Question 1

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

Accepted Answer

From 1837 to 1862, the United States adhered to a bimetallic standard, which allowed for both gold and silver to be used as currency. However, during the Civil War, the country switched to a paper currency system.

Question 2

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 = ρ^(B-A) Find the new domestic interest rate if a sterilized purchase of foreign assets adjusts A s.t. (a) B - A = -.01/ ρ_o (b) B - A = .01/ ρ_o (c) B - A = .03/ ρ_o

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

Question 3

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

Accepted Answer

The answer of Assuming perfect asset substitutability, can sterilized intervention...

Question 4

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. Please 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 5

A balance of payments crises under fixed exchange rates occurs when

Accepted Answer

A balance of payments crisis under fixed exchange rates occurs when a country runs out of foreign reserves because it is obligated to maintain the fixed exchange rate and cannot devalue its currency to restore equilibrium. This often happens when there is a large trade deficit or capital flight, causing a drain on foreign reserves.

Question 6

Balance of payments crises under fixed exchange rates occur because of

Accepted Answer

Balance of payments crises under fixed exchange rates occur because of government policies that are inconsistent with fixed exchange rates. For example, if a country maintains an overvalued fixed exchange rate, it can result in a persistent trade deficit, leading to a depletion of foreign exchange reserves and eventually a balance of payments crisis. Similarly, if a country follows expansionary fiscal or monetary policies that lead to inflation, it can result in a loss of competitiveness and an outflow of capital, further worsening the balance of payments situation.

Question 7

Please list the drawbacks of the gold standard.

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The answer of Please list the drawbacks of the gold...

Question 8

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

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

Question 9

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.

Accepted Answer

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

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?

Accepted Answer

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

Question 11

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 12

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 13

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 = ρ^(B-A) 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 14

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.

Accepted Answer

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

Question 15

Please show how the 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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The answer of Please show how the country whose currency...

Question 16

Imperfect asset substitutability assumes:

Accepted Answer

Imperfect asset substitutability assumes that there is a difference in returns between foreign and domestic currency, but both are influenced by risk. This means that investors may not be able to perfectly substitute one for the other, as they are not identical assets.

Question 17

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

Question 18

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

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

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

From the figure below, please provide an explanation for the large growth rate of international reserves held by developing countries and the sharp decline in the 1980s.

Accepted Answer

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

Quiz 18: Fixed Exchange Rates and Foreign Exchange Intervention