Question 1

To fix its exchange rate, a government can use:

Accepted Answer

Exchange market intervention involves the government buying or selling its own currency in the foreign exchange market, which can influence the exchange rate. This is a common tool used by governments to manage the value of their currency and stabilize their economy. The other options, such as competition, speculation, and arbitrage, do not directly address the issue of fixing an exchange rate.

Question 2

With a fixed exchange rate regime, monetary policy is:

Accepted Answer

With a fixed exchange rate regime, the exchange rate is set and cannot be adjusted through monetary policy. Therefore, the ability of monetary policy to shift aggregate demand to the right is limited, as it cannot adjust the exchange rate to support that shift. Monetary policy can still affect the economy through its impact on interest rates and the money supply, but these effects are more limited in a fixed exchange rate regime. Monetary policy's ability to shift aggregate supply to the right is not directly affected by the exchange rate regime.

Question 3

A depreciation of a currency below the exchange rate fixed by its government can be countered by all of the following measures EXCEPT by:

Accepted Answer

The answer of A depreciation of a currency below the...

Question 4

The Bretton Woods monetary system:

Accepted Answer

The Bretton Woods monetary system broke down in 1971, when President Nixon suspended the convertibility of the US dollar into gold, effectively ending the system.

Question 5

One limitation of maintaining a fixed exchange rate system is that:

Accepted Answer

Maintaining a fixed exchange rate system limits the flexibility of the country's monetary policy, making it difficult to achieve other goals such as full employment or economic growth. This is because the country must focus on maintaining the value of its currency at a fixed rate, rather than adjusting interest rates or money supply to stimulate the economy.

Question 6

When countries seek to maintain fixed exchange rates through intervention, their governments or central banks:

Accepted Answer

The answer of When countries seek to maintain fixed exchange...

Question 7

The Bretton Woods agreement called for:

Accepted Answer

The Bretton Woods agreement called for maintaining fixed exchange rates by government intervention. It established a system in which currencies were fixed against the U.S. dollar, which was in turn fixed against gold. This meant that exchange rates between currencies were also fixed. However, governments could intervene to adjust their exchange rates within a narrow band of 1% above or below the fixed rate, in order to correct imbalances in their balance of payments.

Question 8

A major drawback of a floating exchange rate is the:

Accepted Answer

Floating exchange rates can lead to uncertainty about the value of goods traded internationally because the exchange rate can fluctuate significantly due to market forces, making it difficult for businesses to predict the cost of importing or exporting goods.

Question 9

The advantage of a fixed exchange rate is that it:

Accepted Answer

A fixed exchange rate eliminates uncertainty about the value of a currency, as it is pegged to another currency or commodity. However, it may not necessarily create trade surpluses, and it may limit the ability to use monetary policy for macroeconomic stabilization. The elimination of twin deficits is not necessarily a direct advantage of a fixed exchange rate.

Question 10

All of the following are major drawbacks of a fixed exchange rate EXCEPT that:

Accepted Answer

Fixed exchange rates provide certainty in international commerce as the exchange rate remains constant. The major drawbacks of a fixed exchange rate system are A, B, and C as they restrict the flexibility of the economy and involve significant costs. However, fixed exchange rates do not make commerce among countries more uncertain and riskier.

Question 11

Use the following to answer questions :
Figure: Exchange Market Intervention 
-(Figure: Exchange Market Intervention) Look at panel (a) in the figure Exchange Market Intervention. Which of the following approaches could the Genovian government use to raise the value of the geno above its present equilibrium exchange rate and into the target range?

Accepted Answer

Panel (a) shows that the equilibrium exchange rate is below the target range. This indicates that the demand for genos is relatively low compared to the supply. To raise the value of the geno and bring it into the target range, the government could shift the demand curve to the right by raising interest rates. This would encourage investors to deposit their money in Genovia, increasing the demand for genos, and ultimately raising its value. Option A involves using the government's own currency to buy U.S. dollars, which would increase the supply of genos and decrease the supply of dollars, leading to a depreciation of the geno. Option C would increase the supply of dollars, which would further depress the value of the geno. Option D would limit the supply of dollars, reducing demand for genos, and potentially leading to a contraction of the Genovian economy.

Question 12

A floating exchange rate:

Accepted Answer

A floating exchange rate system allows a country's central bank to use monetary policy to influence the exchange rate and help stabilize the economy. It also allows the market to determine the value of the currency based on supply and demand, which can reduce uncertainty for business firms. Additionally, it can make foreign goods easier to price as the exchange rate adjusts to reflect changes in the relative value of currencies.

Question 13

One of the advantages of adopting a fixed exchange rate system is that it:

Accepted Answer

Adopting a fixed exchange rate system reduces uncertainty by providing a stable and predictable exchange rate, which can help facilitate trade and investment.

Question 14

Use the following to answer questions :
Figure: Exchange Market Intervention 
-(Figure: Exchange Market Intervention) Look at panel (b) in the figure Exchange Market Intervention. Which of the following approaches could the Genovian government use to decrease the value of the geno below its present equilibrium exchange rate and into the target range?

Accepted Answer

By using its own currency to buy U.S. dollars, the Genovian government increases the supply of genos in the foreign exchange market, which can decrease the value of the geno.

Question 15

The result of the meeting of representatives of the Allied Nations at Bretton Woods, New Hampshire, in 1944 was:

Accepted Answer

The Bretton Woods conference resulted in the creation of the International Monetary Fund (IMF) and the World Bank, as well as a system of fixed exchange rates. Under this system, participating countries agreed to tie their currency to the US dollar, which was pegged to gold at a fixed rate. The goal was to promote international economic growth and reduce the risk of currency fluctuations.

Question 16

A country wants to maintain a fixed exchange rate with the dollar, but at the current exchange rate its currency is in excess. The country can adopt all of the following policies to maintain its exchange rate EXCEPT:

Accepted Answer

Selling domestic currency and buying U.S. dollars would increase the supply of the domestic currency, exacerbating the excess and putting further downward pressure on the exchange rate, which is contrary to maintaining a fixed exchange rate.

Question 17

Which of the following is NOT true of a fixed exchange rate system?

Accepted Answer

A fixed exchange rate system can make it more difficult to pursue domestic macroeconomic objectives because it limits a country's ability to adjust its monetary policy independently.

Question 18

"Foreign exchange controls" refers to the:

Accepted Answer

Foreign exchange controls refer to restrictions imposed by a country on the amount of foreign currency that individuals or businesses can buy. This is often done through licensing systems that limit the rights of individuals to purchase foreign currency. This is different from fixed exchange rate systems, common currency systems, or restrictions on holding foreign exchange by a central bank.

Question 19

Foreign exchange controls are:

Accepted Answer

Foreign exchange controls refer to government regulations on the purchase and sale of foreign currency. A government licensing system that limits the amount of foreign currency an individual can buy is an example of foreign exchange controls. Fixed and floating exchange rates are different systems for determining the value of one currency relative to another, while international limits on exchange rates do not exist.

Question 20

Assume that the foreign exchange market is trading the domestic currency at a rate (U.S. dollars per unit of the domestic currency) above the rate fixed by the government. To maintain the fixed exchange rate, the government must:

Accepted Answer

The answer of Assume that the foreign exchange market is...

Quiz 19: Open-Economy Macroeconomics