1.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.

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

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

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

The central bank cannot achieve the two goals simultaneously.

2.Suppose the Fed sells dollars for yen. As a result, the supply of dollars______, thereby_____the dollar.

increases; depreciating

decreases; depreciating

decreases; appreciating

increases; appreciating

3.Two factors favoring fixed exchange rates are that fixed rates______________and_______________.

gain an independent monetary policy; promote trade and capital flows

gain an independent monetary policy; prevent speculative attacks

promote trade and capital flows; control inflation

4.If Cuba fixes the peso to the dollar, when the Fed lowers interest rates the Central Bank of Cuba must:

lower interest rates.

increase tax rates.

buy pesos in foreign exchange markets

prevent speculative attacks; promote trade and capital flows

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

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

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.

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

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

6.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?

Output increases, the interest rate decreases.

Output increases, the interest rate increases.

Output decreases, the interest rate increases.

Output decreases, the interest rate decreases.

7.Central banks in countries with relatively_________, like the United States, pay relatively

________ attention to exchange rates.

little foreign trade; relatively little

high levels of foreign trade; relatively little

high levels of foreign trade; a lot of

There is not enough information provided to answer the question.

8.In a country such as Canada, where trade is a very high percentage of GDP, monetary policy likely reacts to

output and inflation.

output, inflation, and exchange rates.

inflation only.

output only.

9.If a central bank raises the real interest rate to offset a shock to aggregate expenditure from increased government purchases

net capital outflows increase, depreciating the real exchange rate.

net capital outflows increase, appreciating the real exchange rate.

net capital outflows decrease, appreciating the real exchange rate.

net capital outflows decrease, depreciating the real exchange rate.

10.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?

This change will make it easier for technology to spread.

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

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

11.Developing countries can finance their expenditures from_________.However, this may be problematic if there is_____________.

foreign governments; little support from foreign citizens

domestic governments; deflation

domestic investment; a low tax rate

foreign savers; a lot of exchange-rate volatility

12.The ________ in confidence that is caused by a rise in the stock market would cause the real exchange rate to ________.

fall; rise

rise; rise

fall; fall

rise; fall

13.The theory of comparative advantage states that countries will specialize in production of goods and services for which they have a comparative advantage. One factor that inhibits this specialization is:

some countries do not have an absolute advantage at producing any product.

the fact that some products are not traded internationally means comparative advantage will not describe the real world.

exchange rate volatility inhibits international trade and prevents complete specialization.

the theory of comparative advantage is incorrect.

14.An appreciation of a country's currency:

hurts importers.

benefits exporters.

hurts owners of foreign assets.

does not affect importers or exporters.

15.(Consider the scenario in Figure above): 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.

C increases, I is constant.

C is constant, I is constant.

C is constant, I decreases.

C increases, I increases.

16.Suppose that confidence in a country's economic performance increases. To stabilize output, the central bank will have to_____the real interest rate, thereby_____the exchange rate.

increase; increasing

increase; lowering

reduce; increasing

reduce; lowering

17.A problem with a single currency area is:

different countries may require different interest rates.

elimination of the costs of currency conversion.

18.If a country's central bank has shown a tendency to expand the money supply excessively and cause inflation, one possible solution is:

to fix the country's exchange rate vis--vis another country that maintains low inflation.

to shut down the central bank

impose capital controls to prevent inflation.

bring the central bank more directly under government control.

19.The strategy of a speculative attack is to

hedge against exchange-rate risk.

force a revaluation of a fixed exchange rate.

force a devaluation of a fixed exchange rate.

appreciate a floating exchange rate.

absolute fixed exchange rates between member countries.

the ability to compare prices across countries.