Question 1

Both France and the United Kingdom successfully used exchange-rate targeting to lower inflation in the late 1980s and early 1990s by tying the value of their currencies to the

Accepted Answer

Both France and the United Kingdom tied the value of their currencies to the German mark to lower inflation in the late 1980s and early 1990s, known as the European Monetary System.

Question 2

An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for ________ traded goods to what is found in the ________ country.

Accepted Answer

Exchange-rate targeting ties the inflation rate for internationally traded goods to what is found in the anchor country, which helps keep inflation under control. Therefore, choice C, which states "internationally;anchor", is the correct answer.

Question 3

If a central bank does not want to allow the domestic currency to depreciate, it will ________ international reserves by purchasing its currency, thereby ________ the monetary base and increasing the risk of higher unemployment.

Accepted Answer

When a central bank wants to prevent its domestic currency from depreciating, it sells international reserves to buy its own currency, which decreases the monetary base. This action can lead to higher unemployment due to tighter monetary conditions.

Question 4

If a central bank does not want to allow the domestic currency to appreciate, it will ________ international reserves by selling its currency, thereby ________ the monetary base and increasing the risk of higher inflation.

Accepted Answer

If a central bank wants to prevent its domestic currency from appreciating, it will need to sell its own currency on the foreign exchange market in exchange for other currencies, which will increase its international reserves (thus "acquiring" reserves). If the central bank does not sterilize this intervention by selling its own securities, it will also increase the domestic monetary base (i.e. the money supply), which can lead to higher inflation if it exceeds the economy's demand for money.

Question 5

Which of the following is not an advantage to exchange-rate targeting?

Accepted Answer

The answer of Which of the following is not an...

Question 6

If a central bank does not want to see its currency rise in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby weakening its currency.

Accepted Answer

If a central bank wants to weaken its currency, it needs to make it less attractive to foreign investors. This can be achieved by pursuing expansionary monetary policy, which involves lowering the domestic interest rate. By doing so, domestic investors will be less likely to save and more likely to spend or invest in foreign assets, while foreign investors will be deterred from investing in the domestic economy. This reduces demand for the domestic currency, leading to a weaker exchange rate.

Question 7

The German central bank gained international reserves in the early 1970s because it sold ________ to prevent mark ________.

Accepted Answer

The answer of The German central bank gained international reserves...

Question 8

In response to the overvalued dollar in the early 1970s, the German Bundesbank bought dollars and sold marks to keep the exchange rate fixed, gaining international reserves. The huge purchase of international reserves meant that the German monetary base began to ________, leading to ________ growth in the German money supply.

Accepted Answer

The German Bundesbank buying dollars and selling marks led to an increase in international reserves, which expanded the German monetary base. As a result, the growth in the German money supply was rapid. So, option D is the correct answer.

Question 9

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of its currency leads to ________ international reserves which ________ the monetary base.

Accepted Answer

When a central bank sells its currency to prevent appreciation, it decreases the supply of that currency in the market which leads to an increase in its value. This leads to higher international reserves for the central bank. However, if the central bank uses these reserves to purchase domestic currency to prevent appreciation further, it injects more money into the economy which can increase the monetary base and ultimately lead to domestic inflation.

Question 10

Since the abandonment of the Bretton Woods system, balance of payments considerations have become ________ important, and exchange rate considerations ________ important in the conduct of monetary policy.

Accepted Answer

The Bretton Woods system had fixed exchange rates, meaning that countries had to adjust their balance of payments to maintain the exchange rate. However, since the abandonment of this system, exchange rate fluctuations have become more important in the conduct of monetary policy. As a result, balance of payments considerations have become less important. Thus, D is the correct answer.

Question 11

In the early 1970s, the U.S. ran large balance of payments ________, causing an ________ dollar and an ________ German mark.

Accepted Answer

A balance of payments deficit occurs when a country imports more goods and services than it exports, leading to a net outflow of currency. This can cause the country's currency to become overvalued, as there is a high demand for it relative to its supply. In the early 1970s, the U.S. ran large balance of payments deficits, leading to an overvalued dollar. This also caused other currencies, such as the German mark, to become undervalued in comparison. Therefore, option B) is the correct answer.

Question 12

In response to the overvalued dollar in the early 1970s, the German Bundesbank bought ________ and sold ________ to keep the exchange rate fixed, gaining international reserves.

