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Economics of Money, Banking, and Financial Markets, 8E Chapter 18 The International Financial System 18.1 Intervention in the Foreign Exchange Market 1) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant. A) sale; purchase B) sale; sale C) purchase; sale D) purchase; purchase Answer: C Ques Status: Revised 2) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base, everything else held constant. A) sale; purchase B) sale; sale C) purchase; sale D) purchase; purchase Answer: A Ques Status: Revised 3) Suppose that the Bank of Japan buys U.S. dollar assets with yen -denominated assets. Everything else held constant, this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: A Ques Status: New Chapter 18 The International Financial System 463 4) Suppose that the Bank of Japan buys yen-denominated assets with U.S. dollar assets. Everything else held constant, this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: D Ques Status: New 5) When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called A) an unsterilized foreign exchange intervention. B) a sterilized foreign exchange intervention. C) an exchange rate feedback rule. D) a money neutral foreign exchange intervention. Answer: A Ques Status: Previous Edition 6) A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called A) an unsterilized foreign exchange intervention. B) a sterilized foreign exchange intervention. C) an exchange rate feedback rule. D) a money neutral foreign exchange intervention. Answer: B Ques Status: Previous Edition 7) Everything else held constant, if a central bank makes an unsterilized purchase of foreign assets, then the domestic money supply will ________ and the domestic currency will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: B Ques Status: New 464 Mishkin · Economics of Money, Banking, and Financial Markets, Eighth Edition 8) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will increase and the domestic currency will ________. A) purchase; appreciate B) purchase; depreciate C) sale; appreciate D) sale; depreciate Answer: B Ques Status: New 9) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will appreciate. A) purchase; increase B) purchase; decrease C) sale; increase D) sale; decrease Answer: D Ques Status: New 10) Everything else held constant, if a central bank makes an unsterilized sale of foreign assets, then the domestic money supply will ________ and the domestic currency will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: C Ques Status: New 11) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will decrease and the domestic currency will ________. A) purchase; appreciate B) purchase; depreciate C) sale; appreciate D) sale; depreciate Answer: C Ques Status: New Chapter 18 The International Financial System 465 12) Everything else held constant, if a central bank makes an unsterilized _________ of foreign assets, then the domestic money supply will ________ and the domestic currency will depreciate. A) purchase; increase B) purchase; decrease C) sale; increase D) sale; decrease Answer: A Ques Status: New 13) Everything else held constant, if a central bank makes a sterilized purchase of foreign assets, then the domestic currency will ________. A) appreciate B) depreciate C) either appreciate, depreciate, or remain constant D) not be affected Answer: D Ques Status: New 14) Because sterilized interventions mean offsetting open market operations, there is no impact on the monetary base and the money supply, and therefore a sterilized intervention A) causes the exchange rate to overshoot in the short run. B) causes the exchange rate to undershoot in the short run. C) causes the exchange rate to depreciate in the short run, but has no effect on the exchange rate in the long run. D) has no effect on the exchange rate. Answer: D Ques Status: Previous Edition 15) Everything else held constant, if a central bank makes a sterilized sale of foreign assets, then the domestic currency will ________. A) appreciate B) depreciate C) either appreciate, depreciate, or remain constant D) not be affected Answer: D Ques Status: New 466 Mishkin · Economics of Money, Banking, and Financial Markets, Eighth Edition 16) If the United States has a current account deficit with England of $1 million, and the Bank of England sells $1 million worth of pounds in the foreign exchange market, then England ________ $1 million of international reserves and its monetary base ________ by $1 million. A) gains; rises B) gains; falls C) loses; rises D) loses; falls Answer: A Ques Status: Revised 17) Explain and demonstrate graphically how an unsterilized purchase of foreign assets leads to overshooting of the exchange rate, and describe the long-run behavior of the exchange rate, everything else held constant. Answer: See figure below. A purchase of foreign assets increases the monetary base and money supply, increasing the price level and decreasing the expected appreciation of the domestic currency. In the short run, this decreased expected appreciation of the domestic currency along with the lower domestic interest rate will decrease the relative expected return on domestic assets causing the domestic currency to depreciate. Over the long run, as the domestic interest rate starts to increase, the domestic currency will start to appreciate, but (assuming money neutrality) will still be at a lower value compared to the starting value. Ques Status: Revised Chapter 18 The International Financial System 467 18.2 Balance of Payments 1) The difference between merchandise exports and imports is called the ________ balance. A) current account B) capital account C) official reserve transactions D) trade Answer: D Ques Status: Revised 2) The account that shows international transactions involving currently produced goods and services is called the A) trade balance. B) current account. C) balance of payments. D) capital account. Answer: B Ques Status: Previous Edition 3) The account that shows international transactions involving financial transactions (stocks, bonds, bank loans, etc.) is called the A) trade balance. B) current account. C) balance of payments. D) capital account. Answer: D Ques Status: New 4) Which of the following does not appear in the current account part of the balance of payments? A) A loan of $1 million from Chase Manhattan bank to Brazil. B) Foreign aid to El Salvador. C) An Air France ticket bought by an American. D) Income earned by General Motors from its plants abroad. Answer: A Ques Status: Revised 468 Mishkin · Economics of Money, Banking, and Financial Markets, Eighth Edition 5) Of the following, the one that appears in the current account of the balance of payments is A) an Italian investorʹs purchase of IBM stock. B) income earned by U.S. subsidiaries of Barclayʹs Bank of London. C) a loan by a Swiss bank to an American corporation. D) a purchase of a British Treasury bond by the Fed. Answer: B Ques Status: Revised 6) Capital ________ are American purchases of foreign assets, and capital ________ are foreign purchases of American assets. A) inflows; outflows B) inflows; inflows C) outflows; outflows D) outflows; inflows Answer: D Ques Status: Previous Edition 7) Which of the following appears in the capital account part of the balance of payments? A) A gift to an American from his English aunt. B) A purchase by the Honda corporation of a U.S. Treasury bill. C) A purchase by the Bank of England of a U.S. Treasury bill. D) Income earned by the Honda corporation on its automobile plant in Ohio. Answer: B Ques Status: Revised 8) The net amount of international reserves that move between governments to finance international transactions is called the ________ balance. A) capital account B) current account C) trade D) official reserve transactions Answer: D Ques Status: New Chapter 18 The International Financial System 469 9) If the current account balance shows a surplus, and the capital account also shows a surplus, then the official reserve transactions balance A) must be positive. B) must be negative. C) must best be zero. D) can either be positive, negative, or zero. Answer: A Ques Status: Revised 10) A current account surplus indicates that America is ________ its claims on foreign wealth, while a deficit indicates that this country is ________ its claims on foreign wealth. A) reducing; reducing B) reducing; increasing C) increasing; reducing D) increasing; increasing Answer: C Ques Status: Previous Edition 11) Because it provides some indication of what is happening to U.S. claims on foreign wealth and the demand for imports and exports, the ________ is closely followed by economists wanting information on the future movement of exchange rates. A) trade balance B) capital account C) current account balance D) statistical discrepancy Answer: C Ques Status: Previous Edition 12) Economists closely follow the current account balance because they believe it can provide information on the future movement of A) interest rates.
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