ECON 2410 Chapter Notes - Chapter 20: European Exchange Rate Mechanism, Arbitrage, Exchange Rate

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Chapter 20- output, the interest rate and the. Uncovered interest parity an arbitrage relation stating that domestic and foreign bonds must have the same expected rate of return, expressed in terms of a common currency (re written) (cid:1831)(cid:3404)1(cid:3397)(cid:1861) (cid:1755)(cid:1755)(cid:1755)(cid:1755)(cid:1755)(cid:1831)(cid:3032)(cid:3364)(cid:3364)(cid:3364)(cid:3364) An increase in the domestic interest rate leads to an increase in the exchange rate. An increase in the foreign exchange rate leads to a decrease in the exchange rate. An increase in the expected future exchange rate leads to an increase in the current exchange rate. Is lm relationship the new relationship for an open economy is written below. Peg the exchange rate to which a country commits under a fixed exchange rate system. Crawling peg an exchange rate mechanism in which the exchange rate is allowed to move over time according to a pre defined formula. Band the limits within which the exchange rate is allowed to move under a fixed exchange rate system.

Related Questions

1.Purchasing power parity implies that

a. the real exchange rate is equal to 1.

b. the law of one price does not hold.

c. inflation rates are equal across countries.

d. the real exchange rate is equal to 0.

e. if the domestic country has low prices, then the domestic currency will depreciate until foreign citizens can buy the same amount of goods as domestic citizens.

2.Which of the following is a prediction from the PPP model of exchange rates?

A. An increase in the US money supply leads to an appreciation of the dollar in the long run.

B. An increase in US production leads to a depreciation of the dollar.

C. An increase in US production will lead to a proportional increase in the inflation rate.

D, An increase in the US money supply leads to a depreciation of the dollar in the long run.

E.An increase in the US interest rates leads to a fall in prices.

3.Relative purchasing power parity predicts that

A.the difference between the inflation rates in the two countries should equal the ratio of the interest rates in the two countries.

B. the difference between the inflation rates in two countries should equal the per cent change in the exchange rate.

C.inflation rates should be equal across countries.

D.the real exchange rate should equal one.

E.relative price levels in the two countries should be equal when expressed in the same currency.

4.Which of the following is NOT a valid explanation for the failure of purchasing power parity?

a. Differences in monetary policies across countries

b. Lack of competition

c. Transportation costs

d. Trade barriers

5.If P represents (the level of) domestic prices, P* represents (the level of) foreign prices and E represents the exchange rate as units of domestic currency per units of foreign currency, then the real exchange rate equals

a. EP/P*	b. P*/EP
C. E/PP*	d. EP*/P
e. P/P*

6.The difference between nominal and real interest rates is that

A.Nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms

B.Nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output

C.Nominal interest rates can fluctuate, while real interest rates always remain fixed

D.Real interest rates can fluctuate, while nominal interest rates always remain fixed

E.Real interest rates are the same in every country, while nominal interest rates are different for every country

7.Which of the following is predicted to cause the value (or price or cost) of U.S. goods to appreciate relative to the value (or price or cost) of foreign goods in the long run?

a. An increase in the growth rate of U.S. GNP. b. A decrease in the growth rate of U.S. GNP.

c. A decline in the growth rate of the U.S. money supply.

d. An increase in the price of petroleum that reduces world demand for American cars. e. An appreciation of the dollar.

jadewallaby469

Assume that China maintains a currency peg to the U.S. dollar. If the peg was abandoned and the yuan - dollar exchange became a floating exchange rate, we can expect:

A	An increase in the rate of domestic economic growth in China.
B	An increase in U.S. interest rates as China reduces purchases of U.S. Treasury debt.
C	Europe would also abandon the peg of the euro to the dollar.
D	An appreciation of the dollar in relation to the yuan.

When the Federal Reserve uses open market operations (OMO) in an expansionary monetary policy:

A	The Fed will purchase stocks from banks, increasing the monetary base.
B	The Fed will decrease the discount rate, decreasing the monetary base.
C	The Fed will buy bonds from banks, increasing bank reserves and increasing the monetary base.
D	The Fed will lower taxes and increase government spending.

All the questions from "Output, Exchange Rates, Macroeconomic Policy, and Open-economy IS-LM-FX Model."

Please answer these questions completely. It is important to me.

Thanks!

6. The TB (i.e., EX â IM) is part of the short-run spending equation. With sticky prices, what would be the effect on the TB with an increase (depreciation) of the home nation's exchange rate?

A. Consumers in the home nation would find it more expensive to buy domestic goods compared to foreign goods, and the trade balance would decrease.

B. Consumers in the home nation would cut back on both domestic and foreign goods and the trade balance would decrease.

C. Consumers in the home nation would increase spending on both domestic and foreign goods, and the trade balance would be unchanged.

D. Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the trade balance to increase.

11. A shift to the left by the IS curve can be achieved by all of the following EXCEPT a(n):

A. decrease in government spending.

B. increase in taxes.

C. increase in the foreign interest rate.

D. decrease in future expected exchange rate Ee.

13. The LM curve will shift to the left, if there is a(n):

A. increase in money supply.

B. increase in interest rate.

C. decrease in money supply.

D. increase in output.

14. If taxes fall and foreign income falls, what will happen to output, ceteris paribus?

A. It will rise.

B. It will stay the same.

C. It will fall.

D. It is uncertain what will happen.

15. Using the IS-LM-FX framework, if we observe that income and interest rate both rise in the Eurozone, this could be the result of

A. contractionary monetary policy pursued by the European Central Bank.

B. expansionary monetary policy pursued by the Federal Reserve System (U.S. central bank).

C. a stock market crash in the Eurozone.

D. increases in government spending in the Eurozone.

18. Whenever U.S. government spending increases,

A. output will not change at all if the U.S. fixes the exchange rate of dollar against major currencies.

B. output will increase by a larger amount when dollar floats than when dollar pegs to other currencies.

C. output will increase by a smaller amount when dollar floats than when dollar pegs to other currencies.

D. output will not change at all since the U.S. adopts a flexible exchange rate.

ECON 2410 Chapter Notes - Chapter 20: European Exchange Rate Mechanism, Arbitrage, Exchange Rate

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