Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
34 Cards in this Set
- Front
- Back
|
If the Federal Reserve buys dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange? International reserves will _______, while the money supply _______ and the exchange rate ________ |
Decrease, remains unchanged and remains unchanged |
|
|
If the Federal Reserve buys dollars in the foreign exchange market but does not sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange? International reserves will _______, while the money supply _______ and the exchange rate ________ |
Decreases, Decreases, and Increases |
|
|
A British subject's purchase of a share of J&J stock An American's purchase of an airline ticket from Air France The Swiss government's purchase of US Treasury Bills A Japanese's purchase of California oranges $50 Million of foreign aid to Honduras A loan by an American bank to Mexico An American bank's borrowing of Eurodollars |
Capital; Receipt Current; Payment Method; Receipt Current; Receipt Current; Payment Capital; Payment Capital; Receipt |
|
|
How can a large balance-of-payments surplus contribute to a country's inflation rate |
The money supply may be expanded in order to facilitate the purchase of foreign exchange and assets |
|
|
"Balance-of-payments deficits always cause a country to lose international reserves." Is this statement true, false, or uncertain? |
False. Sometimes international reserves may remain unchanged |
|
|
Under the gold standard, if Britain became more productive relative to the US, what would happen to the money supply in Britain The money supply would |
Increase |
|
|
why would the changes in the money supply help preserve a fixed exchange rate between the US and Britain? Changes in the money supply would cause prices in Britain to _____ relative to the US |
Rise |
|
|
"Inflation is not possible under the gold standard." Is this statement true, false, or uncertain? |
False. Inflation can occur if the supply of gold increases |
|
|
"If a country wants to keep its exchange from changing, it must give up some control over its money supply." True, False, or Uncertain |
True. Necessary interventions in the foreign exchange market will affect the money supply |
|
|
In a pure flexible exchange rate system, the foreign exchange market: Does this mean that the foreign exchange market has no effect on monetary policy? |
Has no direct effect on the money supply because there is no central bank intervention No, because monetary authorities may want to manipulate exchange rates by changing the money supply and interest rates. |
|
|
Why did the exchanges rate peg lead to difficulties for the countries in the ERM when German reunification occurred? |
Germany raised interest rates, which also raised interest rates in ERM countries, slowing growth and increasing unemployment |
|
|
Suppose the Mexican central bank chose to peg the peso to the US dollar and commit to a fixed peso/dollar exchange rate. Explain how the peg must be maintained if a shock in the US economy forces the FED to pursue contractionary monetary policy. |
The Mexican central bank needs to sell foreign assets and buy domestic peso currency |
|
|
What does this say about the ability of central banks to address domestic economic problems while maintaining a pegged exchange rate? |
The Domestic central bank is forced to import the monetary policy of the pegging country There is no scope for domestic monetary policy stabilization |
|
|
Capital inflows can promote financial instability in an emerging market country because they can lead to a lending boom and excessive risk taking on the part of banks, which helps trigger |
A financial crisis |
|
|
A case for capital inflow controls can be made because these inflows: |
May cause a lending boom and lead to excessive risk taking |
|
|
A capital inflow can promote financial instability in an emerging market country because it causes banks in a country to _____ interest rates in an attempt to compete in a lending boom |
Lower |
|
|
Which of the following is an advantage of controls on capital outflows? |
The controls may stem excessive risk taking by domestic banks |
|
|
What are the disadvantages of having the IMF as an international lender of last resort? |
It encourages countries to not implement austerity measures because they will get bailed out anyway It encourages risky behavior by countries by increasing moral hazard |
|
|
During the last two decades, this agency has acted like an international lender of last resort to cope with financial instability |
The IMF |
|
|
A criticism of the activities of the IMF is that it creates a serious ______ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs |
Moral Hazard |
|
|
Critics of the IMF contend that its bail-out of the Mexican economy in the mid-1990s set the stage for the Asian crisis of the late 1990s because ______ expected to be bailed out if things went wrong |
Foreign lenders |
|
|
Why does a balance-of-payments deficit for the US have a different effect on its international reserves than a balance-of-payments deficit for the Netherlands? |
The dollar is used as a reserve currency by many foreign central banks |
|
|
Why can balance-of-payments deficits force some countries to implement a contractionary monetary policy A balance-of-payments deficit lead to a ___ of the domestic currency on foreign exchange markets This will cause the value of the domestic currency to _____ on foreign exchange markets This might cause the monetary authorities to _____ international reserves to support the foreign exchange value of the domestic currency |
Surplus Depreciate Sell |
|
|
The central bank would need to _____ domestic currency and ____ foreign assets This would cause the domestic money supply to _______ |
Sell; Buy Increase |
|
|
"The abandonment of fixed exchange rates after 1973 has meant that countries have pursued more independent monetary policies." |
Uncertain. Many countries have continued to engage in substantial intervention in the foreign exchange market |
|
|
How can persistent US balance-of-payment deficits stimulate world inflation |
When other countries buy US dollars to keep their exchange rate from changing relative to the dollar, it cause a faster money supply growth in these countries |
|
|
What are some of the disadvantages of China's pegging of the yuan to the dollar |
Many countries have threatened to erect trade barriers against Chinese goods An increase in the Chinese monetary base and money supply can produce high inflation |
|
|
How can the long-term bond market help reduce the time-inconsistency problem for monetary policy |
An overly expansionary monetary policy will lead to a sharp fall in the price of long-term bonds, which is undesirable |
|
|
Can the foreign exchange market also perform this role? |
Yes, an overly expansionary monetary policy will lead to a sharp decline in the value of the currency, which is undesirable |
|
|
What are the key advantages of exchange rate targeting as a monetary policy strategy |
It helps keep inflation under control It mitigates the time inconsistency problem It is simple and clear |
|
|
When is exchange rate targeting likely to be a sensible strategy for industrialized countries |
When domestic monetary institutions are unlikely to provide good policy making When there are benefits of an exchange-rate target unrelated to monetary policy |
|
|
When is exchange rate targeting likely to be a sensible strategy for emerging market countries |
When it is the only way to break inflationary psychology and stabilize the economy |
|
|
Advantages and Disadvantages using only exchange rate target |
A The Central Bank cannot create inflation It is a stronger commitment to a fixed exchange rate D IT limits the ability of the central bank to act as a lender of last resort It is still subject to the threat of a speculative attack |
|
|
Advantages and Disadvantages of dollarization |
A There is no possibility of a speculative attack D. Loss of seignorage |
