Section 7

Question 1

A large country can:

Answer 1

benefit by imposing a tariff

Question 2

Which of the following is not a condition of an ideal currency regime?
1. Independently floating exchange rates
2. Fully independent monetary policy
3. Fully convertible currencies

Answer 2

Independently floating exchange rates

Question 3

Would a tariff, export subsidy or import quota most likely increase domestic government revenue?

Answer 3

Tariff

Question 4

If Brazil and South Africa have free trade with each other, a common trade policy against all other countries, but no free movement of factors of production between them, then Brazil and South Africa are part of a…

Answer 4

Customs Union

Question 5

Which of the following best represents a contractionary fiscal policy?
1. A temporary suspension of payroll taxes
2. A freeze in discretionary government spending
3. Public spending on a high-speed railway

Answer 5

A freeze in discretionary government spending

Question 6

In practice, both a fixed parity regime and a target zone regime allow the exchange rate to float within a band around the parity level. The most likely rationale for the band is that the band allows the monetary authority to…

Answer 6

Exercise more discretion in monetary policy

Question 7

When a central bank announces a decrease in its official policy rate, the desired impact is an increase in…

Answer 7

Investment

Question 8

Which is the most accurate statement regarding central banks and monetary policy?
1. Monetary policies work through the economy via four independent channels
2. Commercial and interbank interest rates move inversely to official interest rates
3. Central bank activities are typically intended to maintain price stability

Answer 8

Central bank activities are typically intended to maintain price stability

Question 9

A fixed exchange rate regime in which the monetary authority is legally required to hold foreign exchange reserves backing 100% of its domestic currency issuance is best described as…

Answer 9

A currency board

Question 10

Monetary policy is least likely to include:
1. Setting an inflation rate target
2. Enacting a transfer payment program
3. Changing an official interest rate

Answer 10

Enacting a transfer payment program

Question 11

Which of the following trade restrictions is likely to result in the greatest welfare loss for the importing country?
1. Voluntary Export Restraint
2. Tariff
3. Import Quota

Answer 11

Voluntary Export Restraint

Question 12

Which action is a central bank least likely to take if it wants to encourage business and households to borrow for investment and consumption purposes?
1. Purchase mortgage bonds or other securities
2. Purchase long-dated government treasuries
3. Sell long-dated government securities

Answer 12

Sell long-dated government securities

Question 13

Which of the following factors best explains why regional trading agreements are more popular than larger multilateral trade agreements?
1. Minimal displacement costs
2. Quicker and easier policy coordination
3. Trade diversions benefit members

Answer 13

Quicker and easier policy coordination

Question 14

A strong home currency can harm exports; exporters typically benefit from a weaker home country currency. (T/F)

Answer 14

True

Question 15

The European Central Bank is located in:

Answer 15

Frankfurt

Question 16

The Bretton Woods Agreement called for the establishment of a single European currency. (T/F)

Answer 16

False

Question 17

Which one is not a disadvantage of a freely floating exchange rate system?
1. The government may intervene to change the value of a given currency
2. The exchange rate risk is high and may be costly to manage
3. It can adversely affect a country that has high unemployment
4. It can adversely affect a country that has high inflation

Answer 17

The government may intervene to change the value of a given currency

Question 18

If a US firm plans to frequently purchase goods from Hong Kong over the next several years, it does not have to worry about exchange rate risk. (T/F)

Answer 18

False

Question 19

Countries that have adopted the euro must agree on a single ______ policy.

Answer 19

Monetary

Question 20

Which of the following did not occur as a result of Bretton Woods Agreement?
1. Currencies were allowed to fluctuate no more than 1% above or below the initially set rates
2. Values of all currencies were fixed with respect to each other
3. The United States experienced no balance-of-trade deficits
4. Each currency was valued in terms of gold

Answer 20

The United States experienced no balance-of-trade deficites

Question 21

Under a fixed exchange rate system, US inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system. (T/F)

Answer 21

True

Question 22

The European countries conforming to the euro are completely insulated from movements in the euro’s value with respect to other currencies. (T/F)

Answer 22

False

Question 23

Which of the following is true regarding the euro?
1. It allows for more consistent economic conditions across countries
2. Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders
3. It prevents each country from conducting its own monetary policy

Answer 23

All of the above

Question 24

A currency peg is insulated from economic or political conditions, such that the exchange rate in the market will only change if the country’s government breaks the peg and sets a new exchange rate. (T/F)

Answer 24

False

Question 25

In a sterilized exchange rate arrangement, a country’s home currency value is pegged to a foreign currency or to some unit of account. (T/F)

Answer 25

False

Question 26

Under a managed float exchange rate system, the Fed may attempt to stimulate the US economy by ____ the dollar. Such an adjustment in the dollar’s value should _____ the US demand for products produced by major foreign countries.

Answer 26

weakening; decrease

Question 27

A common way to reduce inflation is to weaken the value of the domestic country. (T/F)

Answer 27

False

Question 28

The currency of Country X is pegged to the currency of Country Y. Assume that Country Y’s currency appreciates against the currency of Country Z. It is likely that Country X will export ____ to country Z and import _____ from Country Z.

Answer 28

less; more

Question 29

Under a fixed exchange rate system…

Answer 29

central bank intervention in the foreign exchange market is often necessary

Question 30

Assume that Japan and the US frequently trade with each other. Under freely floating exchange rate system, high inflation in the US will place ______ pressure on Japanese yen, ______ the amount of Japanese yen available for sale, and result in _______ inflation in Japan.

Answer 30

upward; reduce; unchanged

Question 31

An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from unemployment problems in other countries. (T/F)

Answer 31

True

Question 32

Under the system known as the “dirty” float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system. (T/F)

Answer 32

False

Question 33

In a sterilized exchanged rate arrangement, a country’s home currency value is pegged to a foreign currency or to some unit of account. (T/F)

Answer 33

False

Question 34

Dollarization refers to the replacement of local currency with US dollars. (T/F)

Answer 34

True

Question 35

When using indirect intervention, a central bank is likely to focus on…

Answer 35

interest rates

Question 36

Countries that have adopted the euro tend to have very similar _______.

Answer 36

Interest rates

Question 37

Currency devaluation can boost a country’s exports, but currency revaluation can increase foreign competition. (T/F)

Answer 37

True

Question 38

If the Fed _____ the interest rates when inflationary expectations remain unchanged, the most likely result is that the value of the dollar will ______ and the economy may ______.

Answer 38

increases; appreciate; weaken

Question 39

To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously _____ Treasury securities.

Answer 39

buy; buy

Question 40

Assuming no credit risk, the interest rates among countries in the eurozone should be similar. (T/F)

Answer 40

True

Question 41

The establishment of the euro allows for more consistent economic conditions across countries but eliminates the power of any individual European country to solve local economic problems with its own unique monetary policy. (T/F)

Answer 41

True

Question 42

Under a pegged exchange rate system, the home currency’s value is pegged to a foreign currency. (T/F)

Answer 42

True

Question 43

A stronger dollar places ____ pressure on US inflation, which in turn places _____ pressure on US interest rates, which in turn places ______ pressure on US bond prices.

Answer 43

downward; downward; upward

Question 44

A strong home currency can harm exports; exporters typically benefit from a weaker home country currency. (T/F)

Answer 44

True

Question 45

Under a managed float exchange rate system, the Fed may attempt to stimulate the US economy by ____ the dollar. Such an adjustment in the dollar’s value should _____ the US demand for products produced by major foreign countries.

Answer 45

weakening; decrease

Question 46

The European Central Bank is responsible for monetary policy in all countries that adopted the euro as its currency. (T/F)

Answer 46

True