Question 1

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called

Accepted Answer

A)   an unsterilized foreign exchange intervention.
B)   a sterilized foreign exchange intervention.
C)   a balance-of-payment exchange rate rule.
D)   monetary neutrality.E) A) and C)
F) A) and B)

Question 2

The offsetting of international reserve flows by central banks that wish to follow an independent monetary policy is known as:

Accepted Answer

A)   Printing money
B)   Balancing the official settlements
C)   The monetary approach
D)   SterilizationE) C) and D)
F) A) and D)

Question 3

To derive the monetary approach, we need money demand equals to money supply and:

Accepted Answer

A)   leakages equal injections.
B)   absolute purchasing power parity to hold.
C)   covered interest parity to hold.
D)   All of the above are correct.E) C) and D)
F) All of the above

Question 4

The MABP implies that the change in international reserves equals to the foreign inflation rate plus the growth rate of domestic output minus the change in domestic money creation.

Accepted Answer

A) True 
 B)False

Question 5

In a perfectly floating exchange rate regime, according to the monetary approach to the exchange rate MAER) , what would be the effect of a decrease in U.S. output growth by 3% on the dollar price of a Swiss franc $/SFr) ?

Accepted Answer

A)   Swiss franc would depreciate against the dollar.
B)   Swiss franc would appreciate against the dollar.
C)   The exchange rate remains unaffected.
D)   The dollar would appreciate against the Swiss Franc.E) A) and C)
F) A) and B) B

Question 6

"Under the monetary approach to exchange rate, a rise in domestic income will cause a depreciation of domestic currency."

Accepted Answer

A) True 
 B)False

Question 7

According to the monetary approach of the balance of payments MABP) , if the foreign inflation rate decreases 50%, the U.S. foreign reserves will

Accepted Answer

A)   increase because foreign central bank buys U.S. dollars and sells its currency.
B)   increase because foreign central bank buys its currency and sells U.S. dollars.
C)   decrease because foreign central bank buys U.S. dollars and sells its currency.
D)   decrease because foreign central bank buys its currency and sells U.S. dollars.E) B) and C)
F) C) and D)

Question 8

One key implication of the MABR is that expansionary monetary policy:

Accepted Answer

A)   Always increases output.
B)   Always decreases output.
C)   Alters output in the short run, but not in the long run.
D)   Does not alter output in the short run or the long run.E) None of the above
F) B) and D)

Question 9

The monetary approach is derived from the assumptions)  that:

Accepted Answer

A)   money demand equals money supply.
B)   money demand is a fixed proportion of the domestic price level times real income.
C)   the law of one price holds.
D)   All of the above are correct.E) All of the above
F) B) and C) D

Question 10

Suppose the U.S. income grows by 4 percent. Under the MABR, which of the following percentage changes could offset this growth?

Accepted Answer

A)   International reserves increase by 2 percent and foreign inflation rises by 2 percent
B)   International reserves increase by 2 percent and foreign inflation falls by 2 percent
C)   International reserves decrease by 2 percent and foreign inflation rises by 2 percent
D)   International reserves decrease by 2 percent and foreign inflation falls by 2 percentE) C) and D)
F) All of the above

Question 11

An unsterilized intervention in which a central bank sells domestic currency to buy foreign assets will lead to:

Accepted Answer

A)   an increase in foreign reserves
B)   a decrease in domestic money supply
C)   an appreciation of domestic currency
D)   All of the above are correct.E) B) and C)
F) A) and B)

Question 12

Under MABP, the full effect of the monetary policy is felt on the exchange rate.

Accepted Answer

A) True 
 B)False

Question 13

Sterilized intervention is the policy that:

Accepted Answer

A)   targets a domestic inflation rate within a certain range of values.
B)   attempts to influence exchange rate movements with official statements on the government's preferred rate, without taking any direct action in the financial markets.
C)   coordinates monetary and fiscal policies with one's trading partners so as to achieve particular international economic outcomes.
D)   offsets private capital movements with changes in the asset portfolio of the central bank.E) All of the above
F) C) and D)

Question 14

"Under the specie flow mechanism, a trade-surplus nation would realize gold inflows, an increase in its money supply, and a rise of domestic inflation."

Accepted Answer

A) True 
 B)False

Question 15

The monetary approach in the case of a managed floating exchange rate:

Accepted Answer

A)   Is like that of currency boards.
B)   Introduces variables to represent changes in fiscal policy.
C)   Is a combination of MABP and MAER.
D)   Is not possible to model.E) A) and B)
F) B) and D)

Question 16

The MAER emphasizes money demand and money supply as determinants of exchange rate movements.

