Question 1

From 1994 to 2005, the data show that China broadly operated under a:&#10;A) Floating exchange rate&#10;B) Fixed exchange rate&#10;C) Currency board&#10;D) Gold standard

Accepted Answer

During this period, China maintained a fixed exchange rate policy, pegging the value of its currency, the yuan (RMB), to the US dollar at a relatively constant rate to maintain export competitiveness and economic stability.

Question 2

When one country can produce all goods at less cost than another country, it has:&#10;A) A trade surplus&#10;B) Cheaper labor&#10;C) Absolute advantage&#10;D) Comparative advantage

Accepted Answer

Absolute advantage refers to the ability of a country to produce all goods at a lower cost than another country.

Question 3

Despite different costs of production, two countries can both benefit from trade due to the:&#10;A) Political agreemenets&#10;B) Different labor costs&#10;C) Absolute advantage&#10;D) Comparative advantage

Accepted Answer

Comparative advantage explains how countries can benefit from trade even when one country can produce goods at a lower cost overall. It emphasizes trading based on the relative efficiency of producing goods, allowing each country to specialize in producing goods where they have a lower opportunity cost, leading to mutual benefits from trade.

Question 4

The purchase or sale of foreign currency by a central bank while maintaining the money base is known as:&#10;A) Open market operations&#10;B) Quantitative easing&#10;C) Currency sterilization&#10;D) Forward guidance

Accepted Answer

Currency sterilization involves a central bank engaging in the purchase or sale of foreign currency to influence the value of its domestic currency, while simultaneously conducting offsetting operations to keep the money supply constant. This process prevents the foreign exchange interventions from affecting the domestic money base.

Question 5

Suppose there are more foreign currencies on the market that a central bank purchases. If the central bank does nothing else:&#10;A) The monetary base rises&#10;B) The monetary base falls&#10;C) There is not effect on the monetary base&#10;D) We do not have enough information to know

Accepted Answer

When a central bank purchases foreign currencies, it typically pays for them with its own currency. This action increases the amount of domestic currency in circulation, effectively increasing the monetary base.

Question 6

After more foreign currency arrives on the market, the central bank buys it. They thereafter prevent the monetary base by changing by:&#10;A) Raising minimum reserve requirements&#10;B) Paying lower interest rates on reserves&#10;C) Selling domestic bonds by purchasing the equal amount of reserves&#10;D) Purchasing foreign government bonds

Accepted Answer

By selling domestic bonds, the central bank can absorb the excess reserves created by the foreign currency purchase, thus preventing the monetary base from changing.

Question 7

Restrictions on the ability to purchase currency is known as:&#10;A) Capital controls&#10;B) Reserve requirements&#10;C) A floating exchange rate&#10;D) A currency board

Accepted Answer

Capital controls are regulatory measures used to limit or regulate the flow of foreign capital in and out of a country's economy, which can include restrictions on the ability to purchase foreign currency.

Question 8

The introduction of more dollars into the foreign exchange market would:&#10;A) Cause the dollar to appreciate relative to the yuan&#10;B) Have no effect on the value of the dollar&#10;C) Cause the dollar to depreciate relative to the yuan&#10;D) Cause the yuan to depreciate relative to the dollar

Accepted Answer

Introducing more dollars into the foreign exchange market increases the supply of dollars, which typically causes the dollar to depreciate relative to other currencies, such as the yuan.

Question 9

If the value of the domestic currency weakens relative to the foreign currency, demand for the domestic country's goods:&#10;A) Rises&#10;B) Falls&#10;C) Does not change&#10;D) We do not have enough information to know

Accepted Answer

When the value of the domestic currency weakens relative to the foreign currency, the domestic country's goods become cheaper for foreign buyers, increasing demand for those goods.

Question 10

Which of the following is not a part of the &#34;impossible trinity&#34;?&#10;A) Independent monetary policy&#10;B) Free capital flows&#10;C) Floating exchange rate&#10;D) Fixed exchange rate

Accepted Answer

The "impossible trinity" (also known as the trilemma) posits that it is impossible to have all three of the following at the same time: an independent monetary policy, free capital flows, and a fixed exchange rate. A floating exchange rate is not part of this trinity, as it is the alternative to having a fixed exchange rate.

Deck 7: Monetary Sterilization in China