Question 1

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 appreciation of its domestic currency, it needs to increase the supply of its currency in the foreign exchange market. This can be done by acquiring international reserves (such as US dollars or euros) and selling its own currency in exchange. This increases the supply of domestic currency relative to the demand, which prevents its appreciation. However, this also increases the monetary base, leading to a higher risk of inflation.

Question 2

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

When the Bundesbank bought dollars and sold marks to keep the exchange rate fixed, it gained international reserves. The huge purchase of these international reserves increased the German monetary base, leading to rapid growth in the German money supply. Therefore, option D, grow; rapid is the correct choice.

Question 3

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, helping to control inflation.

Question 4

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, where currency values were pegged to the U.S. dollar, and the dollar was tied to gold. As a result, balance of payments considerations were important in the management of the system. However, since the system was abandoned, exchange rates are now determined by market forces, and therefore exchange rate considerations have become more important for monetary policy. On the other hand, balance of payments considerations are now less important since they do not have a direct impact on exchange rates.

Question 5

Under the Bretton Woods system,when a country adopted an expansionary monetary policy,thereby causing a balance of payments ________,the country would eventually be forced to implement ________ monetary policy.

Accepted Answer

Under the Bretton Woods system, adopting an expansionary monetary policy could lead to a balance of payments deficit. To correct this imbalance, a country would be forced to adopt a contractionary monetary policy to stabilize its currency and balance of payments.

Question 6

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 own currency to prevent appreciation, this leads to a higher supply of the currency in the foreign exchange market. This, in turn, leads to higher demand for the foreign currency, which leads to a decrease in the central bank's international reserves. As a result, the central bank's ability to control the monetary base is reduced, which can lead to domestic inflation. Thus, only option D is correct.

Question 7

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 8

Because the United States was the reserve-currency country under the Bretton Woods system,it could run large balance of payments ________ without ________ significant amounts of international reserves.

Accepted Answer

As the reserve-currency country, the United States was able to run large balance of payments deficits without losing significant amounts of international reserves.

Question 9

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 10

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 11

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

Accepted Answer

A crawling peg is a type of exchange-rate targeting rule where the government allows the domestic currency to depreciate at a steady rate relative to a foreign currency or a basket of foreign currencies. This allows for some flexibility in the exchange rate to accommodate changes in the economy, but still maintains a relatively stable exchange rate. In this case, the crawling peg allows inflation in the pegging country to be higher than that of the anchor country, which is the country to which the exchange rate is pegged. This is because the steady depreciation of the domestic currency makes imports more expensive, which can increase inflation.

Question 12

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 allows a central bank to be governed by a policy rule, which follows a predetermined set of rules rather than discretionary policy. This decreases the probability of policy developing a time-inconsistency problem where the central bank fails to follow its own stated policies consistently over time.

Question 13

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

This type of monetary policy strategy is specifically focused on maintaining a fixed exchange rate between a country's currency and the currency of a larger, low inflation country. The goal is to stabilize the exchange rate and ensure that the domestic currency retains its value in comparison to the larger country's currency. This is different from currency targeting (B), which focuses on maintaining a stable value for the domestic currency in general, and from monetary targeting (C), which focuses on controlling the money supply to manage inflation. Inflation targeting (D) is another type of monetary policy strategy that aims to keep inflation within a specified target range, but this is not directly related to maintaining a fixed exchange rate.

Question 14

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 15

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 interest rates, which would decrease the supply of money in the economy and make it more expensive to borrow. This would make the currency more attractive to investors, thereby strengthening its value.

Question 16

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 17

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 the central bank wants to weaken its currency, it needs to pursue an expansionary monetary policy. This means increasing the money supply and lowering interest rates to encourage borrowing and investment. Lowering interest rates will make the domestic currency less attractive to foreign investors, thereby weakening it.

Question 18

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 19

To keep from running out of international reserves under the Bretton Woods system,a country had to implement ________ monetary policy to ________ its currency.

Accepted Answer

Under the Bretton Woods system, if a country was running out of international reserves, it needed to implement contractionary monetary policy. This policy would reduce the money supply, increase interest rates, and as a result, strengthen the country's currency by making it more attractive to foreign investors.

Question 20

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.

Quiz 18: The International Financial System

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.

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.

Under the Bretton Woods system,when a country adopted an expansionary monetary policy,thereby causing a balance of payments ,the country would eventually be forced to implement monetary policy.

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.

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

Because the United States was the reserve-currency country under the Bretton Woods system,it could run large balance of payments without significant amounts of international reserves.

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.

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.

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

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

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.

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 see its currency fall in value,it may pursue monetary policy to the domestic interest rate,thereby strengthening its currency.

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 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 .

To keep from running out of international reserves under the Bretton Woods system,a country had to implement monetary policy to 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.