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72 Cards in this Set
- Front
- Back
Uncovered Interest rate Parity says that interest rate differential equals
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expected appreciation/depreciation of the currency
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In a flexible exchange rate regime, suppose that US's economy goes into a recession. As a
result, US's residents purchase fewer goods from abroad. How does this affect the dollarpound exchange rate? |
The result is a decrease in the exchange rate, implying a depreciation of the UK
pound and an appreciation of the U.S. dollar |
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If the Japanese yen depreciates against other currencies in the exchange markets, this will:
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Tend to improve the Japanese balance of trade
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Suppose Sweden's inflation rate is less than that of its trading partner. Under a floating exchange rate system, Sweden would experience a:
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Appreciation in its currency
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The internal macroeconomic policy that the Eurozone adopts is:
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Fixed exchange rate and free movement of capital but no independent monetary
policy |
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To temporarily offset an appreciation in the dollar's exchange value, the Federal Reserve
could ____ the U.S. money supply which would promote a (an) ____ in U.S. interest rates and a (an) ____ in investment flows to the United States. |
Increase, decrease, decrease
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Under a floating exchange-rate system, if American exports increase and American
imports fall, the value of the dollar will: |
Appreciate
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Given an initial equilibrium in the money market and foreign exchange market, suppose
the Federal Reserve increases the money supply of the United States. Under a floating exchange-rate system, the dollar would |
Depreciate in value relative to other currencies
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As a result of the __________, the dollar became the world’s chief reserve currency
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Bretton-Woods Conference
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Which statement is not valid regarding the Bretton Woods System?
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The exchange rates were flexible during that period of time
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Given a system of floating exchange rates, stronger U.S. preferences for imports would
trigger: |
An increase in the demand for imports and an increase in the demand for foreign currency
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With a fixed exchange rate and free movement of capital, the role of monetary policy
is directed towards: |
keeping the domestic interest rate at the world interest rate
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All of the following are problems with IMF except:
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Technical assistance for developing countries
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Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and:
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Increase the demand for dollars
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Refer to Figure 1. Suppose the United States decreases investment spending in
Switzerland, thus reducing the demand for francs from D0 to D2. Under a floating exchange rate system, the new equilibrium exchange rate would be: |
$0.40 per franc
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Which of the following is likely to result in long-run appreciation of the U.S. dollar
relative to the peso? |
Stronger Mexican preferences for goods produced in the United States
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In the interbank market for foreign exchange, the ____ refers to the price for which a
bank is willing to buy a unit of foreign currency |
Bid rate
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Which exchange-rate system involves a "leaning against the wind" strategy in which
short-term fluctuations in exchange rates are reduced without adhering to any particular exchange rate over the long run? |
Managed floating exchange rates
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An exchange rate system such as Nicaragua’s where the currency value is maintained
against another currency, but the parity value is allowed to change at regular intervals is called a |
crawling peg.
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Which of the following is a central feature in the Asian currency crises?
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Weak banking system
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Which of the following is not a central feature in first generation models of currency
crises? |
Reduction in the money supply
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Suppose the exchange value of the British pound is $2 per pound while the exchange
value of the Swiss franc is 50 (dollar) cents per franc. The cross exchange rate between the pound and the franc is: |
4 francs per pound
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When the central bank undertakes an open market purchase,
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the money supply increases
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When the dollar gets stronger the following is most accurate:
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Foreign tourists travel in the U.S. at a higher cost
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The gold standard era occurred
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prior to 1914.
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The exchange rate between the U.S. dollar and the British pound is $1.55/pound. If you
wish to buy $1,000 worth of pounds, how many pounds could you get? |
645
1000/1.55 = 645 |
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Which of the following is not a valid statement regarding Fixed Exchange Rate
Regimes? |
Fixed exchange rate regime can be designed to last forever
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Assume that the Japan faces a 6 percent inflation rate while no (zero) inflation exists in
US. According to the purchasing-power parity theory, the dollar would be expected to: |
Appreciate by 6 percent against the yen
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A country can operate a fixed exchange rate and practice independent monetary policy
if and only if: |
it restricts inflows and outflows of financial capital
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Assume the following: (1) the interest rate on 6-month treasury bills is 12 percent per
annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50 while the 6-month forward price of the pound is $1.485 Refer to Exhibit 2. By investing in U.K. treasury bills rather than U.S. treasury bills, and not covering exchange rate risk, U.S. investors earn an extra return of: |
8 percent per year, 4 percent for the 6 months
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Refer to Exhibit 2. If U.S. investors cover their exchange rate risk, the extra return for the 6 months on the U.K. treasury bills is:
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3.0 percent
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An appreciation in the value of the U.S. dollar against the British pound would tend to:
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Discourage the British from buying American goods
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The desirable policy choices according to the Macroeconomic Policy Trilemma, are:
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Fixed exchange rate, free movement of capital, and independent monetary policy.
