Question 1

Each of the following is a benefit of a floating exchange rate system except

Accepted Answer

Governments keeping contracts with investors in foreign countries is not directly related to the benefits of a floating exchange rate system. Floating exchange rates adjust based on market conditions, allowing for more flexibility in monetary policy and less direct government intervention in setting exchange rates, unlike fixed exchange rate systems where maintaining international contracts might be more directly relevant.

Question 2

Each of the following is a cost of a floating exchange rate system except

Accepted Answer

Floating exchange rate systems do not inherently avoid political turmoil; instead, they can lead to uncertainty and fluctuations that might contribute to economic or political challenges. The other options (A, B, D) are considered costs or disadvantages associated with floating exchange rates, such as breaking contracts due to exchange rate changes, discouraging international trade due to increased risk, and uncertainty for exporters and firms about competitors' costs.

Question 3

The reunification of Germany in 1990

Accepted Answer

The reunification of Germany in 1990 led to increased government spending and investment in East Germany, which shifted the IS curve outward. To counteract the inflationary pressures and overheating of the economy, the Bundesbank tightened monetary policy, which shifted the LM curve to the left and raised real interest rates.

Question 4

In response to rising real interest rates in Germany after German reunification, other western European countries that were part of the European Exchange Rate Mechanism were forced to

Accepted Answer

To maintain fixed exchange rates with the German mark within the European Exchange Rate Mechanism, other western European countries had to increase their interest rates to match the rising rates in Germany, thereby stabilizing exchange rates and preventing their currencies from depreciating against the mark.

Question 5

In a fixed-exchange rate system with a high degree of capital mobility, if foreign exchange speculators' expectations of the long-run fundamental real value of the exchange rate increases and foreign interest rates increase,

Accepted Answer

In a fixed-exchange rate system with high capital mobility, if speculators expect the real value of the domestic currency to increase and foreign interest rates rise, the domestic central bank would need to increase domestic interest rates. This action is necessary to prevent capital outflow (which would be attracted by higher foreign interest rates) and to maintain the fixed exchange rate by making domestic assets more attractive.

Question 6

Each of the following is a strategy undertaken by western European countries that were part of the European Exchange Rate Mechanism in response to the 1992 speculative attack on their currencies except

Accepted Answer

Options A, B, and D were actual strategies used by European countries during the 1992 speculative attack. However, instituting restrictions on currency trading (option C) was not a widely adopted strategy among these countries in response to the crisis. They primarily focused on using their currency reserves to defend their currencies, raising interest rates, or eventually allowing their currencies to float rather than imposing direct controls on currency trading.

Question 7

One of the reasons that collapses of currencies occur is

Accepted Answer

Countries with overvalued exchange rates and large inflation-financed budget deficits are vulnerable to speculative attacks, especially when capital mobility is limited, as these conditions create economic imbalances that speculators can exploit.

Question 8

One of the reasons that collapses of currencies occur is

Accepted Answer

Speculative attacks occur when speculators believe that a government's policies to maintain fixed exchange rates are unsustainable, as was the case in Western Europe in 1992.

Question 9

Mexico's peso crisis in 1994-95 was a surprise for each of the following reasons except

Accepted Answer

The Mexico peso crisis of 1994-95 was surprising for several reasons, but low profits from investing in Mexico were not among them. The crisis was unexpected mainly because the government had a balanced budget, inflation was not anticipated to rise significantly, and there was no doubt about the government's willingness to increase interest rates to stabilize the currency. The profitability of investments in Mexico, whether high or low, was not a direct factor in the surprise surrounding the crisis.

Question 10

Each of the following was a factor that reduced foreign exchange speculators' estimates of the long-run value of the Mexican peso except

Accepted Answer

Entering into the North American Free Trade Agreement (NAFTA) would generally be seen as a positive development for Mexico's economy, potentially increasing trade and investment, rather than reducing the long-run value of the Mexican peso. Choices A, B, and D all describe events that could undermine confidence in the peso.

Question 11

A factor that clearly worsened the impact of the East Asian Crisis of 1997-1998 was

Accepted Answer

Many of East Asia's banks and companies had indeed borrowed heavily in foreign currencies like dollars or yen. When their own currencies devalued during the crisis, the cost of repaying these loans in terms of their local currencies soared, exacerbating the financial strain on these institutions.

Question 12

The U.S. trade deficit has _________ since 2001 which may lead to a _________ of the dollar.

Accepted Answer

The U.S. trade deficit has continued to grow since 2001, and a growing trade deficit can lead to a depreciation of the dollar as it indicates that the country is importing more than it is exporting, increasing demand for foreign currencies and decreasing demand for the dollar.

Question 13

Using the exchange-rate equation,  a decrease in    means that

Accepted Answer

The answer of Using the exchange-rate equation,  a decrease...

Question 14

Each of the following is something that a country can do to reduce its vulnerability to foreign exchange crisis except

Accepted Answer

Options A, B, and C are measures that can help a country reduce its vulnerability to foreign exchange crises. Option A involves discouraging borrowing in foreign currencies to prevent issues related to currency mismatches. Option B suggests having a flexible exchange rate system to absorb shocks without causing domestic economic problems. Option C acknowledges the importance of controlling capital movements to maintain a fixed exchange rate. However, option D, which suggests that keeping an exchange rate fixed requires the free flow of capital, can actually increase vulnerability to foreign exchange crises by making the economy more susceptible to sudden stops and reversals of capital flows.

Question 15

Borrowing in foreign currencies

Accepted Answer

When a country borrows in foreign currencies and its own currency depreciates, the real cost of repaying those loans increases because it requires more of the domestic currency to buy the foreign currency needed to repay the debt.

Question 16

Raising interest rates to stave off currency depreciation

Accepted Answer

Raising interest rates can reduce investment spending as borrowing costs increase, which can lead to lower aggregate demand, output, employment, and economic growth.

Quiz 15: International Economic Policy

Each of the following is a benefit of a floating exchange rate system except

Each of the following is a cost of a floating exchange rate system except

The reunification of Germany in 1990

In response to rising real interest rates in Germany after German reunification, other western European countries that were part of the European Exchange Rate Mechanism were forced to

In a fixed-exchange rate system with a high degree of capital mobility, if foreign exchange speculators' expectations of the long-run fundamental real value of the exchange rate increases and foreign interest rates increase,

Each of the following is a strategy undertaken by western European countries that were part of the European Exchange Rate Mechanism in response to the 1992 speculative attack on their currencies except

One of the reasons that collapses of currencies occur is

One of the reasons that collapses of currencies occur is

Mexico's peso crisis in 1994-95 was a surprise for each of the following reasons except

Each of the following was a factor that reduced foreign exchange speculators' estimates of the long-run value of the Mexican peso except

A factor that clearly worsened the impact of the East Asian Crisis of 1997-1998 was

The U.S. trade deficit has _ since 2001 which may lead to a _ of the dollar.

Using the exchange-rate equation, a decrease in means that

Each of the following is something that a country can do to reduce its vulnerability to foreign exchange crisis except

Borrowing in foreign currencies

Raising interest rates to stave off currency depreciation