PS4_answers - NAME STUDENT NUMBER A-1 Financial Markets and International Finance IK Finanzmrkte und internationale Whrungsbeziehungen PROBLEM SET

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NAME: A-1 STUDENT NUMBER Financial Markets and International Finance IK Finanzmärkte und internationale Währungsbeziehungen PROBLEM SET 4 INSTRUCTIONS: part A should be prepared for discussion in class. Part B should be turned in on 11 June 2007 in class. DO NOT TURN IN PART A. PART A QUESTION (A.1) By fixing the exchange rate, the central bank gives up its ability to (a) adjust taxes (b) increase government spending (c) influence the economy through fiscal policy (d) depreciate the domestic currency (e) influence the economy through monetary policy Answer: E. By fixing the exchange rate, the central bank does not allow the foreign exchange market to determine the exchange rate. With the exchange rate fixed, the central bank cannot adjust the money supply using Monetary Policy. (A.2) A system of managed floating exchange rates is (a) A system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. (b) A system in which governments use flexible exchange rates. (c) A system in which governments are forbidden from attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. (d) A system in which governments need to reach a prior agreement among them before they may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. (e) None of the above statement is true. Answer: A
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NAME: A-2 STUDENT NUMBER (A.3) Under fixed exchange rate with assets that are perfect substitutes, in general, (a) The domestic and foreign interest rates are equal, R = R* (b) R = R* + (Ee – E)/E (c) None of the above (d) E is equal to one. (e) One of the above Answer: A (A.4) Under fixed rates, which one of the following statements is the most accurate? (a) Monetary policy can affect only output. (b) Monetary policy can affect only employment. (c) Monetary policy can affect only international reserves. (d) Monetary policy can not affect international reserves. (e) None of the above statements is true. Answer: C: recall that fixed exchange rates mean ineffective monetary policy. (A.5) Under a fixed exchange rate: (a) Devaluation causes a decrease in output, a decrease in official reserves, and a contraction of the money supply. (b) Devaluation causes a rise in output, a rise in official reserves, and an expansion of the money supply. (c) Devaluation causes a rise in output and a rise in official reserves. (d) Devaluation causes a rise in output and an expansion of the money supply. (e) Devaluation causes a rise in official reserves, and an expansion of the money supply. Answer: B
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NAME: A-3 STUDENT NUMBER (A.6) The expectation of future devaluation causes a balance of payments crisis marked by (a) a sharp rise in reserves and a fall in the home interest rate below the world interest rate (b) a sharp fall in reserves and an even bigger fall in the home interest rate below the world interest rate (c)
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This note was uploaded on 09/23/2008 for the course ECONOMICS 240 taught by Professor Cramer during the Spring '08 term at American University in Bulgaria.

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PS4_answers - NAME STUDENT NUMBER A-1 Financial Markets and International Finance IK Finanzmrkte und internationale Whrungsbeziehungen PROBLEM SET

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