Accepted Answer

To maintain the fixed exchange rate, the German Bundesbank bought dollars and sold marks. This action was aimed at preventing the dollar from depreciating further against the mark, thereby increasing their international reserves in dollars.

Question 13

Exchange-rate targeting allows a central bank to ________, thus this will ________ the probability of policy developing a time-inconsistency problem.

Accepted Answer

Exchange-rate targeting involves following a specific policy rule, which means that the central bank is less likely to deviate from its stated objectives and therefore less likely to develop a time-inconsistency problem. In contrast, discretionary policy, where the central bank has more flexibility in choosing its policy actions, is more likely to suffer from time-inconsistency issues. Therefore, A is the correct choice as it correctly identifies that exchange-rate targeting is associated with following a policy rule and decreasing the probability of a time-inconsistency problem.

Question 14

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of foreign currencies leads to ________ international reserves which ________ the monetary base.

Accepted Answer

When a central bank purchases foreign currencies to prevent its own currency from appreciating, it increases its international reserves. This action, in turn, increases the monetary base, which can stimulate domestic inflation.

Question 15

If a central bank does not want to see its currency ________ in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby ________ its currency.

Accepted Answer

The answer of If a central bank does not want...

Question 16

Under an exchange-rate targeting rule for monetary policy, a crawling peg

Accepted Answer

A crawling peg under an exchange-rate targeting rule allows the domestic currency to depreciate at a steady rate so that inflation in the pegging country can be higher than that of the anchor country. This is done to maintain competitiveness and promote exports.

Question 17

Under exchange-rate targeting, the central bank in the targeting country ________ lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is ________ transmitted to the targeting country.

Accepted Answer

Under exchange-rate targeting, the central bank in the targeting country does lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is directly transmitted to the targeting country.

Question 18

If a central bank does not want to see its currency ________ in value, it may pursue contractionary monetary policy to raise the domestic interest rate, thereby ________ its currency.

Accepted Answer

Contractionary monetary policy, which involves raising interest rates, is typically used to reduce inflation and can lead to an appreciation of the currency. Higher interest rates attract foreign investors looking for higher returns, thus increasing demand for the currency and strengthening its value.

Question 19

If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency.

Accepted Answer

If a central bank wants to prevent the depreciation of its currency, it will pursue a contractionary monetary policy, which involves raising the domestic interest rate. This will make holding the currency more attractive to foreign investors, increasing demand for the currency and thus strengthening its value in the foreign exchange market.

Question 20

A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting.

Accepted Answer

The description provided in the question matches the definition of exchange-rate targeting, which involves a fixed exchange rate regime tied to another currency. The other options, while related to monetary policy, do not specifically describe a fixed exchange rate regime.

Quiz 21: The International Financial System

Both France and the United Kingdom successfully used exchange-rate targeting to lower inflation in the late 1980s and early 1990s by tying the value of their currencies to the

An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for traded goods to what is found in the country.

If a central bank does not want to allow the domestic currency to depreciate, it will international reserves by purchasing its currency, thereby the monetary base and increasing the risk of higher unemployment.

If a central bank does not want to allow the domestic currency to appreciate, it will international reserves by selling its currency, thereby the monetary base and increasing the risk of higher inflation.

Which of the following is not an advantage to exchange-rate targeting?

If a central bank does not want to see its currency rise in value, it may pursue monetary policy to the domestic interest rate, thereby weakening its currency.

The German central bank gained international reserves in the early 1970s because it sold to prevent mark .

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the of its currency leads to international reserves which the monetary base.

Since the abandonment of the Bretton Woods system, balance of payments considerations have become important, and exchange rate considerations important in the conduct of monetary policy.

In the early 1970s, the U.S. ran large balance of payments , causing an dollar and an German mark.

In response to the overvalued dollar in the early 1970s, the German Bundesbank bought and sold to keep the exchange rate fixed, gaining international reserves.

Exchange-rate targeting allows a central bank to , thus this will the probability of policy developing a time-inconsistency problem.

A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the of foreign currencies leads to international reserves which the monetary base.

If a central bank does not want to see its currency in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby its currency.

Under an exchange-rate targeting rule for monetary policy, a crawling peg

Under exchange-rate targeting, the central bank in the targeting country lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is transmitted to the targeting country.

If a central bank does not want to see its currency in value, it may pursue contractionary monetary policy to raise the domestic interest rate, thereby its currency.

If a central bank does not want to see its currency fall in value, it may pursue monetary policy to the domestic interest rate, thereby strengthening its currency.

A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting.