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Unformatted text preview: Chapter 17: Fixed Exchange Rates and Foreign Exchange Intervention Multiple Choice Questions 1. Why is the reserve center in the reserve currency fixed rate system asymmetric? A. The reserve center fixes its exchange rate against the reserve currency, and all other countries are subject to that rate. B. Other countries fix their exchange rate to the reserve currency, and there is no exchange rate left for the reserve center to fix. C. The center country has to intervene all the time and regulate the balance of payments. D. The center country never has to intervene and bears none of the burden of financing its balance of payments. E. Both B and D. Answer: E 2. Imperfect asset substitutability assumes that A. the returns on foreign and domestic currency bonds are the same. B. the returns on foreign and domestic currency are different. C. the returns on foreign and domestic currency are influenced by risk. D. Both B and C E. sterilized intervention proves to be unproductive. Answer: D 3. Benefit(s) of the gold standard include A. asymmetry. B. making real values of national monies more stable and predictable. C. limiting money creation. D. Both A and C. E. Both B and C. Answer: E 4. Which of the following are true, based on the Monetary Approach to the Balance of Payments? A. If the demand for money increases, a budget surplus will result, and the money supply will have to decrease to maintain equilibrium. B. If the demand for money increases, a budget surplus will result, and the money supply will have to increase to maintain equilibrium. C. If the demand for money increases, a budget deficit will result, and the money supply will have to decrease to maintain equilibrium. D. If the demand for money increases, a budget deficit will result, and the money supply will have to increase to maintain equilibrium. E. According to the Monetary Approach, money market equilibrium does not have to be maintained if the balance of payments is not in equilibrium. Answer: B 5. 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. 6. Fiscal Expansion under a fixed exchange rate has what effect(s) on the economy? A. The money supply decreases. B. Output decreases. C. The exchange rate increases. D. The exchange rate decreases initially but then returns to its original point....
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This note was uploaded on 01/20/2010 for the course BUSINESS A FNC 402 taught by Professor Salaarfarooq during the Summer '09 term at Lahore School of Economics.
- Summer '09
- Exchange Rate