B18

Question 1

Explain managed floating

Answer 1

Having the central bank manage the exchange rate to lessen its volatility, a dirty float as opposed to a clean fully flexible one

Question 2

What are regional currency arangements

Answer 2

When regions cooperate in managing their exchange rate compared to eachother, f.ex currency unions like the EU had before the euro

Question 3

What are the assets and liabilities of the central bank balance sheet

Answer 3

their assets are foreign and domestic assets such as foreign currency and gold and their liabilities are private bank deposits and currency in circulation

Question 4

How does the central bank reduce money supply

Answer 4

By selling assets and removing the money earned from circulation, so called open market operation

Question 5

What happens when a central bank purchases foreign assets

Answer 5

It increases the amount of domestic currency in circulation although it is now in the hands of foreigners

Question 6

What is sterialized open market operations

Answer 6

When the central bank does an action and a similar reverse action to shift its account balance without changing the money supply

Question 7

What does an increase in a central banks claim on foreign assets imply for the national money supply

Answer 7

it increases as the central bank creates money to pay for foreign assets

Question 8

How does a central bank keep the exchange rate fixed

Answer 8

By keeping the interest rate in the parity condition by controlling the money supply through the purchase and sale of foreign assets as to not effect domestic demand/ output

Question 9

Can a central bank both engage in monetary policy and fix the exchange rate

Answer 9

No, it is either or as one hinges on keeping the interest parity codition fixed while the other tries to change it

Question 10

Fiscal policy becomes stronger when exchange rates are fixed

Answer 10

true

Question 11

How does a central bank revalue or devalue a currency

Answer 11

By announcing its willingness to trade unlimited amounts of currency at that price, someone will listen either buyers or sellers

Question 12

What is a balance of payment crisis

Answer 12

When the market belives that the central bank will devalue the currency due to unemployment or a shortage of foreign reservese causing people to flee the devaluation by selling their currency to the central bank for foreign reserves (capital flight)

Question 13

Can capital flight cause a devaluation

Answer 13

Yes as it depletes foreign reserves

Question 14

What is a speculative attack

Answer 14

When speculators buy all the foreign reserves and forces the currency to be non fixed

Question 15

What is imperfect asset substitutability

Answer 15

When it is possible for assets expected returns to differ in equalibrium f.ex becouse of risk

Question 16

How does imperfect substitutability effect the interest parity condition

Answer 16

People demand a risk premium for investing in a more volotile currency

Question 17

In imperfect asset substitutability when the central bank buys sterilized foreign exchange the foreign currency depreciates

Answer 17

yes becouse of the increased risk premium somehow

Question 18

Can steralized intervention be used as a signal for a governments view on the financial situation

Answer 18

Yes although if it is not followed up with policy the market will stop listening

Question 19

What is and are the effects of a reserve currency

Answer 19

A reserve currency is a currency that many others are pegged to by policy and by holding substantial reserves in that currency, in effect all members of the peg will have exchange rates fixed to eachother

Question 20

What are the benefits of being the country issuing the reserve currency

Answer 20

You can still engage in monetary policy while keeping the exchange rate constant as the rest needs to follow, this leads to a power imbalance as the reserve center can effect both itself and the other countries at will

Question 21

What is a gold standard

Answer 21

When a currency is pegged to gold by having large gold reserves, avoids the power imbalance of a reserve currency

Question 22

What are the pros and cons of a gold standard

Answer 22

the pro is that it puts a natural cap on inflation but 1 it puts constraints on the power to fight unemployment, 2 it relies on the relative price of gold to everything else which may varry, 3 countries cannot increase their gold when the economy grows unless they find more gold and 4 lastly it gives gold producing countries power over worldwide macroeconomics