Deck 18: Fixed Exchange Rates and Currency Unions

Question 1

The term for an exchange rate system where the currency is inconvertible is:

A) the gold standard.
B) exchange controls.
C) domestic price controls.
D) a verbatim currency system.
E) a variable currency system.

Answer 1

exchange controls.

Question 2

One of the ways governments control capital inflows and outflows is by:

A) regulating imports.
B) regulating exports.
C) regulating FDI.
D) regulating domestic businesses.
E) not having exchange controls.

Answer 2

regulating FDI.

Question 3

An inconvertible currency:

A) cannot be freely exchanged for another currency by consumers.
B) cannot be exchanged for another currency by the government.
C) can never be exchanged for another currency.
D) can be freely exchange by businesses.
E) never depreciates.

Answer 3

cannot be freely exchanged for another currency by consumers.

Question 4

Exchange controls:

A) require the government to balance inflows and outflows of foreign exchange at the current exchange rate.
B) require the government to ensure that the foreign exchange market is perfectly competitive.
C) require the government to sell more foreign exchange than it buys.
D) require the government to stop buying foreign exchange.
E) Require the government to intervene in the foreign exchange market.

Question 5

With exchange controls, a shortage of foreign exchange may require the government to:

A) devalue the currency.
B) adopt restrictive macroeconomic policies.
C) ration available foreign exchange among its competing uses.
D) All of the above.
E) None of the above

Question 6

Which of the following is one of the difficulties associated with exchange controls?

A) The ease of dealing with an efficient government agency
B) The difficulty of keeping the nominal and the real exchange rates aligned
C) Maintaining purchasing power parity
D) The relative simplicity of balancing inflows and outflows of foreign exchange
E) The stability of the real exchange rate.

Question 7

Which of the following is the term that refers to the buying and selling of foreign exchange by a central bank?

A) Sterilization
B) Exchange controls
C) Open market operations
D) Intervention
E) monetary policy

Question 8

An increase in a country's interest rate would necessitate which of the following actions by a central bank that did not want the nominal exchange rate to change?

A) An immediate adoption of exchange controls
B) The engineering of an exchange-rate shock
C) The buying of foreign exchange
D) The selling of foreign exchange
E) banning imports

Question 9

Intervention in the foreign exchange market means:

A) the government or central bank buys or sells foreign exchange.
B) the government restricts individuals from buying and selling foreign exchange.
C) the government restricts the importation of certain goods.
D) the government devalues the currency in the foreign exchange market.
E) that the central bank manipulates interest rates.

Question 10

If total inflows of foreign exchange exceed total outflows of foreign exchange at the current fixed exchange rate, the government would need to intervene and:

A) buy foreign exchange to maintain the exchange rate.
B) sell foreign exchange to maintain the exchange rate.
C) devalue the country's currency.
D) conduct an expansionary monetary policy.
E) reduce trade flows.

Question 11

If total outflows of foreign exchange exceed total inflows of foreign exchange at the current fixed exchange rate, the government would need to intervene and:

A) buy foreign exchange to maintain the exchange rate.
B) sell foreign exchange to maintain the exchange rate.
C) devalue the country's currency.
D) conduct an expansionary monetary policy.
E) conduct an expansionary fiscal policy.

Question 12

If a central bank intervenes in the foreign exchange market and does nothing else then:

A) the current account will get worse.
B) the current account will correct itself automatically.
C) the money supply will be unaffected.
D) sterilization will occur.
E) sterilization will be ineffective.

Question 13

Intervention in the foreign exchange market by selling foreign exchange causes:

A) the money supply to rise.
B) the money supply to fall.
C) no effect on the money supply.
D) a capital outflow.
E) FDI to decline.

Question 14

Intervention in the foreign exchange market by buying foreign exchange causes:

A) the money supply to rise.
B) the money supply to fall.
C) no effect on the money supply.
D) a capital outflow.
E) FDI to increase.

