Question 1

Why may a central bank intervene in the foreign exchange market when its currency is appreciating?

Accepted Answer

When a currency appreciates, it can make a country's exports more expensive and less competitive in the global market. A central bank may intervene to prevent this and support the export sector.

Question 2

Throughout most of the post-World War II period,the use of capital controls by governments around the world was declining.But in the late 1990s,a number of governments expressed renewed interest in capital controls.What accounts for this renewed interest?

Accepted Answer

The answer of Throughout most of the post-World War II...

Question 3

A purchase of foreign assets by a central bank has the same impact on the monetary base as

Accepted Answer

A purchase of foreign assets by a central bank involves the central bank buying foreign currency, which increases the monetary base. This is similar to an open market purchase of government securities, where the central bank buys government bonds to increase the monetary base.

Question 4

If a central bank engages in an unsterilized foreign-exchange intervention with the intention of raising the foreign-exchange value of its currency

Accepted Answer

When a central bank engages in an unsterilized foreign-exchange intervention to raise the value of its currency, it sells domestic currency in exchange for foreign currency, reducing its holdings of international reserves.

Question 5

How would monetary easing by the Swiss National Bank affect the value of the franc?

Accepted Answer

Monetary easing by the Swiss National Bank, which involves reducing interest rates, would reduce demand for francs as investors seek higher returns in other currencies. This would lead to a depreciation of the franc's value.

Question 6

Which of the following will NOT result from an unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency?

Accepted Answer

When the central bank sells foreign assets to purchase domestic currency, it results in an increase in the domestic money supply, not a decrease. Therefore, option D is the correct answer as it does not result from this type of intervention. Options A, B, and C are all likely outcomes of such an intervention.

Question 7

Capital inflow restrictions

Accepted Answer

Capital inflow restrictions, also known as capital flow management measures, aim to reduce the flow of foreign capital into a country. These measures may include taxes or limits on foreign investment in specific sectors. They are generally seen as a less extreme option than full capital controls, which completely restrict the movement of capital in and out of a country. While there may be debate among economists regarding the effectiveness of capital inflow restrictions, they are often seen as a way to reduce the risk of domestic lending booms and excessive risk-taking by domestic banks. It is worth noting that the United States and Europe have both imposed capital inflow restrictions at various times, but the specific timing and nature of these measures varies.

Question 8

Countries in which region experienced disruptive capital flows in 1997-98?

Accepted Answer

The countries in East Asia, particularly Thailand, Indonesia, South Korea, and Malaysia, experienced disruptive capital flows in 1997-98, referred to as the Asian financial crisis. This led to a significant depreciation of their currencies, large-scale bankruptcies of companies, and economic downturns.

Question 9

If a central bank wishes to raise the foreign-exchange value of its currency,it will

Accepted Answer

When a central bank buys domestic currency and sells foreign assets, it reduces the supply of its currency in the foreign exchange market, leading to an increase in the currency's value. This action also involves using foreign reserves to purchase the domestic currency, which can help appreciate its value against other currencies.

Question 10

Make use of a T-account to show the effect of the Fed's sale of $500 million worth of foreign government securities on the Fed's balance sheet.(assume the Fed receives a check from the sale of securities).

Accepted Answer

The answer of Make use of a T-account to show...

Question 11

Why may a central bank intervene in the foreign exchange market when its currency is depreciating?

Accepted Answer

When a currency depreciates, it can lead to higher import prices, which may contribute to inflation. Central banks may intervene to stabilize the currency and control inflationary pressures.

Question 12

The main difference between a sterilized intervention and unsterilized intervention in the foreign exchange market is

Accepted Answer

The main difference between a sterilized intervention and unsterilized intervention in the foreign exchange market is that a sterilized intervention does not change the monetary base, while an unsterilized intervention does. In a sterilized intervention, the central bank buys or sells foreign currency while simultaneously engaging in a domestic open market operation to offset the effect on the monetary base. This means that the intervention has no effect on the overall money supply. In contrast, an unsterilized intervention does not involve an offsetting open market operation, which means that it does affect the monetary base and therefore the overall money supply.