Accepted Answer

A) True 
 B)False

Question 17

The monetary approach states that, under a fixed exchange rate system, an excess demand for money leads to a trade deficit.

Accepted Answer

A) True 
 B)False

Question 18

According to Hume's Specie Flow Mechanism, during the Gold Standard, if the domestic inflation rises sharply, the domestic country will experience ___________ and the foreign trading partner will experience __________.

Accepted Answer

A)   trade deficit; higher prices.
B)   trade deficit; lower prices.
C)   trade surplus; higher prices.
D)   trade surplus; lower prices.E) All of the above
F) B) and C)

Question 19

The official holdings of gold and foreign exchange, special drawing rights SDRs) , and changes in reserves at the International Monetary Fund are known as:

Accepted Answer

A)   Official settlements balance
B)   Central bank holdings
C)   Current account balance
D)   Capital account balanceE) A) and B)
F) B) and D)

Question 20

Assume floating exchange rates. Suppose there are a 5% growth in U.S output and a 5% increase in foreign inflation. Then, which of the following will offset these changes?

Accepted Answer

A)   10% increase in money supply.
B)   10% decrease in money supply.
C)   10% increase in the exchange rate.
D)   The two changes offset each other.E) A) and B)
F) B) and C) C

Exam 14: Prices and Exchange Rates: Purchasing Power Parity

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called

Correct AnswerverifiedShow Answer

The offsetting of international reserve flows by central banks that wish to follow an independent monetary policy is known as:

Correct AnswerverifiedShow Answer

To derive the monetary approach, we need money demand equals to money supply and:

Correct AnswerverifiedShow Answer

The MABP implies that the change in international reserves equals to the foreign inflation rate plus the growth rate of domestic output minus the change in domestic money creation.

Correct AnswerverifiedShow Answer

In a perfectly floating exchange rate regime, according to the monetary approach to the exchange rate MAER) , what would be the effect of a decrease in U.S. output growth by 3% on the dollar price of a Swiss franc $/SFr) ?

Correct AnswerverifiedB

"Under the monetary approach to exchange rate, a rise in domestic income will cause a depreciation of domestic currency."

Correct AnswerverifiedShow Answer

According to the monetary approach of the balance of payments MABP) , if the foreign inflation rate decreases 50%, the U.S. foreign reserves will

Correct AnswerverifiedShow Answer

One key implication of the MABR is that expansionary monetary policy:

Correct AnswerverifiedShow Answer

The monetary approach is derived from the assumptions) that:

Correct AnswerverifiedD

Suppose the U.S. income grows by 4 percent. Under the MABR, which of the following percentage changes could offset this growth?

Correct AnswerverifiedShow Answer

An unsterilized intervention in which a central bank sells domestic currency to buy foreign assets will lead to:

Correct AnswerverifiedShow Answer

Under MABP, the full effect of the monetary policy is felt on the exchange rate.

Correct AnswerverifiedShow Answer

Sterilized intervention is the policy that:

Correct AnswerverifiedShow Answer

"Under the specie flow mechanism, a trade-surplus nation would realize gold inflows, an increase in its money supply, and a rise of domestic inflation."

Correct AnswerverifiedShow Answer

The monetary approach in the case of a managed floating exchange rate:

Correct AnswerverifiedShow Answer

The MAER emphasizes money demand and money supply as determinants of exchange rate movements.

Correct AnswerverifiedShow Answer

The monetary approach states that, under a fixed exchange rate system, an excess demand for money leads to a trade deficit.

Correct AnswerverifiedShow Answer

According to Hume's Specie Flow Mechanism, during the Gold Standard, if the domestic inflation rises sharply, the domestic country will experience ___________ and the foreign trading partner will experience __________.

Correct AnswerverifiedShow Answer

The official holdings of gold and foreign exchange, special drawing rights SDRs) , and changes in reserves at the International Monetary Fund are known as:

Correct AnswerverifiedShow Answer

Assume floating exchange rates. Suppose there are a 5% growth in U.S output and a 5% increase in foreign inflation. Then, which of the following will offset these changes?

Correct AnswerverifiedC

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B

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D

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According to Hume's Specie Flow Mechanism, during the Gold Standard, if the domestic inflation rises sharply, the domestic country will experience _ and the foreign trading partner will experience .

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C