Final Exam Part 5
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Final Exam Part 5 explores key aspects of U. S. Commercial banks' balance sheets, including asset categories, liabilities, and bank reserves. It assesses understanding of financial structures and their significance in banking operations, crucial for anyone studying or working in finance.
- 1.
Considering the balance sheet for all commercial banks in the U.S., the largest category of assets is:
- A.
Cash items
- B.
U.S. Government Securities
- C.
Required reserves
- D.
Loans
Correct Answer
D. LoansExplanation
The correct answer is Loans. This is because loans are a major source of income for commercial banks. Banks provide loans to individuals and businesses, earning interest on the amount borrowed. Loans also represent the bank's investment in the economy and are a significant portion of their assets. Cash items, U.S. Government Securities, and required reserves are also important assets for banks, but loans typically make up the largest category on the balance sheet.Rate this question:
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- 2.
Considering the balance sheet for all commercial banks in the U.S., the largest category of liabilities is:
- A.
Borrowing from other banks in the U.S.
- B.
Savings deposits and time deposits
- C.
Checkable deposits
- D.
Borrowings from non-banks in the U.S.
Correct Answer
B. Savings deposits and time depositsExplanation
The largest category of liabilities on the balance sheet for all commercial banks in the U.S. is savings deposits and time deposits. This means that the banks owe a significant amount of money to their customers who have deposited funds into their savings accounts and time deposits. These deposits are considered liabilities because the banks are obligated to repay them to the depositors upon request. This category of liabilities is typically larger than other categories such as checkable deposits or borrowings from other banks or non-banks.Rate this question:
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- 3.
Considering the balance sheet for all commercial banks in the U.S., the net worth of banks is:
- A.
About 5 times the total assets
- B.
About 1/11 of total assets
- C.
Just about the same as total assets
- D.
About the same as total liabilities
Correct Answer
B. About 1/11 of total assetsExplanation
The net worth of banks being about 1/11 of total assets means that the total value of the bank's liabilities is about 11 times greater than its net worth. This indicates that banks rely heavily on borrowed funds to finance their operations and investments. It also suggests that banks have a relatively low level of equity compared to their total assets, which could make them more vulnerable to financial risks and potential losses.Rate this question:
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- 4.
A bank's reserves include:
- A.
Vault cash
- B.
U.S. Treasury Securities
- C.
The bank's loan portfolio
- D.
U.S. Treasury bills and vault cash
Correct Answer
A. Vault cashExplanation
A bank's reserves include vault cash, which refers to the physical cash held by the bank in its vaults. This cash is readily available for withdrawal by customers and can be used to meet their demands for cash. Vault cash is an important component of a bank's reserves as it ensures that the bank has enough cash on hand to satisfy customer needs and maintain liquidity.Rate this question:
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- 5.
Secondary reserves for banks are:
- A.
The same as the bank's net worth
- B.
Mainly the bank's liquid securities
- C.
Vault cash
- D.
Deposits the bank has at the Federal Reserve
Correct Answer
B. Mainly the bank's liquid securitiesExplanation
Secondary reserves for banks refer to the assets that banks hold to meet their short-term liquidity needs. These reserves are typically in the form of liquid securities, such as government bonds or treasury bills, that can be easily converted into cash. While the bank's net worth represents its overall financial health, it is not specifically related to secondary reserves. Vault cash refers to the physical cash held by the bank, which is also a form of reserve but not the main component of secondary reserves. Deposits the bank has at the Federal Reserve are not considered secondary reserves but rather primary reserves. Therefore, the correct answer is that secondary reserves for banks are mainly the bank's liquid securities.Rate this question:
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- 6.
One thing that is common for all bank loans is that they are:
- A.
Securitized
- B.
Liquid
- C.
Part of the banks' assets
- D.
Unsecured
Correct Answer
C. Part of the banks' assetsExplanation
Bank loans are considered part of the banks' assets because they represent the money owed to the bank by borrowers. When a bank grants a loan, it creates an asset for itself in the form of the loan receivable. This means that the bank has a legal claim to the repayment of the loan, and it can use the loan as collateral or sell it to generate income. Therefore, bank loans are an integral part of a bank's balance sheet and contribute to its overall asset value.Rate this question:
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- 7.
Checkable deposits have decreased since the 1970's mainly because:
- A.
Regulators allowed higher rates to be paid on these accounts and banks found them to be highly unprofitable
- B.
People prefer to use credit cards rather than writing checks
- C.