Question 13

If a central bank wishes to lower the foreign-exchange value of its currency,it will

Accepted Answer

If a central bank wishes to lower the foreign-exchange value of its currency, it will sell domestic currency and buy foreign assets. This will increase the supply of the domestic currency in the foreign exchange market, leading to a decrease in its value relative to other currencies.

Question 14

A central bank may be reluctant to see its currency appreciate because

Accepted Answer

If a currency appreciates, it becomes more expensive relative to other currencies, which can make imports cheaper but exports more expensive. This means that the country's exports may become less competitive in world markets, which can harm the country's economy.

Question 15

The sale of foreign assets by a central bank accompanied by an open market purchase of securities of the same size results in

Accepted Answer

This is a sterilized intervention because the central bank is neutralizing the impact on the monetary base that would result from selling foreign assets by simultaneously purchasing securities in the open market. This keeps the monetary base unchanged.

Question 16

An unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency will result in

Accepted Answer

When the central bank sells foreign assets to purchase domestic currency, it decreases the supply of foreign currency and increases the demand for domestic currency. This leads to an appreciation of the domestic currency, which in turn makes exports more expensive and imports cheaper. As a result, the demand for domestic goods and services decreases, leading to a decrease in aggregate demand and a decrease in inflation. This decrease in inflation makes it possible for the central bank to lower interest rates, which helps to stimulate economic growth. However, if the central bank does not sterilize the intervention by selling domestic bonds or reducing the money supply, then the increase in demand for domestic currency will lead to higher domestic interest rates.

Question 17

The Swiss franc is considered to be stronger if

Accepted Answer

When it takes fewer francs to acquire a foreign currency, it indicates that the franc has appreciated or strengthened against that currency.

Question 18

Make use of a T-account to show the effect of the Fed's purchase of $5 billion worth of foreign government securities on the Fed's balance sheet (note: assume the Fed writes a check to purchase the securities).

Accepted Answer

The answer of Make use of a T-account to show...

Question 19

How does a sterilized intervention by the Fed in foreign exchange markets differ from an unsterilized intervention?

Accepted Answer

The answer of How does a sterilized intervention by the...

Question 20

The main reason central banks engage in foreign-exchange interventions is to

Accepted Answer

The main reason central banks engage in foreign-exchange interventions is to stabilize the exchange rate. This involves buying or selling their own currency in the foreign exchange market in order to influence the exchange rate and maintain stability. Stabilizing the exchange rate can have various benefits, such as promoting exports, reducing inflation, and maintaining financial stability.

Quiz 16: The International Financial System and Monetary Policy

Why may a central bank intervene in the foreign exchange market when its currency is appreciating?

Throughout most of the post-World War II period,the use of capital controls by governments around the world was declining.But in the late 1990s,a number of governments expressed renewed interest in capital controls.What accounts for this renewed interest?

A purchase of foreign assets by a central bank has the same impact on the monetary base as

If a central bank engages in an unsterilized foreign-exchange intervention with the intention of raising the foreign-exchange value of its currency

How would monetary easing by the Swiss National Bank affect the value of the franc?

Which of the following will NOT result from an unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency?

Capital inflow restrictions

Countries in which region experienced disruptive capital flows in 1997-98?

If a central bank wishes to raise the foreign-exchange value of its currency,it will

Make use of a T-account to show the effect of the Fed's sale of $500 million worth of foreign government securities on the Fed's balance sheet.(assume the Fed receives a check from the sale of securities).

Why may a central bank intervene in the foreign exchange market when its currency is depreciating?

The main difference between a sterilized intervention and unsterilized intervention in the foreign exchange market is

If a central bank wishes to lower the foreign-exchange value of its currency,it will

A central bank may be reluctant to see its currency appreciate because

The sale of foreign assets by a central bank accompanied by an open market purchase of securities of the same size results in

An unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency will result in

The Swiss franc is considered to be stronger if

Make use of a T-account to show the effect of the Fed's purchase of $5 billion worth of foreign government securities on the Fed's balance sheet (note: assume the Fed writes a check to purchase the securities).

How does a sterilized intervention by the Fed in foreign exchange markets differ from an unsterilized intervention?

The main reason central banks engage in foreign-exchange interventions is to