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The “Outsourced” movie touches all of the followings except:
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highly skilled Indian workers migrating to US
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All of the followings are accurate except:
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The “Outsourced” movie advocates cultural condescending to foreign culture
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According to the “Federal Reserve System and the interest rates” article, The FOMC
moved aggressively to change the target federal funds rate in meetings on January 22 and January 30. Which of the following events would most likely cause the FOMC to decrease the target federal funds rate in future meetings? |
Rising unemployment and continued weakness in consumption and investment
expenditures |
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The Bretton Woods Agreement of 1944 established a monetary system based on:
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Gold and pegged exchange rates
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Scenario: Assume that there are only two countries in the world and flexible exchange rates:
UK and US. Suppose that C, I, and G all stay the same in the UK and the United States. Answer the following two questions. Assume that that net exports from the UK increase As a result, what will happen to GDP in each country? |
GDP will increase in the UK and decrease in the United States.
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What happens with the exports from the UK when the exchange rate (measured in dollars per pound) decreases?
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The quantity of exports is higher
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The original purpose of the World Bank, as discussed at the Bretton Woods conference,
was to |
lend funds to war-torn countries to rebuild infrastructure
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Second generation models of currency crises can most reliably explain
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the 1992 crisis in the European Exchange Rate Mechanism (ERM)
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Assume that interest rates on comparable securities are identical in the United States and
foreign countries. Now suppose that investors anticipate that in the future the U.S. dollar will depreciate against foreign currencies. Investment funds would thus be expected to: |
Flow from the United States to foreign countries
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A devaluation is when a country
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lowers the fixed value of its currency.
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Suppose that on the gold standard, the U.S. fixes the price of an ounce of gold at $25. Great Britain fixes the price of gold at £16 per ounce. What is the implied exchange rate between the dollar and the pound?
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$1.5625 / £
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The organization that was founded to lend reserves to member countries experiencing a temporary shortage in foreign exchange reserves is the
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International Monetary Fund.
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Rather than constructing their own currency baskets, many nations peg the value of their currencies to a currency basket defined by the International Monetary Fund. Which of the following illustrates this basket?
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Special Drawing Rights
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Proponents of freely floating exchange rates maintain that:
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The system allows the central bank independency in pursuing domestic economic goals
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As a result of the __________, the dollar became the world’s chief reserve currency.
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Bretton-Woods Conference
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The original purpose of the World Bank, as discussed at the Bretton Woods conference, was to
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lend funds to war-torn countries to rebuild infrastructure
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Small nations (e.g., the Ivory Coast) whose trade and financial relationships are mainly with a single partner tend to utilize:
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Pegged exchange rates
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The central bank of the United Kingdom could prevent the pound from appreciating by:
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Selling pounds on the foreign exchange market
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If Canadian speculators believed the Swiss franc was going to depreciate against the U.S. dollar, they would:
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Purchase U.S. dollars
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In first-generation models of currency crises, speculators
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exacerbate the crisis when foreign reserves are depleted to a critical level
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If the Japanese yen appreciates against other currencies in the exchange markets, this will:
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Tend to worsen the Japanese balance of trade
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If Mexico fully dollarizes its economy, it agrees to
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Replace pesos with U.S. dollars in its economy
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Which exchange-rate system involves a "leaning against the wind" strategy in which short-term fluctuations in exchange rates are reduced without adhering to any particular exchange rate over the long run?
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Managed floating exchange rates
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To offset an appreciation of the dollar against the yen, the Federal Reserve would:
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Sell dollars on the foreign exchange market and lower domestic interest rates
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The third generation financial crises occurred in
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Asia
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Which exchange-rate mechanism calls for frequent redefining of the par value by small amounts to remove a payments disequilibrium?
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Crawling pegged exchange rates
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To defend a pegged exchange rate that overvalues its currency, a country could:
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Purchase its own currency in international markets
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A surplus nation can reduce its payments imbalance by:
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Revaluing its national currency
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To help insulate their economies from inflation, currency depreciation, and capital flight, developing countries have implemented:
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Currency Boards
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he Federal Reserve Bank uses open market operations to directly affect:
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The money supply
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Suppose that the one year Swiss franc interest rate is 5% and the one year U.K. interest rate is 4%. If the one year forward rate is 0.45 pounds per francs what must the spot exchange rate be (£/Sfr) if covered interest parity holds?
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0.4545
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Assets of the central bank include:
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Domestic Credit & Foreign Reserves
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A country can operate a fixed exchange rate and practice independent monetary policy if and only if
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it restricts inflows and outflows of financial capital
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The difference between covered and uncovered interest parity is that
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the former uses forward contracts to eliminate interest rate risk; the latter is based on the expectations about exchange rates
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With a flexible exchange rate and free movement of capital, the role of monetary policy is directed towards:
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inflation and unemployment
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In the case of fixed exchange rate, the Uncovered Interest rate Parity reduces to:
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Interest rates are equal between countries
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With a fixed exchange rate and free movement of capital, the role of monetary policy is directed towards:
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keeping the domestic interest rate at the world interest rate
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Given a system of floating exchange rates, an expansionary monetary policy by the Federal Reserve will cause
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the dollar to depreciate and will increase U.S. net exports
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In the Eurozone, the ___________ policies include free movement of capital, single currency but no independent national monetary policies while the ____________ policies include free movement of capital, independent monetary policy, and flexible exchange rates:
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Internal, External
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