1.              Suppose that firms in Boversia gain confidence in the economy, so domestic investment rises for any given interest rate. For now, assume that net capital outflows don’t change. What happens to output and the real exchange rate when the Boversian central bank holds the real interest rate constant? (Hint: Stick to the assumptions made in chapter 17.)

A.              Output increases and the real exchange rate increases.

B.              Output increases and the real exchange rate decreases.

C.              Output increases and the real exchange rate stays constant.

D.             None of the given answers are correct

2.              Suppose again that investment rises in Boversia. In this case, assume that higher confidence in the economy also causes a decrease in net capital outflows. What happens to output and the real exchange rate when the Boversian central bank holds the real interest constant. (Hint: Stick to the assumptions made in chapter 17.)

A.              Output increases and the real exchange rate increases.

B.              Output increases and the real exchange rate decreases.

C.              Output increases and the real exchange rate stays constant.

D.             None of the given answers are correct.

3.              Consider the scenario in Figure 17.4: a rise in confidence causes a fall in net capital outflows, and the central bank adjusts the interest rate to keep the exchange rate constant. For this case, what happens to consumption and investment.

A.              C increases, I increases.

B.              C increases, I is constant.

C.              C is constant, I decreases.

D.             C is constant, I is constant.

4.              Suppose government spending rises in Boversia, shifting the AE curve outward. The central bank would like to keep both output and the real exchange rate constant. How can policymakers accomplish these goals through a combination of an interest-rate adjustment and capital controls.

A.              The central bank has to increase the real interest rate and prevent capital outflows.

B.              The central bank has to increase the real interest rate and prevent capital inflows.

C.              The central bank has to decrease the real interest rate and prevent capital outflows.

D.             The central bank cannot achieve the two goals simultaneously.

5.              Compare two statements about exchange rates by former Treasury Secretary Henry Paulson, both from 2007: (1) “A strong dollar is in our nation’s interest.” (2) “The currency [China’s yuan] needs to appreciate, and it needs to appreciate faster.” Are the two statements consistent with one another?

A.              The two statements are consistent because both imply a yuan appreciation.

B.              The two statements are consistent because both imply a dollar depreciation.

C.              The two statements are not consistent.

D.             There is not enough information to judge the consistency of the two statements.

6.              What is the difference between an appreciation and a revaluation of a currency?

A.              Appreciation implies that a currency becomes more valuable as measured in units of foreign currency while a revaluation implies that the currency becomes less valuable as measured in units of foreign currency.

B.              Appreciation and revaluation both imply that a currency becomes more valuable as measured in units of foreign currency but onlyappreciation requires government or central bank action.

C.              Appreciation and revaluation both imply that a currency becomes more valuable as measured in units of foreign currency, but onlyrevaluation requires government or central bank action.

D.             Appreciation happens in response to speculative attacks while revaluation happens in response to controlling inflation.

7.              In 2020, Boversia fixes its exchange rate at 0.5 dollars per bover. From 2020 to 2025, Boversia experiences inflation of 5 percent per year, while U.S. inflation is 2 percent per year. By how much does Boversia’s real exchange rate change from 2020 to 2025? Assume an initial price level of 1 in both countries.

A.              approximately 2%

B.              approximately 3%

C.              approximately 10%

D.             approximately 15%

8.              Some countries have a “crawling peg” for their nominal exchange rate: they adjust it by a fixed percentage every year. For example, Boversia might reduce its exchange rate against the dollar by 3 percent per year. Why might a country adopt a crawling peg?

A.              To avoid extreme fluctuations in the nominal exchange rate.

B.              To keep the real exchange rate constant.

C.              To avoid falling net exports over time.

D.             All of the given answers are correct.

9.              Boversia has a fixed exchange rate against the dollar. Taxes rise in the United States, reducing U.S. aggregate expenditure. The Federal Reserve adjusts the U.S. interest rate to keep output constant, and Boversia’s central bank adjusts its interest rate to keep the exchange rate constant. What happens to Boversia’s output and interest rate?

A.              Output increases, the interest rate increases.

B.              Output increases, the interest rate decreases.

C.              Output decreases, the interest rate increases.

D.             Output decreases, the interest rate decreases.

10.           Under the Maastricht Treaty, a country may adopt the euro only if its government budget deficit is less than 3 percent of its GDP. What is the rationale for this requirement? (Hint: See Section 14.2.)

