Question 1

An adjustment of central parities in the EMS is called a

Accepted Answer

An adjustment of central parities in the EMS is called a realignment. It involves changing the exchange rates of member countries' currencies with respect to each other and against the ECU to bring their currencies back in line with their economic fundamentals. Nominal appreciation or depreciation refers to changes in exchange rates due to market forces, while real appreciation or depreciation takes into account inflation differentials between countries. Re-coupling and re-paritization are not terms commonly used in the context of the EMS.

Question 2

Assume a country is in a fixed exchange rate regime.Now suppose that individuals expect that policy makers will revalue its currency.Explain the various actions that policy makers can choose in response to this expected revaluation.

Accepted Answer

The answer of Assume a country is in a fixed...

Question 3

Suppose a reduction in the domestic one-year interest rate expected to occur in two years .All else fixed,will the reduction in interest rate have which of the following effects in a flexible exchange rate regime?

Accepted Answer

The answer of Suppose a reduction in the domestic one-year...

Question 4

Suppose country A pegs its nominal exchange rate to country B and that country A has a higher inflation rate than country B.In this situation,country A will experience

Accepted Answer

Country A will experience a real appreciation because its higher inflation rate makes its goods more expensive relative to country B's. This can worsen its trade position as exports become less competitive, and the real exchange rate increases as the nominal rate is fixed but prices rise faster in country A.

Question 5

Suppose the economy is operating below the natural level of output.Discuss the arguments for and against using a devaluation in such a situation.

Accepted Answer

The answer of Suppose the economy is operating below the...

Question 6

Assume that policy makers are pursuing a fixed exchange rate regime.Assume that the economy is initially operating at the natural level (i.e.,Y = Yn).Suppose fiscal policy makers increase government spending.This fiscal contraction will cause which of the following?

Accepted Answer

The answer of Assume that policy makers are pursuing a...

Question 7

After continuing crises in 1993,the EMS countries

Accepted Answer

In response to the crises in 1993, the European Monetary System (EMS) countries decided to widen the band of allowable fluctuations around central parities to reduce the pressure on currencies and provide more flexibility within the system.

Question 8

Explain what factors cause shifts of the aggregate demand curve in the open economy model.

Accepted Answer

The answer of Explain what factors cause shifts of the...

Question 9

First,briefly explain why the AD curve is downward sloping in a closed economy.Second,briefly explain why the AD curve is downward sloping in an open economy under fixed exchange rates.And finally,briefly compare the size of the slopes of the two AD curves.

Accepted Answer

The answer of First,briefly explain why the AD curve is...

Question 10

During the EMS crisis in 1992,

Accepted Answer

During the EMS crisis in 1992, England and Italy abandoned the system by devaluing their currencies. Other countries like France, Germany, and Belgium stood firm and refused to change central parities.

Question 11

Suppose output is above the natural level of output.In a fixed exchange rate regime,explain the two ways the economy can return to the natural level of output.

Accepted Answer

The answer of Suppose output is above the natural level...

Question 12

Suppose foreign exchange markets anticipate a revaluation for country A.Further assume that policy makers in country A will continue to fix its nominal exchange rate.In order to peg the currency at its original level,which of the following must occur?

Accepted Answer

The answer of Suppose foreign exchange markets anticipate a revaluation...

Question 13

Suppose a country that has been pegging its currency is faced with a situation where financial market participants now expect some future revaluation.In such a situation,we would generally expect which of the following to occur?

Accepted Answer

The answer of Suppose a country that has been pegging...

Question 14

Assume a country is in a fixed exchange rate regime.Explain what factors might cause individuals to expect that a country will revalue its currency.

Accepted Answer

The answer of Assume a country is in a fixed...

Question 15

Assume that policy makers are pursuing a fixed exchange rate regime.Assume that the economy is initially operating at the natural level (i.e.,Y = Yn).Suppose a reduction in wealth causes households to reduce consumption.This wealth-induced decrease in consumption will cause which of the following to occur?

Accepted Answer

A reduction in consumption will lead to a decrease in aggregate demand, which will cause the real exchange rate to depreciate in the medium run.

Question 16

In a fixed exchange rate regime,which of the following policies could lead to a greater trade deficit and leave aggregate demand constant?

Accepted Answer

Increasing government spending and revaluing the currency could lead to a greater trade deficit by making imports cheaper and exports more expensive, thus increasing the volume of imports relative to exports. However, the increase in government spending could offset the decrease in net exports, leaving aggregate demand constant.

Question 17

A country which does not revalue when financial markets expect it to will probably suffer

Accepted Answer

The answer of A country which does not revalue when...

Question 18

Suppose the economy is initially operating above the natural level of output.In a fixed exchange rate regime,explain how the economy will adjust to this situation.

Accepted Answer

The answer of Suppose the economy is initially operating above...

Question 19

Suppose country A pegs its nominal exchange rate to country B and that country A has a lower inflation rate than country B.In this situation,country A will experience

Accepted Answer

A real depreciation occurs when the nominal exchange rate remains constant but the price level in the domestic country rises relative to the price level in the foreign country. In this case, country A has a lower inflation rate than country B, so the price level in country A will rise less than the price level in country B. This will lead to a real depreciation of the currency of country A.A better trade position occurs when a country's exports increase or its imports decrease. In this case, the real depreciation of the currency of country A will make its exports cheaper and its imports more expensive. This will lead to an increase in exports and a decrease in imports, resulting in a better trade position for country A.A reduction in the real exchange rate occurs when the real value of the domestic currency falls relative to the real value of the foreign currency. In this case, the real depreciation of the currency of country A will lead to a reduction in the real exchange rate.

Question 20

Suppose a country that has been pegging its currency is faced with a situation where financial market participants now expect some future devaluation.In such a situation,we would generally expect which of the following to occur?

Accepted Answer