These deposit accounts offer little or no interest so depositors find them to be expensive
- D.
As banks added fees to these accounts people increased their holdings of currency
Correct Answer
C. These deposit accounts offer little or no interest so depositors find them to be expensive -
- 8.
Which of the following is a bank liability?
- A.
Mortgage loans
- B.
Demand deposits
- C.
Reserves
- D.
U.S. Treasury securities
Correct Answer
B. Demand depositsExplanation
Demand deposits are considered a bank liability because they represent funds that customers have deposited in their accounts and can withdraw on demand. Banks are obligated to repay these deposits to customers whenever they request it. Therefore, demand deposits are a liability for the bank as they represent a debt owed to the depositors.Rate this question:
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- 9.
Repurchase agreements are usually used by banks that:
- A.
Have a need for long-term financing
- B.
Need cash for a very short period of time
- C.
Have negative net worth
- D.
Cannot obtain financing from any other source
Correct Answer
B. Need cash for a very short period of timeExplanation
Repurchase agreements, also known as repos, are commonly used by banks to obtain short-term cash. In a repo, the bank sells securities to another party with an agreement to repurchase them at a later date, usually within a few days or weeks. This allows banks to quickly access cash for a short period of time, which can be used for various purposes such as meeting temporary liquidity needs or funding daily operations. Therefore, the correct answer is "Need cash for a very short period of time."Rate this question:
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- 10.
Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its capital by $1million and its assets by $10 million, then the bank's:
- A.
Risk increases and its leverage decreases
- B.
Liabilities decrease and its leverage increases
- C.
Leverage decreases and its liabilities increase
- D.
Leverage and risk increases
Correct Answer
D. Leverage and risk increasesExplanation
When a bank increases its capital and assets, its leverage ratio decreases because the ratio is calculated by dividing the bank's assets by its capital. However, the question asks about the bank's leverage, not the leverage ratio. Leverage refers to the bank's ability to use borrowed money to increase its potential returns. By increasing its capital and assets, the bank is taking on more risk because it now has more money at stake. Therefore, the bank's leverage and risk both increase.Rate this question:
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- 11.
If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity ratio is:
- A.
10 to 1
- B.
5 to 1
- C.
9 to 1
- D.
0.1 to 1
Correct Answer
C. 9 to 1Explanation
The debt-to-equity ratio is calculated by dividing the total debt of a company by its shareholders' equity. In this case, the net worth of the bank represents its shareholders' equity. Therefore, the bank's debt-to-equity ratio would be 9 to 1, indicating that its total debt is 9 times its shareholders' equity.Rate this question:
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- 12.
Everything else equal, if the ratio of bank assets to bank capital increases, the bank's return on equity should:
- A.
Remain constant
- B.
Decrease
- C.
Increase
- D.
Cannot be determined from the information provided
Correct Answer
C. IncreaseExplanation
When the ratio of bank assets to bank capital increases, it means that the bank is taking on more debt relative to its equity. This implies that the bank is leveraging its capital more, which can lead to higher returns on equity. By increasing the leverage, the bank can generate higher profits from its assets, resulting in an increase in return on equity. Therefore, the correct answer is increase.Rate this question:
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- 13.
Net interest income for a bank is:
- A.
The difference between gross income and net income after taxes
- B.
The interest banks earn from uses of funds
- C.
The difference between interest income and interest expense
- D.
The difference between interest income and total expenses
Correct Answer
C. The difference between interest income and interest expenseExplanation
The correct answer is the difference between interest income and interest expense. Net interest income for a bank is calculated by subtracting the interest expense, which is the cost of funds borrowed by the bank, from the interest income, which is the revenue generated from lending activities. This measure reflects the profitability of a bank's core lending operations and is a key indicator of its financial health.Rate this question:
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- 14.
A bank's Return on Equity (ROE) is calculated by:
- A.
Dividing the bank's net profit after taxes by the bank's capital
- B.
Dividing the banks liabilities by the bank's capital
- C.
Taking the bank's assets plus the net profit after taxes and dividing this sum by the bank's capital
- D.
Dividing the bank's net profit after taxes by the sum of the bank's assets and its liabilities
Correct Answer
A. Dividing the bank's net profit after taxes by the bank's capitalExplanation
The correct answer is dividing the bank's net profit after taxes by the bank's capital. This calculation gives the Return on Equity (ROE) which measures the profitability of a bank by comparing its net profit to the amount of capital invested in the bank. A higher ROE indicates better profitability and efficiency in utilizing the bank's capital.Rate this question:
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- 15.
