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117.1WhyStudyFixedExchangeRates?1)Therearenoquestionsforthissection.Answer:TRUE17.2CentralBankInterventionandtheMoneySupply1)Acentralbank'sinternationalreservesincludeC)anygoldthatitownsandforeignanddomesticassets.2)TheliabilitiessideofacentralbankincludeC)depositsheldbytheprivatebanksandcurrencyincirculation.3)Whichoneofthefollowingstatementsismosttrue?A)Anycentralbankpurchaseofassetsautomaticallyresultsinanincreaseinthedomesticmoneysupply,whileanycentralbanksaleofassetsautomaticallycausesthemoneysupplytodecline.A4)Whichoneofthefollowingstatementsisthemosttrue?A)Ifcentralbanksarenotsterilizingandthehomecountryhasabalanceofpaymentssurplus,anyassociatedincreaseinthehomecentralbank'sforeignassetimpliesanincreasedhomemoneysupply.5)Whichoneofthefollowingstatementsismosttrue?C)Ifcentralbanksarenotsterilizingandthehomecountryhasabalanceofpaymentssurplus,anyassociateddecreaseinaforeigncentralbank'sclaimsonthehomecountryimpliesadecreasedforeignmoneysupply.17.3HowtheCentralBankFixestheExchangeRate1)AsystemofmanagedfloatingexchangeratesisA)asysteminwhichgovernmentsmayattempttomoderateexchangeratemovementswithoutkeepingexchangeratesrigidlyfixed.2)Underfixedexchangerate,ingeneral,A)thedomesticandforeigninterestratesareequal,R=R.3)Underfixedexchangerate,ingeneralwhichoneofthefollowingstatementsisthemostaccurate?A)Thefollowingconditionshouldholdfordomesticmoneymarketequilibrium:Ms/P=L(R,Y).4)Whichoneofthefollowingstatementsisthemostaccurate?D)Underafixedexchangerate,centralbankmonetarytoolsarepowerlesstoaffecttheeconomy'smoneysupplyoritsoutput.5)Whatistheexpecteddollarrateofreturnondollardepositswithtoday'sexchangerateat$1.10pereuro,nextyear'sexpectedexchangerateat$1.165pereuro,thedollarinterestrateat10%,andtheeurointerestrateat5%?A)10%17.4StabilizationPolicieswithaFixedExchangeRate1)Byfixingtheexchangerate,thecentralbankgivesupitsabilitytoE)influencetheeconomythroughmonetarypolicy.2)FiscalExpansionunderafixedexchangehaswhateffect(s)ontheeconomy:D)theexchangeratedecreasesinitiallybutthenreturnstoitsoriginalpoint.3)Whenacountry'scurrencyisdevalued:B)outputincreases.D)themoneysupplyincreases.E)BothBandD.4)Underfixedrates,whichoneofthefollowingstatementsisthemostaccurate?C)Monetarypolicycanaffectonlyinternationalreserves.5)Underfixedrates,whichoneofthefollowingstatementsisthemostaccurate?A)Fiscalpolicycanaffectoutput,employmentandinternationalreservesatthesametime.6)Whichoneofthefollowingstatementsisthemostaccurate?C)Fiscalpolicyaffectsemploymentmoreunderfixedthanunderflexibleexchangerateregimes.7)Whichoneofthefollowingstatementsisthemostaccurate?B)Fiscalpolicyaffectsoutputmoreunderfixedthanunderflexibleexchangerateregimes.8)Whichoneofthefollowingstatementsisthemostaccurate?B)Adevaluationoccurswhenthecentralbankraisesthedomesticcurrencypriceofforeigncurrency,E,anda2revaluationoccurswhenthecentralbanklowersE.9)Whichoneofthefollowingstatementsisthemostaccurate?C)DepreciationisariseinEwhentheexchangeratefloatswhiledevaluationisariseinEwhentheexchangerateisfixed.10)Whichoneofthefollowingstatementsisthemostaccurate?B)AppreciationisafallinEwhentheexchangeratefloatswhilerevaluationisafallinEwhentheexchangerateisfixed.11)Whichoneofthefollowingstatementsisthemostaccurate?C)Devaluationreflectsadeliberategovernmentdecisionwhiledepreciationisanoutcomeofgovernmentactionsandmarketforcesactingtogether.12)Whichoneofthefollowingstatementsisthemostaccurate?B)Revaluationreflectsadeliberategovernmentdecisionwhileappreciationisanoutcomeofgovernmentactionsandmarketforcesactingtogether.13)Underfixedexchangerate,whichoneofthefollowingstatementsisthemostaccurate?B)Devaluationcausesariseinoutput,ariseinofficialreserves,andanexpansionofthemoneysupply.A14)Underfixedexchangerate,whichoneofthefollowingstatementsisthemostaccurate?A)Devaluationcausesariseinoutput.15)Underfixedexchangerate,whichoneofthefollowingstatementsisthemostaccurate?C)Devaluationcausesanexpansionofthemoneysupply.16)Themainreason(s)whygovernmentssometimeschosetodevaluetheircurrenciesis(are):A)devaluationallowsthegovernmenttofightdomesticunemploymentdespitethelackofeffectivemonetarypolicy.B)devaluationimprovesinthecurrentaccount.C)devaluationincreasesforeignreservesheldbythecentralbank.D)Alloftheabove.17.5BalanceofPaymentsCrisesandCapitalFlight1)AbalanceofpaymentscrisisisbestdescribedasB)asharpchangeinforeignreservessparkedbyachangeinexpectationsaboutthefutureexchangerate.2)TheexpectationoffuturedevaluationcausesabalanceofpaymentscrisismarkedbyC)asharpfallinreservesandariseinthehomeinterestrateabovetheworldinterestrate.3)TheexpectationoffuturerevaluationcausesabalanceofpaymentscrisismarkedbyA)asharpriseinreservesandafallinthehomeinterestratebelowtheworldinterestrate.4)CapitalflightA)decreasesreserves.B)isoftenassociatedwiththeexpectationofdevaluation.C)mayindirectlyinducedevaluation.E)A,B,andC.5)CurrencycrisesmayresultfromA)excessivepurchasesofgovernmentbondsbycentralbanks.B)speculativeattacksonthecurrency.D)AandB.C6)Whichofthefollowingbestdescribesadeliberategovernmentdecisiontolowert