B) increase; decrease
C) increase; increase
D) decrease; decrease
E) leave unchanged; decrease

Accepted Answer

The answer of If assets are imperfect substitutes, then an...

Question 10

Please briefly describe what is meant by a gold exchange standard.

Accepted Answer

The answer of Please briefly describe what is meant by...

Question 11

From 1837 and up until the Civil War, the United States adhered to a
A) gold standard.
B) silver standard.
C) bimetallic standard.
D) bronze standard.
E) copper standard.

Accepted Answer

From 1837 to the Civil War, the United States adhered to the bimetallic standard, which allowed for both gold and silver to be used as legal tender in the country. This system was later replaced by the gold standard in 1873.

Question 12

Use a figure to show the effect of a sterilized central bank purchase of foreign assets under the imperfect asset substitutability assumption.

Accepted Answer

The answer of Use a figure to show the effect...

Question 13

Under the gold standard, if the dollar price of gold is pegged at $35 per ounce and the euro price of gold is pegged at 12 euro per ounce, what is the dollar/euro exchange rate?

Accepted Answer

The answer of Under the gold standard, if the dollar...

Question 14

Briefly discuss the main advantage of the bimetallic standard over the gold standard.

Accepted Answer

The answer of Briefly discuss the main advantage of the...

Question 15

This question concerns the mechanism of a reserve currency standard.
Two countries, X and Y, have two currencies, x and y, fixed to the reserve currency, the U.S. dollar. Suppose the exchange rate between x and the U.S. dollar is 3x per dollar. Suppose the exchange rate between y and the U.S. dollar is 5y per dollar. Explain (using numbers) the mechanism if the x-y exchange rate was 0.5 x per y.

Accepted Answer

The answer of This question concerns the mechanism of a...

Question 16

Describe the mechanism which would take place if the Bank of England decides to increase its money supply by purchasing domestic assets under the gold standard.

Accepted Answer

The answer of Describe the mechanism which would take place...

Question 17

This question concerns the mechanism of a reserve currency standard.
Two countries, X and Y, have two currencies, x and y, fixed to the reserve currency, the U.S. dollar. Suppose the exchange rate between x and the U.S. dollar is 3x per dollar. Suppose the exchange rate between y and the U.S. dollar is 5y per dollar. Explain (using numbers) the mechanism if the x-y exchange rate was 0.8 x per y.

Accepted Answer

The answer of This question concerns the mechanism of a...

Question 18

From the Civil War up to 1914, the United States adhered to a
A) gold standard.
B) silver standard.
C) bimetallic standard.
D) bronze standard.
E) copper standard.

Accepted Answer

From the Civil War up to 1914, the United States adhered to the gold standard, in which the value of the dollar was pegged to a fixed amount of gold. This meant that the government would redeem any paper currency in circulation for its equivalent value in gold.

Question 19

Does the signalling effect of foreign exchange intervention support or refute the claim that assets cannot be perfect substitutes if sterilized intervention is going to have any effect? Please explain.

Accepted Answer

The answer of Does the signalling effect of foreign exchange...

Question 20

Assume that initially, the risk premium, ρ = 0 and that the domestic and foreign interest rates are given by R = .06, R* = .05. Suppose that the risk premium depends linearly on the difference between domestic government debt, B, and domestic assets of the central bank, A, i.e.,
ρ =  Find the new domestic interest rate if a sterilized purchase of foreign assets adjusts A s.t.
(a) B - A = -.01/  (b) B - A = .01/  (c) B - A = .03/

Accepted Answer

The answer of Assume that initially, the risk premium, ρ...

Quiz 18: Fixed Exchange Rates and Foreign Exchange Intervention

A balance of payments crises under fixed exchange rates occurs when

Under the gold standard, if the dollar price of gold is pegged at $35 per ounce and the dollar/euro exchange rate is set at $2.40 per euro, what must the euro price of gold be pegged at?

List the drawbacks of the gold standard.

Explain how a country whose currency is the reserve currency can use monetary policy for macroeconomic stabilization. In particular, explain the result if that country doubled its domestic money supply.

From the figure below, please provide an explanation for the large decline in the growth rate of international reserves held by developing countries in the 2008-2009 period.

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.

Balance of payments crises under fixed exchange rates occur because of

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.