Final Exam Part 4

98 Questions | By Tpc43b | Last updated: Feb 15, 2013 | Total Attempts: 39

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Econ 3229 Study Guide

Questions and Answers

1.

If capital flows freely between countries and a country has a fixed exchange rate, one thing you know is that the country:
- A.
  
  Exports more than it imports
- B.
  
  Must have ample gold reserves
- C.
  
  Cannot have a domestic monetary policy
- D.
  
  Must be running large trade deficits
2.

If the inflation rate in country A is 3.5% and the inflation rate in country B is 3.0%, we should expect the percentage change in the number of units of country A's currency per unit of country B's currency to be:
- A.
  
  +0.5%
- B.
  
  -0.5%
- C.
  
  + 16.7%
- D.
  
  +6.5%
3.

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
4.

International capital mobility:
- A.
  
  Contributes to the rigidity of exchange rates
- B.
  
  Contributes to the equalization of expected returns across countries
- C.
  
  Eliminates arbitrage opportunities
- D.
  
  Makes interest rates equal across countries
5.

If the bonds of two different countries are identical, their expected returns will:
- A.
  
  Be equal if capital flows freely internationally
- B.
  
  Always be equal
- C.
  
  Be equal only if the exchange rate between the two countries is fixed
- D.
  
  Be equal only if the inflation rate is the same in each country
6.

When arbitrage occurs across countries with flexible exchange rates and when the bonds in each country are identical and there are no barriers to capital flows:
- A.
  
  The interest rates on the bonds will be identical
- B.
  
  The prices of the bonds will be identical
- C.
  
  The inflation rates in each country will be identical
- D.
  
  None of the answers provided is correct
7.

Which of the following statements is incorrect?
- A.
  
  A country cannot be open to international capital flows, control its domestic interest rate and fix its exchange rate
- B.
  
  A country can be open to international capital flows and control its own domestic interest rate but it can't fix its exchange rate
- C.
  
  A country can be open to international capital flows, control its domestic interest rate, and fix its exchange rate
- D.
  
  A country cannot be open to international capital flows if it expects to control its own domestic interest rate and to fix its exchange rate
8.

The United States would be characterized as having:
- A.
  
  A controlled domestic interest rate, a closed capital market and a flexible exchange rate
- B.
  
  A controlled domestic interest rate, an open capital market and a flexible exchange rate
- C.
  
  No control over the domestic interest rate, an open capital market and a flexible exchange rate
- D.
  
  A controlled domestic interest rate, an open capital market and a fixed exchange rate
9.

Which of the following would be an example of a capital outflow control?
- A.
  
  Mexico limiting the number of U.S. dollars an American can bring into the country
- B.
  
  Mexico limiting the number of U.S. dollars its citizens can purchase before leaving on their vacation to the U.S.
- C.
  
  Mexico limiting the number of pesos its citizens can take out of the country
- D.
  
  All of the answers given would be examples of capital outflow controls
10.

If foreigners are restricted in their ability to buy investments in a country then that government is imposing:
- A.
  
  Controls on capital inflows
- B.
  
  Controls on capital outflows
- C.
  
  Controls on both capital inflows and outflows
- D.
  
  Fixed exchange rates
11.

If the Fed desired to fix the euro/dollar exchange rate, they would have to:
- A.
  
  Get the European Central Bank to also agree to fixed exchange rates
- B.
  
  Maintain ample reserves of dollars
- C.
  
  Be willing to exchange dollars for euros whenever anyone asked
- D.
  
  Impose capital controls
12.

If the Fed decides to maintain a fixed euro/dollar exchange rate when they purchase euros:
- A.
  
  They increase the number of dollars
- B.
  
  Downward pressure is put on domestic interest rates
- C.
  
  The domestic money supply increases
- D.
  
  All of the answers given are correct
13.

The focus for most central banks today is:
- A.
  
  The quantity of M1
- B.
  
  Interest rates
- C.
  
  The quantity of M2
- D.
  
  Controlling the size of the money multiplier
14.

Most central banks, including the Fed and the ECB, provide discount loans at a rate:
- A.
  
  Equal to the target interest rate
- B.
  
  Below the target interest rate
- C.
  
  Above the target interest rate
- D.
  
  That is equal to the overnight interbank lending rate
15.

The ways the Fed can inject reserves into the banking system include:
- A.
  
  An increase in the size of the Fed's balance sheet through purchasing securities
- B.
  
  Increasing the discount rate
- C.
  
  Making loans to non-bank corporations
- D.
  
  An increase in the size of the Fed's balance sheet through selling securities
16.

The tools of monetary policy available to the Fed include each of the following, except the:
- A.
  
  Currency-to-deposit ratio
- B.
  
  Discount rate
- C.
  
  Target federal funds rate
- D.
  
  Reserve requirement
17.

Which of the following statements is most correct?
- A.
  
  The FOMC sets the federal funds rate
- B.
  
  The discount rate is the primary policy tool of the FOMC
- C.
  
  The FOMC sets the target federal funds rate
- D.
  
  The difference between the target and actual federal funds rate is the dealer's spread
18.

Which of the following would be categorized as an unconventional monetary policy tool?
- A.
  
  Discount window lending
- B.
  
  Lending to nonbanks
- C.
  
  Federal funds rate target
- D.
  
  Deposit rate
19.

If the market federal funds rate were below the target rate, the response from the Fed would likely be to:
- A.
  
  Raise the required reserve rate
- B.
  
  Purchase U.S. Treasury securities
- C.
  
  Sell U.S. Treasury securities
- D.
  
  Raise the discount rate
20.

If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be:
- A.
  
  The market federal funds rate will decrease
- B.
  
  The market federal funds rate will equal the target rate
- C.
  
  The market federal funds rate will increase
- D.
  
  Nothing; the Fed would act immediately and the market would not be affected
21.

One reason the target federal funds rate may not equal the actual federal funds rate is because:
- A.
  
  There is no way that the Fed could keep the actual rate at the target rate
- B.
  
  The target rate changes with the demand for reserves
- C.
  
  Attaining the target rate involves forecasting reserve demand and forecasts are subject to error
- D.
  
  None of the answers is correct; the target and the actual federal funds rates are always equal
22.

Discount lending ties into the Fed's function of:
- A.
  
  Lender of last resort
- B.
  
  Open market operations
- C.
  
  The government's bank
- D.
  
  Regulation of banking
23.

The Fed will make a discount loan to a bank during a crisis:
- A.
  
  No matter what condition the bank is in
- B.
  
  Only if the bank is sound financially and can provide collateral for the loan
- C.
  
  But if the bank doesn't have collateral the interest rate is higher
- D.
  
  Only if the bank would fail without the loan
24.

The types of loans the Fed makes consist of each of the following, except:
- A.
  
  Primary credit
- B.
  
  Conditional credit
- C.
  
  Seasonal credit
- D.
  
  Secondary credit
25.

Secondary credit provided by the Fed is designed for:
- A.
  
  Banks who qualify for a lower interest than what is available under primary credit
- B.
  
  Banks that are in trouble and cannot obtain a loan from anyone else
- C.
  
  Banks that want to borrow without putting up collateral
- D.
  
  Foreign banks