Question 1

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

Accepted Answer

Contractionary monetary policy, which involves raising interest rates, is typically used to reduce inflation and can lead to an appreciation of the currency. Higher interest rates attract foreign investors looking for higher returns, thus increasing demand for the currency and strengthening its value.

Question 2

Under an exchange-rate targeting rule for monetary policy,a crawling peg

Accepted Answer

A crawling peg is a type of exchange-rate targeting rule in which the domestic currency is allowed to depreciate at a steady rate against the anchor currency. This allows the pegging country to maintain a certain level of competitiveness in international trade while allowing for higher inflation than the anchor country. Therefore, choice C is the best answer. Choices A and B refer to fixed exchange-rate regimes rather than crawling pegs. Choice D is incorrect because a crawling peg is designed to allow for higher inflation in the pegging country, not lower inflation.

Question 3

Both France and the United Kingdom successfully used exchange-rate targeting to lower inflation in the late 1980s and early 1990s by tying the value of their currencies to the

Accepted Answer

Both France and the United Kingdom tied the value of their currencies to the German mark in order to lower inflation in the late 1980s and early 1990s.

Question 4

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.

Accepted Answer

A contractionary monetary policy involves raising the domestic interest rate, which can make it harder for investors to borrow money and invest in other currencies. This can increase demand for the local currency and strengthen its value.

Question 5

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.

Accepted Answer

When a central bank purchases foreign currencies to prevent its own currency from appreciating, it increases its international reserves. This action, in turn, increases the monetary base, which can stimulate domestic inflation.

Question 6

Because the United States was the reserve-currency country under the Bretton Woods system,it could run large balance of payments ________ without ________ significant amounts of international reserves.

Accepted Answer

As the reserve-currency country, the United States was able to run large balance of payments deficits without losing significant amounts of international reserves.

Question 7

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.

Accepted Answer

Expansionary monetary policy involves lowering the domestic interest rate, which would make it less attractive for foreign investors to hold the currency and thereby weaken its value.

Question 8

Under exchange-rate targeting,the central bank in the targeting country ________ lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is ________ transmitted to the targeting country.

Accepted Answer

Under exchange-rate targeting, the central bank loses the ability to pursue its own independent monetary policy because it must align its policies with those of the anchor country to maintain the target exchange rate. Additionally, any shocks to the anchor country's economy are directly transmitted to the targeting country through the fixed exchange rate mechanism.

Question 9

An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for ________ traded goods to what is found in the ________ country.

Accepted Answer

Exchange-rate targeting ties the inflation rate for internationally traded goods to what is found in the anchor country, which helps keep inflation under control. Therefore, choice C, which states "internationally;anchor", is the correct answer.

Question 10

Under the Bretton Woods system,when a country adopted an expansionary monetary policy,thereby causing a balance of payments ________,the country would eventually be forced to implement ________ monetary policy.

Accepted Answer

Under the Bretton Woods system, adopting an expansionary monetary policy could lead to a balance of payments deficit. To correct this imbalance, a country would be forced to adopt a contractionary monetary policy to stabilize its currency and balance of payments.

Question 11

The German central bank gained international reserves in the early 1970s because it sold ________ to prevent mark ________.

Accepted Answer

The answer of The German central bank gained international reserves...

Question 12

Exchange-rate targeting allows a central bank to ________,thus this will ________ the probability of policy developing a time-inconsistency problem.

Accepted Answer

Exchange-rate targeting involves a central bank following a policy rule that sets a specific exchange rate target. This helps to decrease the probability of the policy developing a time-inconsistency problem, where the central bank deviates from its stated policy due to short-term pressures or political considerations. On the other hand, following a discretionary policy where the central bank makes ad-hoc decisions based on current economic conditions increases the likelihood of time-inconsistency problems. Therefore, choice A is the best answer.

Question 13

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.

Accepted Answer

The answer of A central bank's attempt to prevent an...

Question 14

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.

Accepted Answer

If a central bank does not want to allow the domestic currency to appreciate, it will acquire international reserves by selling its currency. This increases the supply of domestic currency in the market, which would increase the monetary base, and in turn increase the risk of higher inflation.

Question 15

Since the abandonment of the Bretton Woods system,balance of payments considerations have become ________ important,and exchange rate considerations ________ important in the conduct of monetary policy.

Accepted Answer

The Bretton Woods system had fixed exchange rates, meaning that countries had to adjust their balance of payments to maintain the exchange rate. However, since the abandonment of this system, exchange rate fluctuations have become more important in the conduct of monetary policy. As a result, balance of payments considerations have become less important. Thus, D is the correct answer.

Question 16

Which of the following is NOT an advantage to exchange-rate targeting?

Accepted Answer

Exchange-rate targeting does not inherently increase the accountability of policymakers, as it focuses on maintaining a fixed exchange rate rather than directly addressing policy transparency or accountability.

Question 17

A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large,low inflation country is called ________ targeting.

Accepted Answer

This policy strategy is called exchange-rate targeting as it involves fixing the exchange rate of a country's currency to a larger, stable currency to stabilize its value and control inflation. This approach is different from inflation targeting, which focuses on maintaining a stable and low rate of inflation through monetary policy tools.

Question 18

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.

Accepted Answer

When a central bank wants to prevent its domestic currency from depreciating, it sells international reserves to buy its own currency, which decreases the monetary base. This action can lead to higher unemployment due to tighter monetary conditions.

Question 19

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.

Accepted Answer

Expansionary monetary policy lowers domestic interest rates, making the currency less attractive to foreign investors, which can lead to a decrease in the currency's value, or weakening it.

Question 20

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

Accepted Answer

Under the Bretton Woods system, if a country was running out of international reserves, it needed to implement contractionary monetary policy. This policy would reduce the money supply, increase interest rates, and as a result, strengthen the country's currency by making it more attractive to foreign investors.

Quiz 18: The International Financial System

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

Under an exchange-rate targeting rule for monetary policy,a crawling peg

Both France and the United Kingdom successfully used exchange-rate targeting to lower inflation in the late 1980s and early 1990s by tying the value of their currencies to the

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.

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.

Because the United States was the reserve-currency country under the Bretton Woods system,it could run large balance of payments without significant amounts of international reserves.

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.

Under exchange-rate targeting,the central bank in the targeting country lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is transmitted to the targeting country.

An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for traded goods to what is found in the country.

Under the Bretton Woods system,when a country adopted an expansionary monetary policy,thereby causing a balance of payments ,the country would eventually be forced to implement monetary policy.

The German central bank gained international reserves in the early 1970s because it sold to prevent mark .

Exchange-rate targeting allows a central bank to ,thus this will the probability of policy developing a time-inconsistency problem.

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.

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.

Since the abandonment of the Bretton Woods system,balance of payments considerations have become important,and exchange rate considerations important in the conduct of monetary policy.

Which of the following is NOT an advantage to exchange-rate targeting?

A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large,low inflation country is called ________ targeting.

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.

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.

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