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1 | |
If capital flows freely between countries and a country has a fixed exchange rate, one thing you know is: |
| | A) | The country exports more than it imports. |
| | B) | It must have ample gold reserves. |
| | C) | It must have a strong monetary policy. |
| | D) | It cannot have a domestic monetary policy. |
| | E) | None of the above. |
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2 | |
If inflation in country B exceeds inflation in country A purchasing power parity implies that: |
| | A) | The currency of country A should depreciate relative to the currency of country B. |
| | B) | The currency of country B will depreciate relative to the currency of country A. |
| | C) | The inflation rate in country A will rise to match the inflation rate in country B. |
| | D) | The inflation rate in country B will fall to match the inflation rate in country A. |
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3 | |
If the inflation rate in country A is 4.5% and the inflation rate in country B is 3.0% we should expect the percentage change in the number of units of country A's currency per unit of country B's currency to be: |
| | A) | +50.0% |
| | B) | –0.5% |
| | C) | +1.5% |
| | D) | +75% |
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4 | |
Which of the following statements is most correct: |
| | A) | A central bank cannot have both, a fixed exchange rate and an independent inflation policy. |
| | B) | A central bank can select between a fixed exchange rate and an independent inflation policy provided fiscal policy cooperates. |
| | C) | The central banks of most industrialized countries focus on fixed exchange rates. |
| | D) | While most central banks of industrialized countries favor fixing exchange rates, their primary concern is on domestic inflation. |
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5 | |
When arbitrage occurs across countries with a flexible exchange rate when the bonds in each country are identical and there are no barriers to capital flows: |
| | A) | The interest rates on the bonds will be identical. |
| | B) | The prices of the bonds will be identical. |
| | C) | Expected returns are the same. |
| | D) | The inflation rates in each country will be identical. |
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6 | |
Consider the following, an investor in the U.S. is pondering a one year investment. She can purchase a domestic bond for $5000 and it has an interest rate of i; she can also purchase a bond in England for 7500 British pounds (£) and the bond pays an interest rate of i f. The current exchange rate is $1.50/£. She considers the bonds to be of equal risk. If i = i f the expected returns are not equal. What do you know: |
| | A) | The exchange rate must be flexible |
| | B) | The bonds initially sold for different prices. |
| | C) | Arbitrage doesn't work. |
| | D) | The exchange rate is fixed between the U.S. and Britain. |
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7 | |
Which of the following best characterizes the United States: |
| | A) | A controlled domestic interest rate, a closed capital market and a flexible exchange rate. |
| | B) | A controlled domestic interest rate, an open capital market and a fixed exchange rate. |
| | C) | No control over the domestic interest rate, an open capital market and a flexible exchange rate. |
| | D) | A controlled domestic interest rate, an open capital market and a flexible exchange rate. |
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8 | |
If the Fed decides to maintain a fixed euro/dollar exchange rate, when they buy euros: |
| | A) | This will decrease banking system reserves. |
| | B) | The domestic money supply will decrease. |
| | C) | There will be pressure on domestic interest rates to decrease. |
| | D) | All of the above. |
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9 | |
A sterilized foreign exchange intervention would: |
| | A) | Not alter the central bank's holdings of international reserves. |
| | B) | Alter the liability side of the central bank's balance sheet but leave the asset side unchanged. |
| | C) | Leave the central bank's balance sheet unchanged. |
| | D) | Alter the asset side of a central bank's balance sheet but leave the domestic monetary base unchanged. |
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10 | |
Fixing an exchange rate between two countries makes the most sense when: |
| | A) | Both countries use the same national language. |
| | B) | The countries macroeconomic fluctuations are negatively correlated. |
| | C) | The countries macroeconomic fluctuations are positively correlated. |
| | D) | One country has a lot of international reserves and the other doesn't. |
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11 | |
A country that suffers from bouts of high inflation and wants to fix its exchange rate should tie its currency to: |
| | A) | The currency of a larger country. |
| | B) | The currency of a country with a strong reputation for low inflation. |
| | C) | The currency of a country with similar inflation performance. |
| | D) | The currency of a country that is still on the gold standard. |
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12 | |
If the U.S. were to revert to a gold standard: |
| | A) | Trade deficits would result in gold reserves in the U.S. increasing. |
| | B) | Trade deficits would quickly disappear. |
| | C) | Trade deficits would result in higher domestic interest rates. |
| | D) | Trade deficits would result in high inflation. |
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13 | |
In 1997 there was a speculative attack on the Thai baht, this resulted from: |
| | A) | The belief by speculators that the Thai central bank didn't have U.S. dollar reserves to maintain the current fixed rate. |
| | B) | The belief by speculators that the Thai central bank was run by corrupt officials. |
| | C) | The revelation that the Thai central bank had depleted its gold reserves. |
| | D) | The overthrow of the Thai president and the central bank. |
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14 | |
The Bretton Woods System failed in 1971 due to: |
| | A) | Very low rates of inflation in the U.S. |
| | B) | The lack of capital mobility across international borders. |
| | C) | The desire on the part of participating countries to have an independent monetary policy. |
| | D) | All of the above. |
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15 | |
The International Monetary fund: |
| | A) | Today provides loans to countries facing a capital crisis and serves in an advisory capacity. |
| | B) | Today serves only in the role of financing current account deficits. |
| | C) | Today serves only in an advisory capacity, it does not have any lending powers. |
| | D) | Doesn't exist any longer, it was phased out in 1971 with the collapse of the Bretton Woods System. |
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