SOLVED

1) One of the chief advantages of exchange rate pegging is that ________. A) a country is able to pursue an independent monetary policy over the course of the business cycle. B) it can be an effective means of reducing inflation. C) the currency can be used to promote export growth. D) it allows the monetary authorities to actively respond to the problems of inflation and unemployment. 2) In many countries, an exchange-rate peg substitutes for ________. A) speculative attacks B) an export-oriented sector C) discretionary monetary policy D) capital controls 3) If at a given exchange rate, the supply of dollars is greater than the demand for dollars ________. A) an equilibrium exists. B) there will be upward pressure on the value of the dollar. C) there will be downward pressure on the value of the dollar. D) the demand for dollars must fall to reestablish an equilibrium value. 4) In a “crawling peg” regime, ________. A) the value of the currency is fixed to a basket of commodities B) higher inflation is permitted. C) several anchor currencies are used in succession D) the currency may gain value, but cannot lose value 5) If at a given exchange rate, the supply of dollars is less than the demand for dollars ________. A) an equilibrium must exist. B) a fixed exchange rate system must be in operation. C) the supply of dollars must rise D) there will be upward pressure on the value of the dollar. 6) If the nominal expected return on foreign assets is higher than on dollar assets ________. A) foreigners will want to hold additional dollar assets. B) Americans will want to hold additional dollar assets. C) foreigners will want to hold fewer foreign assets. D) foreigners will want to hold additional foreign assets. 7) The key danger facing a country with an exchange rate peg is ________. A) loss of credibility B) loss of export markets C) monetary policy mistakes D) capital controls 8) Under the Exchange Rate Mechanism (ERM) ________ A) OECD countries allowed their currencies to float freely against one another. B) countries within the the European Economic Community fixed the value of their respective currencies to the German mark. C) the Euro was established at the stroke of midnight, January 1, 1999. D) South American countries, led by Argentina, adopted a dirty float. 9) The Tequila effect ________. A) led to a number of financial innovations, including the creation of collateralized debt obligations. B) allowed speculators, like George Soros, to make billions by attacking European currencies, like the British pound. C) involved speculative attacks on Latin American currencies in the wake of the Mexican devaluation of 1994. D) involves the negative effects associated with the consumption of liquids distilled from the agave plant. 10) What are some reasons that an “emerging market” country may choose a fixed exchange rate regime? 11) How does the policy trilemma help to explain the failure of Argentina’s currency board?