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| 1 | |
Which of the following statements is correct? |
| | A) | The Fed engages in foreign currency transactions on a daily basis. |
| | B) | The Fed engages in foreign currency transactions in conjunction with the meetings of the FOMC. |
| | C) | The Fed almost never engages in foreign currency transactions. |
| | D) | The Fed is not permitted to engage in foreign currency transactions. |
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| 2 | |
The currency of country A will depreciate relative to that of country B if: |
| | A) | the inflation rate in country B is higher than that in country A. |
| | B) | the inflation rate in country A is higher than that in country B. |
| | C) | the inflation rates in the two countries are the same but country A fixes its exchange rate. |
| | D) | Both a and c are correct. |
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| 3 | |
If the inflation rate in country A is 2.5% and the inflation rate in country B is 2.0% 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) | + 4.5%. |
| | B) | 0.5%. |
| | C) | +1.25%. |
| | D) | +.8%. |
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| 4 | |
If a country like Mexico, for example, wants its inflation rate to diverge from that of the United States, then: |
| | A) | if the U.S. inflation rate rises Mexico must be prepared for the peso/dollar exchange rate to decrease. |
| | B) | if the U.S. inflation rate rises Mexico must be prepared for the peso/dollar exchange rate to increase. |
| | C) | if the U.S. inflation rate falls Mexico must be prepared for the peso/dollar exchange rate to decrease. |
| | D) | None of the above; it would not be in Mexico's best interests for its inflation rate to diverge from that of the United States. |
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| 5 | |
If arbitrage occurs across countries with a fixed 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 interest rate on the domestic bond will be greater than that on the foreign bond due to differences in inflation. |
| | C) | the expected return from the foreign bond will be higher. |
| | 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 $5,000 that has an interest rate of i; she can also purchase a bond in England for 10,000 British pounds (£) that pays an interest rate of if. The current exchange rate is $2.00/£. She considers the bonds to be of equal risk. Ifi = ifbut the $/£ exchange rate is expected to fall, the investor should: |
| | A) | buy the U.S. bond. |
| | B) | buy the British bond. |
| | C) | buy the British bond and hold it until after the exchange rate falls. |
| | D) | rely on arbitrage to equalize her return whichever bond she buys. |
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| 7 | |
Capital controls consist of: |
| | A) | restrictions on the ability of foreigners to invest in a country. |
| | B) | obstacles that prevent the selling of investments and taking funds out of the country. |
| | C) | fixed interest rates. |
| | D) | All of the above are correct. |
| | E) | Only a and b are correct. |
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| 8 | |
If the Fed decides to maintain a fixed euro/dollar exchange rate, and buys euros: |
| | A) | its dollar liabilities will decrease. |
| | B) | its dollar liabilities will increase. |
| | C) | there will be pressure on domestic interest rates to increase. |
| | D) | Both b and c are correct. |
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| 9 | |
Which of the following statements is correct? |
| | A) | To sterilize a foreign exchange intervention in which it purchased a foreign bond, the Fed would sell a U.S. Treasury bond. |
| | B) | To sterilize a foreign exchange intervention in which it purchased a foreign bond, the Fed would buy a U.S. Treasury bond of the same face value. |
| | C) | To sterilize a foreign exchange intervention in which it sold a foreign bond, the Fed would sell a U.S. Treasury bond of the same face value. |
| | D) | The Fed will sterilize foreign exchange interventions that increase reserves but not those that decrease reserves. |
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| 10 | |
All of the following are benefits of fixed exchange rates except: |
| | A) | international trade is simplified. |
| | B) | the risk associated with foreign investment is reduced. |
| | C) | policymakers' hands are tied. |
| | D) | it means adopting another country's interest-rate policy. |
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| 11 | |
Speculative attacks are more likely if a country has: |
| | A) | a flexible interest rate. |
| | B) | capital controls. |
| | C) | a fixed exchange rate. |
| | D) | All of the above. |
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| 12 | |
If the U.S. were to revert to a gold standard, a U.S. current account deficit would result in: |
| | A) | gold reserves in the U.S. decreasing. |
| | B) | higher domestic interest rates. |
| | C) | deflation. |
| | D) | All of the above. |
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| 13 | |
Floating exchange rates: |
| | A) | act as automatic macroeconomic stabilizers. |
| | B) | require higher levels of foreign exchange reserves than do fixed exchange rates. |
| | C) | means a country cannot control its domestic interest rates. |
| | D) | All of the above are true. |
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| 14 | |
Under the Bretton Woods System: |
| | A) | each country pegged its currency to the U.S. dollar. |
| | B) | countries held U.S. dollar reserves. |
| | C) | there were complex capital controls. |
| | D) | All of the above. |
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| 15 | |
In a country that has a currency board, its central bank: |
| | A) | has only one job: to maintain the exchange rate. |
| | B) | loses its role as lender of last resort. |
| | C) | will gradually be phased out. |
| | D) | All of the above are correct. |
| | E) | Both a and b are correct. |
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