Question 15

Under a fixed exchange rate system, intervention by a central bank automatically:

A) adjusts the economy to a sustainable internal balance.
B) adjusts the economy to a sustainable external balance.
C) adjusts the exchange rate.
D) adjusts the economy to a sustainable internal and external balance.
E) None of the above

Question 16

Under a fixed exchange rate system, when total inflows of foreign exchange exceed total outflows of foreign exchange at the current fixed exchange rate:

A) the central bank would buy foreign exchange causing the economy to contract.
B) the central bank would sell foreign exchange causing the economy to contract.
C) the central bank would buy foreign exchange causing the economy to expand.
D) the central bank would sell foreign exchange causing the economy to expand.
E) the central bank would buy foreign exchange and cause the price level to rise.

Question 17

Under a fixed exchange rate system, when total outflows of foreign exchange exceed total inflows of foreign exchange at the current fixed exchange rate:

A) the central bank would buy foreign exchange causing the economy to contract.
B) the central bank would sell foreign exchange causing the economy to contract.
C) the central bank would buy foreign exchange causing the economy to expand.
D) the central bank would sell foreign exchange causing the economy to expand.
E) the central bank would sell foreign exchange and cause the price level to fall.

Question 18

Suppose that a country has a current account surplus and the central bank intervenes in the foreign exchange market and does nothing else. Which of the following statements is true in this case?

A) The surplus will get worse.
B) The exchange rate will appreciate.
C) The supply of money will rise.
D) The supply of money will fall.
E) The demand for money would fall.

Question 19

If a country maintains a fixed exchange rate by intervening in the foreign exchange market with no other actions by the central bank then it does not have a _____ policy.

A) expansionary fiscal
B) automatic fiscal
C) discretionary monetary
D) exchange rate
E) discretionary fiscal

Question 20

Which of the following situations would be easiest for a central bank to deal with?

A) External deficit and inflation
B) External deficit and high unemployment
C) External surplus and inflation
D) External balance and high inflation
E) external balance and low inflation.

Question 21

Under a fixed exchange rate system and freely flowing capital:

A) monetary policy is ineffective.
B) fiscal policy is ineffective.
C) monetary policy is very effective.
D) the supply of money is very important.
E) the demand for money will fall.

Question 22

Under fixed exchange rates, when is monetary policy consistent with both internal and external balance?

A) When the economy has unemployment and a current account deficit
B) When the economy has unemployment and a current account surplus
C) When the economy has inflation and a current account surplus
D) When the economy has both inflation and high unemployment
E) When the economy has both low inflation and negative real GDP growth.

Question 23

Under fixed exchange rates, when is monetary policy inconsistent with both internal and external balance?

A) When the economy has unemployment and a current account deficit
B) When the economy has unemployment and a current account surplus
C) When the economy has inflation and a current account deficit
D) When the economy has both inflation and high unemployment
E) When the economy has both high inflation and high unemployment

Question 24

As a government adopts an expansionary fiscal policy:

A) the demand for loanable funds increases causing interest rates to rise.
B) the demand for loanable funds decreases causing interest rates to fall.
C) the supply of loanable funds increases causing interest rates to rise.
D) the supply of loanable funds decreases causing interest rates to fall.
E) neither the supply nor the demand for loanable funds changes.

Question 25

Under a fixed exchange-rate system, as a government adopts an expansionary fiscal policy:

A) the demand for loanable funds increases causing interest rates to rise.
B) the demand for loanable funds decreases causing interest rates to fall.
C) the supply of loanable funds increases causing interest rates to rise.
D) the supply of loanable funds decreases causing interest rates to fall.
E) the demand for loanable funds does not change and interest rates fall.

Question 26

In an open economy with fixed exchange rates, expansionary fiscal policy causes:

A) interest rates to rise and an inflow of foreign capital causing the government to intervene and buy foreign currency.
B) interest rates to fall and an inflow of foreign capital causing the government to intervene and buy foreign currency.
C) interest rates to rise and an outflow of foreign capital causing the government to intervene and sell foreign currency.
D) interest rates to fall and an outflow of foreign capital causing the government to intervene and buy foreign currency.
E) interest rates to remain unchanged with an outflow of foreign capital causing the government to intervene and sell foreign currency.

