Question 1

Briefly discuss the main advantage of the bimetallic standard over the gold standard.

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Question 2

A balance of payments crises under fixed exchange rates occurs when
A) marginal returns on foreign exchange investments approach zero.
B) a country runs out of foreign reserves.
C) a country is in a liquidity trap.
D) forward currency markets undergo high volatility.
E) exports and imports expand beyond some point.

Accepted Answer

A balance of payments crisis occurs when a country exhausts its foreign reserves and is unable to meet its external financial obligations. This is a common problem under fixed exchange rates since the government must maintain the exchange rate by buying or selling its own currency in foreign exchange markets, which depletes foreign reserves. Once reserves are depleted, a devaluation or floating of the currency may be necessary to restore balance to the payments system.

Question 3

From the Civil War up to 1914, the United States adhered to a
A) gold standard.
B) silver standard.
C) bimetallic standard.
D) bronze standard.
E) copper standard.

Accepted Answer

The United States was on the gold standard during this period, with the value of the currency pegged to a fixed quantity of gold. This meant that people could exchange their paper money for gold at a fixed rate, and the government was committed to maintaining this exchange rate.

Question 4

From 1837 and up until the Civil War, the United States adhered to a
A) gold standard.
B) silver standard.
C) bimetallic standard.
D) bronze standard.
E) copper standard.

Accepted Answer

From 1837 to the Civil War, the United States adhered to a bimetallic standard, which meant that both gold and silver were accepted as currency and had a fixed exchange rate with each other. This allowed for greater flexibility in the money supply and helped to prevent large fluctuations in the value of the currency.

Question 5

Please briefly describe what is meant by a gold exchange standard.

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Question 6

Balance of payments crises under fixed exchange rates occur because of
A) government policies that are inconsistent with fixed exchange rates.
B) punitive currency wars.
C) global inflation and trade imbalances due to war.
D) excessive exports and imports that overload the global system.
E) monotonic expansion in global currency volume.

Accepted Answer

Balance of payments crises under fixed exchange rates occur because government policies may be inconsistent with maintaining a fixed exchange rate. For example, if a country has an expansionary monetary policy that causes inflation, this will lead to an outflow of capital and a decrease in demand for the country's currency, putting pressure on the fixed exchange rate. Similarly, if a country's fiscal policy creates large budget deficits, this can also cause a loss of confidence in the currency and put pressure on the fixed exchange rate.

Question 7

Describe the mechanism which would take place if the Bank of England decides to increase its money supply by purchasing domestic assets under the gold standard.

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Question 8

List the drawbacks of the gold standard.

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Question 9

Does the signalling effect of foreign exchange intervention support or refute the claim that assets cannot be perfect substitutes if sterilized intervention is going to have any effect?
 Please explain.

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Question 10

If assets are imperfect substitutes, then a decrease in the amount of domestic currency bonds held by the public will ________ the risk premium and ________ the amount of domestic currency bonds held by the central bank.
A) decrease; leave unchanged
B) increase; decrease
C) increase; increase
D) decrease; decrease
E) leave unchanged; decrease

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Question 11

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will ________ the risk premium and ________ the amount of domestic currency bonds held by the central bank.
A) increase; leave unchanged
B) increase; decrease
C) increase; increase
D) decrease; decrease
E) leave unchanged; decrease

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Question 12

Explain how a country whose currency is the reserve currency can use monetary policy for macroeconomic stabilization. In particular, explain the result if that country doubled its domestic money supply.

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Quiz 18: Fixed Exchange Rates and Foreign Exchange Intervention

Briefly discuss the main advantage of the bimetallic standard over the gold standard.

A balance of payments crises under fixed exchange rates occurs when

From the Civil War up to 1914, the United States adhered to a

From 1837 and up until the Civil War, the United States adhered to a

Please briefly describe what is meant by a gold exchange standard.

Balance of payments crises under fixed exchange rates occur because of

Describe the mechanism which would take place if the Bank of England decides to increase its money supply by purchasing domestic assets under the gold standard.

List the drawbacks of the gold standard.

Does the signalling effect of foreign exchange intervention support or refute the claim that assets cannot be perfect substitutes if sterilized intervention is going to have any effect? Please explain.

If assets are imperfect substitutes, then a decrease in the amount of domestic currency bonds held by the public will the risk premium and the amount of domestic currency bonds held by the central bank.

If assets are imperfect substitutes, then an increase in the amount of domestic currency bonds held by the public will the risk premium and the amount of domestic currency bonds held by the central bank.

Explain how a country whose currency is the reserve currency can use monetary policy for macroeconomic stabilization. In particular, explain the result if that country doubled its domestic money supply.