A late-night news report says the president of a local bank is about to be arrested for embezzling money from the bank at which he works. This causes most of the depositors to line up in front of the bank the next morning wanting to withdraw their deposits. This is an example of:
- A.
Liquidity risk
- B.
Operational risk
- C.
Interest rate risk
- D.
Credit risk
Correct Answer
A. Liquidity riskExplanation
The given scenario demonstrates liquidity risk. Liquidity risk refers to the potential for a bank or financial institution to face difficulties in meeting its financial obligations, such as fulfilling deposit withdrawals. In this case, the news report about the president's arrest creates panic among depositors, leading them to line up to withdraw their deposits. This situation puts pressure on the bank's liquidity, as it may struggle to provide cash to all depositors at once. Therefore, the incident highlights the inherent liquidity risk faced by the bank due to the sudden surge in withdrawal demands.Rate this question:
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- 16.
The difference between a bank's reserves and its required reserves is:
- A.
Profits
- B.
Net interest income
- C.
Excess reserves
- D.
Vault cash
Correct Answer
C. Excess reservesExplanation
The difference between a bank's reserves and its required reserves is referred to as excess reserves. Required reserves are the minimum amount of funds that banks are required to hold by the central bank, while excess reserves are any additional funds held by the bank above the required amount. These excess reserves can be used by the bank for various purposes such as lending to other banks or investing in financial securities.Rate this question:
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- 17.
If a bank has deposits of $250 million, reserves that total $30 million and has a required reserve rate of 10 percent:
- A.
The bank is short of required reserves
- B.
The bank has excess reserves of $27.5 million
- C.
The bank has excess reserves of $5 million
- D.
The bank has excess reserves of $3 million
Correct Answer
C. The bank has excess reserves of $5 millionExplanation
The required reserve rate is the percentage of deposits that banks are required to hold as reserves. In this case, the required reserve rate is 10 percent. To determine the required reserves, we multiply the deposits by the required reserve rate: $250 million x 10% = $25 million. Since the bank has reserves that total $30 million, which is greater than the required reserves of $25 million, it has excess reserves. The excess reserves can be calculated by subtracting the required reserves from the total reserves: $30 million - $25 million = $5 million. Therefore, the bank has excess reserves of $5 million.Rate this question:
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- 18.
A bank that does not want to hold a lot of excess reserves but wants to manage liquidity risk is likely to:
- A.
Hold a lot in highly liquid securities
- B.
Make sure that most of its assets are in small business loans
- C.
Have a high ratio of loans to securities
- D.
Limit withdrawals by customers
Correct Answer
A. Hold a lot in highly liquid securitiesExplanation
A bank that does not want to hold a lot of excess reserves but wants to manage liquidity risk is likely to hold a lot in highly liquid securities. This is because highly liquid securities can be easily converted into cash without significant loss in value. By holding these securities, the bank can quickly access funds if needed to meet any unexpected liquidity demands. This allows the bank to manage liquidity risk effectively while minimizing the need for excess reserves.Rate this question:
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- 19.
If Bank A sells some its loans to Bank B for cash, everything else equal:
- A.
Bank A's assets decrease and Bank B's assets increase
- B.
Bank A becomes less liquid while Bank B becomes more liquid
- C.
Banks A's total assets do not change, but Bank A is more liquid
- D.
Bank A's liabilities decrease by the amount of the loans that are sold
Correct Answer
C. Banks A's total assets do not change, but Bank A is more liquidExplanation
When Bank A sells some of its loans to Bank B for cash, Bank A's total assets do not change because even though it has sold some loans, it has received cash in return, which is also considered an asset. However, Bank A becomes more liquid because it now has more cash on hand, which can be easily used to meet its short-term obligations.Rate this question:
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- 20.
A bank that meets deposit withdrawal by borrowing additional funds will alter:
- A.
The asset side of their balance sheet
- B.
The liabilities side of the balance sheet
- C.
The amount of bank capital
- D.
The asset and liabilities side of the balance sheet
Correct Answer
B. The liabilities side of the balance sheetExplanation
When a bank meets deposit withdrawal by borrowing additional funds, it will alter the liabilities side of the balance sheet. This is because borrowing additional funds increases the bank's liabilities, as it now owes more money to lenders. The asset side of the balance sheet may also be affected indirectly, as the borrowed funds can be used to acquire additional assets or to support existing assets. However, the primary impact is on the liabilities side, as it reflects the bank's obligations to repay the borrowed funds. The amount of bank capital may or may not be directly affected by this borrowing, depending on the specific circumstances.Rate this question:
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- 21.
