Question 1

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.

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Question 2

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.

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Question 3

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.

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Question 4

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 because of government policies that are inconsistent with fixed exchange rates. This includes policies such as excessive government spending, overvalued currency, and restricted capital flows. These policies can lead to a depletion of foreign exchange reserves and ultimately a devaluation of the currency, which can trigger a balance of payments crisis.

Question 5

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%?

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Question 6

Assuming perfect asset substitutability,can sterilized intervention by the central bank be effective? Please discuss.

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Question 7

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

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Question 8

List the drawbacks of the gold standard.

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Question 9

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

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Question 10

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?

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Question 11

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

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Question 12

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.

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

Question 13

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 until the Civil War, the United States adhered to a bimetallic standard, meaning that both gold and silver were used as currency at a fixed ratio to each other. This was altered in the late 1800s with the passing of the Gold Standard Act, which established gold as the sole standard for redeeming paper money.

Question 14

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/

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Question 15

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.

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Question 16

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

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Question 17

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.

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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 end of the Civil War to the start of World War I, the United States adhered to a gold standard. This meant that the value of the US dollar was pegged to a fixed amount of gold, and individuals could exchange their dollars for gold at a fixed rate. The gold standard was seen as a symbol of stability and was widely supported by policymakers and economists during this time period.

Question 19

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?

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Question 20

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

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Quiz 18: Fixed Exchange Rates and Foreign Exchange Intervention

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.

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.

Balance of payments crises under fixed exchange rates occur because of

Assuming perfect asset substitutability,can sterilized intervention by the central bank be effective? Please discuss.

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

List the drawbacks of the gold standard.

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

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?

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.

From 1837 and up until the Civil War,the United States adhered to a

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.

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.

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.

From the Civil War up to 1914,the United States adhered to a

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?

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