A.              This requirement will reduce speculative attacks.

B.              This requirement reduces government’s ability to generate seigniorage revenue.

C.              This requirement reduces variation in the inflation rates of the euro countries.

D.             B and C only.

11.           Suppose the U.S. dollar is abolished. To replace it, each of the 12 Federal Reserve Banks issues a currency for its region. The Boston Fed issues the New England dollar, the Richmond Fed issues the Mid-Atlantic dollar, and so on. What are the benefits of this change?

A.              This change will make it easier for goods and services to move across the United States.

B.              This change will make it easier for technology to spread.

C.              This change will make it easier to conduct independent monetary policy that is appropriate for the region.

D.             This change will make it easier to control inflation in the United States.

12.           A currency board issues money backed by a foreign currency (review Section 2.2). Like a currency union, a currency board is an extreme version of a fixed exchange rate. Are speculative attacks a danger with a currency board?

A.              Currency boards can never run out of foreign reserves therefore speculative attacks are not a danger.

B.              Currency boards can never run out of foreign reserves, but speculative attacks are still possible.

C.              Currency boards can run out of foreign reserves and speculative attacks are still possible.

D.             None of the given answers accurately answer the question.

13.           A loss of confidence by savers that increases net capital outflows from a country

A.              increases the real exchange rate, reducing net exports, output and inflation.

B.              increases the real exchange rate, increasing net exports, output and inflation.

C.              reduces the real exchange rate, increasing net exports, output and inflation.

D.             reduces the real exchange rate, reducing net exports, output and inflation.

14.           If a central bank wants to increase the real exchange rate

A.              it buys foreign currency, increasing net capital outflows.

B.              it buys foreign currency, reducing net capital outflows.

C.              it sells foreign currency, increasing net capital outflows.

D.             it sells foreign currency, reducing net capital outflows.

15.           Central banks attempt to stabilize exchange rates using foreign–exchange interventions because

A.              interest–rate adjustments may have undesirable effects on output.

B.              interest–rate adjustments have questionable effectiveness for stabilizing exchange rates.

C.              interest–rate adjustments stop international capital flows.

D.             interest–rate adjustments only work when coordinated with other countries.

16.           A limitation of foreign–exchange interventions is that

A.              foreign–exchange interventions may destabilize output.

B.              foreign–exchange interventions have questionable effectiveness.

C.              foreign–exchange interventions impede the efficient flow of savings.

D.             foreign–exchange interventions require coordination among countries that are unlikely to agree.

17.           An agreement between several countries to work together to change the value of an exchange rate is best described as

A.              an interest–rate adjustment.

B.              policy coordination.

C.              capital controls.

D.             a currency union.

18.           Fixed exchange rates

A.              allow a country to have an independent monetary policy.

B.              are immune from speculative attacks.

C.              discourage trade and capital flows.

D.             help control inflation.

19.           When a country with a fixed exchange rate runs out of international reserves

A.              it must lower interest rates, impose capital controls, or depreciate its exchange rate.

B.              it must raise interest rates, impose capital controls, or depreciate its exchange rate.

C.              it must lower interest rates, impose capital controls, or appreciate its exchange rate.

D.             it must raise interest rates, impose capital controls, or appreciate its exchange rate.

20.           If a country with a fixed exchange has higher inflation than other fixed exchange rate countries

A.              its nominal exchange rate appreciates, requiring devaluation to offset the recessionary effects of nominal appreciation.

B.              its real exchange rate appreciates, requiring devaluation to offset the recessionary effects of real appreciation.

C.              its nominal exchange rate depreciates, requiring devaluation to offset the inflationary effects of nominal appreciation.

D.             its real exchange rate depreciates, requiring devaluation to offset the inflationary effects of real appreciation.

21.           If a small country fixes its exchange rate against a large country’s currency, and the small country initially has a higher inflation rate than the large country, the two inflation rates will be equalized because

                  A.              the higher inflation in the small country appreciates its real exchange rate, reducing net exports and output, and reducing the inflation rate to the same rate as in the large country.

B.              the higher inflation in the small country depreciates its real exchange rate, reducing net exports and output, and reducing the inflation rate to the same rate as in the large country.

C.              the higher inflation in the small country appreciates its real exchange rate, increasing net exports and output, and increasing the inflation rate to the same rate as in the large country.

D.             the higher inflation in the small country depreciates its real exchange rate, reducing net exports and output, and increasing the inflation rate to the same rate as in the large country.

22.           The strategy of a speculative attack is to

A.              hedge against exchange–rate risk.

B.              appreciate a floating exchange rate.

C.              force a revaluation of a fixed exchange rate.

D.             force a devaluation of a fixed exchange rate.