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 through exchange-rate targeting.

Question 2

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

Accepted Answer

Under a crawling peg, the exchange rate is allowed to gradually depreciate at a steady rate over time. This allows for higher inflation in the pegging country compared to the anchor country, as the depreciation of the currency offsets the impact of higher inflation. Therefore, Option C is the correct choice. Option A is incorrect as it refers to a gold standard, which is a fixed exchange rate system, not a crawling peg. Option B is incorrect as it refers to a fixed exchange rate system anchored to a low inflation country. Option D is also incorrect as it refers to a situation where the pegging country has lower inflation than the anchor country, which would not require a crawling peg.

Question 3

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 4

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 means that the central bank follows a policy rule and targets a specific exchange rate level. This reduces the probability of the policy developing a time-inconsistency problem since the policy is predetermined and less prone to discretion. In contrast, following a discretionary policy increases the probability of developing a time-inconsistency problem because policymakers may deviate from the policy rule when faced with unforeseen economic circumstances. Therefore, exchange-rate targeting allows the central bank to be governed by a policy rule and reduces the likelihood of policy inconsistency.

Question 5

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 6

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 7

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 8

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

A fixed exchange rate regime that ties the value of a country's currency to that of a low inflation country is known as an exchange-rate targeting strategy. This strategy aims to maintain a stable exchange rate and ensure low inflation.

Question 9

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 purchase of international reserves meant that the German monetary base increased, which leads to rapid growth in the German money supply. Therefore, the correct choice is D.

Question 10

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 are directly transmitted to the targeting country.

Question 11

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 an appreciation, it leads to a decrease in international reserves which in turn reduces the monetary base. This can lead to domestic inflation as there is now more money chasing fewer goods. Therefore, choice D is the correct answer.

Question 12

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 means that a country is importing more than it is exporting, resulting in an outflow of currency. This decreased demand for the currency leads to a decrease in its value, thus causing an overvalued German mark and an undervalued U.S. dollar.

Question 13

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

To weaken the currency, the central bank needs to pursue expansionary monetary policy, which involves lowering the domestic interest rate. This would make the currency less attractive to investors seeking higher yield, and potentially lead to decreased demand and a lower value of the currency. Contrarily, contractionary monetary policy, with a higher domestic interest rate, would increase demand for the currency, leading to a rise in value.

Question 14

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

A contractionary monetary policy involves raising the domestic interest rate, which can make investing in that country's currency more attractive and therefore strengthen its value. This would be the desirable course of action if the central bank wants to prevent its currency from falling in value. An expansionary monetary policy, on the other hand, would involve lowering the interest rate, which could potentially weaken the currency.

Question 15

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 exchange rate of a currency to the currency of another country, thereby anchoring the inflation rate for traded goods. This helps to keep inflation under control, and is an advantage of exchange-rate targeting. Therefore, the correct choice would be internationally as opposed to domestically, and anchor as opposed to domestic.

Question 16

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 was based on fixed exchange rates and strict controls on capital movements, which made balance of payments considerations more important in the conduct of monetary policy. After its abandonment, exchange rates became more flexible and capital movements more free, making exchange rate considerations more important in the conduct of monetary policy. Therefore, the correct answer is D, less important for balance of payments considerations and more important for exchange rate considerations.

Question 17

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 18

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 the domestic currency from appreciating, it will need to sell its currency and acquire international reserves. As a result of acquiring international reserves, the monetary base will increase. This increases the risk of inflation because if there are more reserves, there are more funds available for lending and investment, which can increase demand and drive up prices.

Question 19

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 20

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.

Quiz 18: 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

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

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

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

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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.