Question 27

In an open economy with fixed exchange rates, an expansionary fiscal policy:

A) is very effective in changing equilibrium output.
B) is not effective in changing equilibrium output.
C) is effective in changing the exchange rate.
D) is not effective in changing capital flows between countries.
E) None of the above

Question 28

As a government adopts a contractionary fiscal policy:

A) the demand for loanable funds increases causing interest rates to rise.
B) the demand for loanable funds decreases causing interest rates to fall.
C) the supply of loanable funds increases causing interest rates to rise.
D) the supply of loanable funds decreases causing interest rates to fall.
E) the supply of loanable funds does not change and interest rates fall.

Question 29

In an open economy with fixed exchange rates, contractionary fiscal policy causes:

A) interest rates to rise and an inflow of foreign capital causing the government to intervene and buy foreign currency.
B) interest rates to fall and an outflow of foreign capital causing the government to intervene and sell foreign currency.
C) interest rates to rise and an outflow of foreign capital causing the government to intervene and sell foreign currency.
D) interest rates to fall and an outflow of foreign capital causing the government to intervene and buy foreign currency.
E) interest rates do not change and an inflow of foreign capital causes the government to intervene and buy foreign currency.

Question 30

An expansionary fiscal policy:

A) puts upward pressure on interest rates causing the government to sell foreign exchange.
B) puts downward pressure on interest rates causing the government to sell foreign exchange.
C) puts upward pressure on interest rates causing the government to buy foreign exchange.
D) puts downward pressure on interest rates causing the government to buy foreign exchange.
E) does not change interest rates causing the government to sell foreign exchange.

Question 31

Which of the following is not one of the effects of a contractionary fiscal policy?

A) A higher government budget deficit
B) A lower interest rate
C) Higher capital inflows
D) Higher interest rates
E) lower real GDP

Question 32

A contractionary fiscal policy:

A) puts upward pressure on interest rates causing the government to sell foreign exchange.
B) puts upward pressure on interest rates causing the government to buy foreign exchange.
C) puts downward pressure on interest rates causing the government to buy foreign exchange.
D) puts downward pressure on interest rates causing the government to sell foreign exchange.
E) does not affect interest rates or the exchange rate.

Question 33

In an open economy with fixed exchange rates, a contractionary fiscal policy:

A) is very effective in changing equilibrium output.
B) is not effective in changing equilibrium output.
C) is effective in changing the exchange rate.
D) is not effective in changing capital flows between countries.
E) does not change capital flows or the exchange rate.

Question 34

Which of the following statements would be true if aggregate demand were increasing rapidly?

A) The central bank would need to sell foreign exchange.
B) The central bank would need to buy foreign exchange.
C) The central bank would need to borrow money from the government.
D) The central bank would need to buy government bonds.
E) The central bank would not change policy.

Question 35

Which of the following is the term used to describe the offsetting of the effects of intervention in the foreign exchange market on the money supply?

A) daily intervention
B) sterilization
C) discretionary monetary policy
D) discretionary fiscal policy
E) currency board

Question 36

The benefits of a currency union associated with not having to exchange currencies is known as a:

A) monetary efficiency gain.
B) currency board gains.
C) transparency gains.
D) n-sum game gains.
E) government efficiency gain

Question 37

A currency union is a good idea as long as the monetary efficiency _____ are larger than the economic stability _____.

A) gains, losses
B) losses, gains
C) costs, benefits
D) costs, losses
E) the marginal costs, marginal benefits

Question 38

The Euro began circulating as a currency for all economic transactions in:

A) 1957
B) 1971
C) 1989
D) 2002
E) 2007

Question 39

Which country is a member of the EU and does not use the Euro as its national currency?

A) Spain
B) Finland
C) Denmark
D) Ireland
E) Greece

Question 40

Which country uses the Euro as its national currency?

A) France
B) Sweden
C) Denmark
D) the UK
E) Turkey

Question 41

The relationship between EU members and the countries using the Euro as their national currency is that:

A) all 15 countries in the EU use the Euro as their national currency.
B) none of the EU countries use the Euro as their national currency.
C) only 6 of the EU countries use the Euro as their national currency.
D) 12 of the EU countries use the Euro as their national currency.
E) 18 of the EU countries use the Euro as their national currency.

Question 42

Which of the following countries is now using the U.S. dollar as a currency for both domestic and international transactions?

A) Canada
B) Argentina
C) Mexico
D) El Salvador
E) the Philippines

Question 43

Which of the following is related to the Trilemma?

A) capital flows.
B) the exchange rates.
C) independent monetary policy.
D) all of the above
E) b and c only

Question 44

One of the reasons that we study fixed exchange rates is that before the 1970s most of the world's economies used a fixed exchange-rate system.

Question 45

There are very few countries in the world that peg the value of their currency to that of another country.

Question 46

A system of fixed exchange rates is more common in developed countries.

Question 47

An inconvertible currency is one that cannot be freely traded for gold.

Question 48

Exchange control systems are common among developing countries.

Question 49

An inconvertible currency is one that cannot by freely traded for another currency.

Question 50

One method of balancing the supply and demand for foreign exchange by a government when the exchange rate is freely floating is to ration the available supply among competing uses.

Question 51

Under a currency board system, the central bank holds no domestic currency.

Question 52

When a country has an inconvertible currency the government adopts exchange controls and becomes a monopolist with respect to holding all foreign exchange.

Question 53

One problem associated with exchange controls is that the government must determine who gets the foreign exchange.

Question 54

Governments using an exchange control system often limit flows of money for capital account transactions.

Question 55

With exchange controls it is possible for the nominal exchange rate to appreciate and for the real exchange rate to also appreciate.

Question 56

Exchange controls tend to create surpluses of foreign exchange that are difficult for the government to dispose of.

Question 57

Countries with exchange controls never have to ration foreign exchange.

Question 58

There will be no black market for U.S. dollars in a country where there are no restrictions on currency transactions.

Question 59

Economists can perfectly predict when an exchange control system will collapse.

Question 60

The buying and selling of foreign exchange by a central bank is known as exchange control.

Question 61

If the demand for foreign exchange increases then the central bank would have to sell foreign exchange to keep the value of the currency fixed.

Question 62

If the supply of foreign exchange decreased, the central bank would have to buy foreign exchange to keep the exchange rate fixed.

Question 63

A decrease in interest rates would lead a central bank to buy foreign exchange if it wanted to keep the exchange rate from changing.

Question 64

Capital outflows make it easier to keep the exchange rate fixed while capital inflows do the reverse.

Question 65

A central bank could buy foreign exchange forever but it cannot sell foreign exchange forever.

Question 66

Offsetting the effects of intervention on the money supply is known as sterilization.

Question 67

Under a fixed exchange rate the government must constantly balance the total demand and total supply of foreign exchange.

Question 68

Intervention is defined as the buying and selling of foreign exchange by the central bank.

Question 69

Intervention in the foreign exchange market means the government rations the available supply of foreign among competing uses.

Question 70

When a country intervenes in the foreign exchange market by selling foreign exchange, the domestic money supply declines.

Question 71

The buying of foreign exchange by the central bank causes the domestic money supply to fall.

Question 72

The selling of foreign exchange by the central bank has no effect on the domestic money supply.

Question 73

Internal balance is always the same thing as external balance.

Question 74

Under a fixed exchange rate system, monetary policy is very effective in achieving internal balance.

Question 75

Under a fixed exchange rate system, monetary policy can only be used to balance the supply and demand for foreign exchange.

Question 76

If a country has an external deficit, intervention in the foreign exchange market by the central bank will create a new equilibrium if the central bank buys foreign exchange.

Question 77

Under a fixed exchange rate system, a contractionary fiscal policy causes the central bank to intervene in the foreign exchange market and sell foreign exchange.

Question 78

With fixed exchange rates, expansionary fiscal policy will increase output and income.

Question 79

An expansionary fiscal policy in an open economy with freely mobile capital and fixed exchange rates is more effective in changing equilibrium output when compared to a closed economy.

Question 80

A contractionary fiscal policy is not very effective when a country adopts a fixed exchange rate.