Question 1

What alternative to restrictions on capital inflows do some economists recommend to minimize the possibility of increased lending booms and risk taking by domestic banks?

Accepted Answer

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Question 2

Why may a central bank intervene in the foreign exchange market when its currency is appreciating?

Accepted Answer

When a country's currency appreciates, its exports become more expensive and less competitive in the global market. This can harm the country's economy, particularly if the export sector is a significant contributor to GDP. To prevent this from happening, central banks may intervene in the foreign exchange market by selling their own currency and buying foreign currency. This increases the supply of their domestic currency, which will cause it to depreciate in value, making exports more affordable and competitive in the global market.

Question 3

The main reason central banks engage in foreign-exchange interventions is to

Accepted Answer

The main reason central banks engage in foreign-exchange interventions is to stabilize the exchange rate. This involves buying or selling foreign currency reserves in order to influence the value of their domestic currency. The aim is to stabilize the exchange rate and prevent large fluctuations that can disrupt trade and investment flows, and potentially cause economic instability.

Question 4

Although coordinated changes in monetary policy are likely to affect the exchange rate,

Accepted Answer

The statement says that coordinated changes in monetary policy are likely to affect the exchange rate, but if they are only sterilized interventions, they are unlikely to have a long-term effect. The other options are not mentioned in the statement.

Question 5

Why may a central bank intervene in the foreign exchange market when its currency is depreciating?

Accepted Answer

The answer of Why may a central bank intervene in...

Question 6

Capital inflow restrictions

Accepted Answer

Capital inflow restrictions can help reduce the risk of domestic lending booms and excessive risk-taking by domestic banks. This is because restrictions on capital inflows make it harder for domestic banks to access cheap foreign funding, which can contribute to the kind of rapid lending growth and risk-taking that can lead to financial crises. Option A and D are incorrect as economists generally view full capital controls as a last resort measure, while the US did not impose capital inflow restrictions in the late 1990s and Europe did not introduce such restrictions in May 2000.

Question 7

Throughout most of the post-World War II period,the use of capital controls by governments around the world was declining.But in the late 1990s,a number of governments expressed renewed interest in capital controls.What accounts for this renewed interest?

Accepted Answer

The answer of Throughout most of the post-World War II...

Question 8

If a central bank wishes to lower the foreign-exchange value of its currency,it will

Accepted Answer

To lower the foreign-exchange value of its currency, a central bank will sell its domestic currency and buy foreign assets. This increases the supply of domestic currency in the foreign exchange market, decreasing its value relative to other currencies.

Question 9

An unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency will result in

Accepted Answer

By selling foreign assets to purchase domestic currency, the central bank will increase the supply of domestic currency in the market, leading to a decrease in its exchange rate. This will make imports cheaper and exports more expensive, leading to a decrease in net exports. To counteract this effect, the central bank will increase domestic interest rates to attract foreign investment and support the exchange rate. Therefore, an unsterilized intervention will result in higher domestic interest rates.

Question 10

If a central bank engages in an unsterilized foreign-exchange intervention with the intention of raising the foreign-exchange value of its currency,

Accepted Answer

When a central bank engages in an unsterilized foreign-exchange intervention to raise the value of its currency, it sells domestic currency in exchange for foreign currency, reducing its holdings of international reserves.

Question 11

A central bank might attempt to offset an increase in the cost of foreign goods by

Accepted Answer

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Question 12

Make use of a T-account to show the effect of the Fed's sale of $500 million worth of government securities on the Fed's balance sheet.(assume the Fed receives a check from the sale of securities)

Accepted Answer

The answer of Make use of a T-account to show...

Question 13

A central bank may be reluctant to see its currency appreciate because

Accepted Answer

If a country's currency appreciates, its products become more expensive in foreign markets, which could result in a decrease in export demand. This, in turn, could lead to a decrease in economic productivity and employment, as export-oriented industries reduce output and lay off workers.

Question 14

If a central bank wishes to raise the foreign-exchange value of its currency,it will

Accepted Answer

When a central bank buys domestic currency and sells foreign assets, it reduces the supply of its currency in the foreign exchange market, leading to an increase in the currency's value. This action also involves converting foreign currency into the domestic currency, further increasing demand for the domestic currency and raising its foreign-exchange value.

Question 15

Make use of a graph of the foreign exchange market to show how the Brazilian Central Bank can use an unsterilized intervention to reduce the value of its currency,the real,in terms of the dollar.

Accepted Answer

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Question 16

Discuss the problems associated with the imposition of capital controls.

Accepted Answer

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Question 17

Which of the following will NOT result from an unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency?

Accepted Answer

Selling foreign assets to purchase domestic currency will lead to a decrease in the foreign-exchange value of the domestic currency and an increase in the foreign-exchange value of the foreign currency. This will result in a decrease in the domestic money supply, as there will be fewer domestic currency units in circulation. Therefore, the correct answer is (D) The domestic money supply will rise, which is the opposite of what actually happens.

Question 18

Countries in which region experienced disruptive capital flows in 1997-98?

Accepted Answer

The countries in East Asia experienced disruptive capital flows in 1997-98, also known as the Asian Financial Crisis. This was due to a combination of factors such as overvalued currencies, high levels of foreign debt, and speculative investments.

Question 19

How does a sterilized intervention by the Fed in foreign exchange market differ from an unsterilized intervention?

Accepted Answer

The answer of How does a sterilized intervention by the...

Question 20

Why do restrictions on capital inflows receive more support from some economists than restrictions of capital outflows?

Accepted Answer

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Quiz 16: The International Financial System and Monetary Policy