An expected appreciation of the dollar, everything else held constant, should cause:
- A.
The supply of dollars to increase
- B.
The demand for dollars to increase
- C.
The demand for dollars to decrease
- D.
The dollar to depreciate now relative to other currencies
Correct Answer
B. The demand for dollars to increaseExplanation
An expected appreciation of the dollar means that the value of the dollar is expected to increase in the future. This would make the dollar more valuable compared to other currencies, leading to an increase in the demand for dollars. When the demand for dollars increases, people are willing to pay more for them, causing the value of the dollar to appreciate further. Therefore, the correct answer is that the demand for dollars would increase.Rate this question:
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- 22.
If U.S. assets are seen as having greater risk relative to foreign assets in the market for foreign exchange, this should cause:
- A.
The demand for dollars to increase
- B.
The supply of dollars to decrease
- C.
The supply of dollars to increase
- D.
The dollar to appreciate
Correct Answer
C. The supply of dollars to increaseExplanation
If U.S. assets are perceived as riskier compared to foreign assets in the foreign exchange market, investors may start selling their U.S. assets and buying foreign assets instead. This would lead to an increase in the supply of dollars in the market, as more people are selling dollars to buy foreign currencies.Rate this question:
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- 23.
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
Correct Answer
A. Buys euros or sells dollarsExplanation
When the Fed buys euros or sells dollars, it is essentially exchanging its own currency (dollars) for euros. This transaction increases the supply of dollars in the market, which in turn increases the reserves held by banks. As banks receive more dollars, their reserves in the banking system increase. Therefore, the correct answer is "Buys euros or sells dollars."Rate this question:
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- 24.
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 euros
- D.
An increase in the demand for dollars and an increase in the supply of euros
Correct Answer
A. A decrease in the demand for dollarsExplanation
When the Fed purchases euros, it is essentially exchanging dollars for euros. This leads to an increase in the supply of euros in the foreign exchange market. As a result, the demand for dollars decreases because individuals and institutions are now more interested in holding euros rather than dollars. Therefore, the correct answer is a decrease in the demand for dollars.Rate this question:
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- 25.
A foreign exchange intervention by a central bank affects the value of a country's currency because it:
- A.
Alters banking system reserves
- B.
Changes domestic interest rates
- C.
Results in a fixed exchange rate
- D.
Alters banking system reserves and it changes domestic interest rates
Correct Answer
D. Alters banking system reserves and it changes domestic interest ratesExplanation
A foreign exchange intervention by a central bank affects the value of a country's currency because it alters banking system reserves and changes domestic interest rates. When a central bank intervenes in the foreign exchange market, it buys or sells its own currency, which affects the supply and demand for that currency. This intervention can increase or decrease the banking system reserves, which in turn can impact domestic interest rates. Higher reserves can lead to lower interest rates, stimulating borrowing and spending, while lower reserves can lead to higher interest rates, discouraging borrowing and spending. Therefore, both the alteration of banking system reserves and the change in domestic interest rates can influence the value of a country's currency.Rate this question:
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- 26.
Assume that the Fed performs a foreign exchange intervention in which it does nothing except buy German government bonds. One result of this will be that:
- A.
The dollar depreciates
- B.
The euro depreciates
- C.
Both the dollar and the euro depreciate
- D.
The dollar appreciates and the euro depreciates
Correct Answer
A. The dollar depreciatesExplanation
When the Fed buys German government bonds, it increases the demand for euros and decreases the supply of dollars in the foreign exchange market. This leads to a decrease in the value of the dollar relative to the euro, causing the dollar to depreciate. Therefore, the correct answer is that the dollar depreciates.Rate this question:
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- 27.
A sterilized foreign exchange intervention would:
- A.
Alter the asset side of a central bank's balance sheet but leave the domestic monetary base unchanged
- B.
Alter the liability side of the central bank's balance sheet but leave the asset side unchanged
- C.
Leave the central bank's balance sheet unchanged
- D.
Not alter the central bank's holdings of international reserves
Correct Answer
A. Alter the asset side of a central bank's balance sheet but leave the domestic monetary base unchangedExplanation
A sterilized foreign exchange intervention refers to a situation where a central bank intervenes in the foreign exchange market to buy or sell domestic currency while simultaneously conducting offsetting transactions to neutralize the impact on the domestic money supply. In this case, the intervention would alter the asset side of the central bank's balance sheet by changing its holdings of foreign currency or foreign assets, but it would not affect the domestic monetary base, which includes currency in circulation and bank reserves. Therefore, the correct answer is that a sterilized foreign exchange intervention would alter the asset side of a central bank's balance sheet but leave the domestic monetary base unchanged.Rate this question:
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- 28.
