Lesson 9 Flashcards
Sells Assets
Sell Euro’s to Increase Supply
Buys Assets
Buy Euro’s to Increase Demand
Foreign Assets
International Reserves
Domestic Assets
Domestic holdings of bonds and loans
Total Assets
Total Assets = Total Liabilities + Net Worth
Increase in Assets =
Increase in Liabilities
When there is a widespread expectation that the currency will be devalued the domestic monetary authorities will face pressure to raise domestic interest rates to maintain the fixed exchange rate.
True
The DD-AA model yields the conclusion that in an economy in which the exchange rate is fixed
fiscal policy is more effective but monetary policy is less effective than under flexible exchange rates
Under fixed exchange rates expansionary monetary policy is______________because central bank purchases of domestic assets (e.g. domestic government bonds) will___________
ineffective; result in equal sales of foreign assets leaving money supply unchanged
When the official value of the exchange rate is above the current market-clearing value of the exchange rate, the central bank has to intervene in the FX market to keep the exchange rate equal to its official value by selling foreign currency for domestic currency.
False
Under fixed exchange rates when the central bank (CB) purchases foreign assets (without any change in domestic assets) the result is
an increase in CB assets with an equal increase in CB liabilities and an increase in money supply
A currency devaluation will
shift the AA curve up or to the right with no shift in the DD curve and increase equilibrium output (Y)
Under fixed exchange rates expansionary fiscal policy (e.g. an increase in G) will result in CB purchases of foreign currency-assets and an expansion of the money supply.
true
under fixed exchange rates, R>R* will occur when
either an expectation of a devaluation of the domestic currency or an increase in the default risk on domestic assets
