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| 1 | |
Purchasing power parity implies: |
| | A) | A basket of goods should sell for the same price in all countries, even if trade barriers exist |
| | B) | A basket of goods will sell for the same price in all countries as long as there are no trade barriers |
| | C) | A basket of goods cannot sell for the same price in different countries due to the different wage rates |
| | D) | As long as goods can move freely across international boundaries, one unit of domestic currency should buy the same basket of goods anywhere in the world |
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| 2 | |
If country A wants to fix its exchange rate with country B, then: |
| | A) | Country A's inflation rate will have to match country B's |
| | B) | Country A's monetary policy must be conducted so the inflation rate in country A matches the inflation rate in country B |
| | C) | Country A's monetary policy will not be able to be used to address domestic issues |
| | D) | All of the answers given are correct |
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| 3 | |
Which of the following statements is most correct? |
| | A) | A central bank can select between a fixed exchange rate and an independent inflation policy provided fiscal policy cooperates |
| | B) | A central bank cannot have both a fixed exchange rate and an independent inflation policy |
| | C) | The central banks of most industrialized countries focus on fixed exchange rates |
| | D) | While most central banks of industrialized countries favor fixing exchange rates, their primary concern is on domestic inflation |
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| 4 | |
Most economists view capital controls: |
| | A) | Unfavorably |
| | B) | Unfavorably, emphasizing their harmful effects on developing countries |
| | C) | Favorably, since this is the main way for countries to exploit their comparative advantage |
| | D) | Favorably, since having them makes capital markets more efficient |
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| 5 | |
Reserves in the banking system will increase if the Fed: |
| | A) | Buys euros or sells dollars |
| | B) | Sells euros or buys dollars |
| | C) | Buys both euros and dollars at the same time |
| | D) | Sells both euros and dollars at the same time |
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| 6 | |
The impact on the foreign exchange market for dollars resulting from the Fed purchasing euros will be: |
| | A) | A decrease in the demand for dollars |
| | B) | An increase in the demand for dollars |
| | C) | An increase in the supply of dollars |
| | D) | A decrease in the demand for dollars and an increase in the supply of dollars |
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| 7 | |
Suppose that you purchase a Korean government bond and the number of won needed to purchase one dollar increases. Your return on the bond: |
| | A) | Decreases by the amount of the dollar's appreciation |
| | B) | Decreases by more than the amount of the dollar's appreciation |
| | C) | Decreases by less than the amount of the dollar's appreciation |
| | D) | Increases by the amount of the dollar's appreciation |
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| 8 | |
A speculative attack on a country with a fixed exchange rate occurs when: |
| | A) | Financial market participants believe the government will have to devalue its currency |
| | B) | Financial market participants believe the government will have to sell off some of their international reserves |
| | C) | Financial market participants believe the currency is undervalued |
| | D) | The country is running out of gold reserves |
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| 9 | |
Most economists do not advocate a return to the gold standard because: |
| | A) | It forces the central bank to fix the price of something we don't really care about while other prices can fluctuate a lot |
| | B) | Most of the gold mined today comes from relatively few countries |
| | C) | Inflation will depend on the rate that gold is mined |
| | D) | All of the answers given are correct |
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| 10 | |
In the spring of 2005, people in business and government were calling for China to move away from its fixed-exchange rate regime because: |
| | A) | Its pegged value was far below purchasing power parity estimates |
| | B) | Its pegged value was far above purchasing power parity estimates |
| | C) | It was adding to China's current account deficit |
| | D) | It was exporting its inflation to the United States |
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| 11 | |
When a country operates with a currency board, the central bank's sole objective is to |
| | A) | Focus on domestic monetary policy |
| | B) | Maintain the domestic interest rate |
| | C) | Maintain the exchange rate |
| | D) | Maintain the target inflation rate |
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| 12 | |
In April 1991, Argentina adopted a currency board primarily to address the problem of: |
| | A) | Slow growth |
| | B) | High interest rates |
| | C) | Large trade surpluses |
| | D) | Triple-digit inflation |
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| 13 | |
Which of the following best defines dollarization? |
| | A) | A country uses the U.S. dollar as well as its currency for all transactions |
| | B) | A country adopts a foreign currency for all transactions basically eliminating its own monetary policy |
| | C) | A country eliminates its own currency for international transactions and requires that all international transactions be conducted in U.S. dollars |
| | D) | The central bank of a country agrees to exchange its own currency for U.S. dollars at a fixed exchange rate |
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| 14 | |
The benefits to a country from dollarization include each of the following, except: |
| | A) | A lower risk premium since inflationary finance is no longer a possibility |
| | B) | Greater and faster integration into world markets, increasing trade and investment |
| | C) | No risk of an exchange rate crisis |
| | D) | Increased revenue from seigniorage |
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| 15 | |
Monetary union, in comparison to dollarization, means that: |
| | A) | Countries forgo revenues from seigniorage |
| | B) | Countries share in monetary policy decisions |
| | C) | The central bank no longer has the ability to be the lender of last resort |
| | D) | All of the answers given are correct |
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