If the Fed were to purchase euros for dollars and at the same time sell U.S. Treasury securities in the open market, this would be an example of:
- A.
An unsterilized foreign exchange intervention
- B.
The Fed not changing their balance sheet at all
- C.
A sterilized foreign exchange intervention
- D.
The Fed altering the domestic monetary base
Correct Answer
C. A sterilized foreign exchange interventionExplanation
A sterilized foreign exchange intervention refers to when a central bank, such as the Fed, buys or sells foreign currency in the foreign exchange market while simultaneously engaging in offsetting transactions to neutralize the impact on the domestic money supply. In this scenario, the Fed is purchasing euros for dollars and selling U.S. Treasury securities, which helps to mitigate any potential effects on the domestic money supply. Therefore, this action can be categorized as a sterilized foreign exchange intervention.Rate this question:
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- 29.
In September of 2000, the Federal Reserve Bank of New York sold dollars in exchange for euro. To keep the federal funds rate on target, the Open Market desk:
- A.
Sold U.S. Treasury bonds
- B.
Bought U.S. Treasury bonds
- C.
Bought dollars
- D.
Sold dollars
Correct Answer
A. Sold U.S. Treasury bondsExplanation
The Federal Reserve Bank of New York sold U.S. Treasury bonds in order to keep the federal funds rate on target. Selling Treasury bonds reduces the amount of money in circulation, which helps to increase interest rates and control inflation. By selling bonds, the Federal Reserve can decrease the money supply and prevent the federal funds rate from falling below the target level. This action helps to stabilize the economy and maintain the desired level of interest rates.Rate this question:
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- 30.
An advantage of fixed exchange rates for a country that suffers from bouts of high inflation is:
- A.
It makes imports less expensive
- B.
It establishes a credible low inflation policy
- C.
It unties policymakers' hands so they can alter the reserves of the banking system as needed
- D.
Policymakers will have increased control over domestic interest rates
Correct Answer
B. It establishes a credible low inflation policyExplanation
Fixed exchange rates can help establish a credible low inflation policy for a country suffering from bouts of high inflation. By pegging their currency to a stable currency or a basket of currencies, the country can signal to investors and markets that it is committed to maintaining low inflation. This can help build confidence in the country's monetary policy and reduce inflation expectations. Additionally, fixed exchange rates can limit the ability of policymakers to engage in inflationary monetary policies, as they need to maintain the exchange rate peg. This constraint can further contribute to a low inflation environment.Rate this question:
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- 31.
A fixed exchange rate policy:
- A.
Decreases central bank policy accountability and transparency
- B.
Strengthens domestic interest rate policy
- C.
Will likely make domestic inflation more volatile
- D.
Imports monetary policy
Correct Answer
D. Imports monetary policyExplanation
A fixed exchange rate policy imports monetary policy because it ties the value of a country's currency to another currency or a fixed value, which means that changes in the monetary policy of the country to which the currency is tied will directly affect the domestic economy. This can include changes in interest rates, inflation rates, and other monetary policy measures. Therefore, a fixed exchange rate policy means that the country's central bank has less control over its own monetary policy and must align it with the policies of the country to which the currency is tied.Rate this question:
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- 32.
A country with a fixed exchange rate policy that is experiencing an economic slowdown will find:
- A.
Their central bank will reduce the domestic interest rate in order to fend off the slowdown
- B.
Their currency will depreciate to stimulate exports
- C.
Their bonds will become less attractive to foreign investors
- D.
The stabilization mechanism that policy makers could have used is completely shut down
Correct Answer
D. The stabilization mechanism that policy makers could have used is completely shut downExplanation
In a country with a fixed exchange rate policy, the government maintains the value of its currency relative to another currency or a basket of currencies. This means that the exchange rate is fixed and does not fluctuate. In an economic slowdown, the central bank typically reduces the domestic interest rate to stimulate borrowing and spending, which can help to revive the economy. However, in a fixed exchange rate system, this option is not available as the exchange rate cannot be adjusted. Therefore, the stabilization mechanism that policy makers could have used to address the economic slowdown is completely shut down.Rate this question:
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Apr 15, 2024Quiz Edited by
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