Lesson 11

Question 1

In the first half of the 1980s the U.S. dollar appreciated in response to a combination

Answer 1

tight U.S. monetary policy and loose U.S. fiscal policy

Question 2

Consider a economy which operates under a system of fixed exchange rates and which is faced with an increase in the foreign rate of interest (R*). We can predict that the result will be_________ pressure of the exchange rate (E) which will require the domestic central bank to _______ foreign-currency-assets for domestic currency thus _____ the domestic money supply until the domestic interest rate has risen to equal the new higher foreign rate.

Answer 2

upward; sell; decreasing

Question 3

In 2001-02 Argentina suffered a currency crisis brought on by

Answer 3

a fixed nominal exchange rate combined with high domestic inflation, which led to a fall in the real exchange rate (a real appreciation) and current account deficits

Question 4

Under floating exchange rates one economy can choose to have a lower long-run rate of inflation than the rest of the world if it accepts continuous appreciation of its currency.

Answer 4

True

Question 5

Under floating exchange rates it is easier to maintain

Answer 5

External Balance (not to big or small of a CA)

Question 6

Under a system of floating,or flexible, exchange rates a sudden and temporary fall in foreign demand for domestic exports will result in a _________ decrease in domestic output than under fixed exchange rates because the shift of the _______ to the left automatically causes a(n) _________

Answer 6

smaller; DD curve; depreciation which partially offsets the initial fall in CA

Question 7

Which of the following is considered to be one of the factors which contributed to the world financial crisis of 2007-09?

Answer 7

a large increase in world savings which led to a drop in global real interest rates