The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

Chapter 19

The International Financial System - all with Video Answers

Educators

Chapter Questions

Problem 1

If the Federal Reserve buys dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange rate?

Pragya Ahuja

Pragya Ahuja

Numerade Educator

Problem 2

If the Federal Reserve buys dollars in the foreign exchange market but does not sterilize the intervention,what will be the impact on international reserves, the money supply, and the exchange rate?

Pragya Ahuja

Numerade Educator

Problem 3

For each of the following, identify in which part of the balance-of-payments account the transaction is recorded (current account, capital account, or net change in international reserves) and whether it is a
receipt or a payment.
a. A British subject's purchase of a share of Johnson \& Johnson stock
b. An American citizen's purchase of an airline ticket from Air France
c. The Swiss government's purchase of U.S. Treasury bills
d. A Japanese citizen's purchase of California oranges
e. $\$ 50$ million of foreign aid to Honduras
f. A loan by an American bank to Mexico
g. An American bank's borrowing of Eurodollars

Pragya Ahuja

Numerade Educator

Problem 4

Why does a balance-of-payments deficit for the United States have a different effect on its international reserves than a balance-of-payments deficit for the Netherlands?

Pragya Ahuja

Numerade Educator

Problem 5

How can a large balance-of-payments surplus contribute to a country's inflation rate?

Pragya Ahuja

Numerade Educator

Problem 6

Why can balance-of-payments deficits force some countries to implement contractionary monetary policies?

Pragya Ahuja

Numerade Educator

Problem 7

Under the gold standard, if Britain became more productive relative to the United States, what would happen to the money supply in the two countries? Why would the changes in the money supply help preserve a fixed exchange rate between the United States and Britain?

Pragya Ahuja

Numerade Educator

Problem 8

What is the exchange rate between dollars and Swiss francs if one dollar is convertible into $1 / 40$ ounce of gold and one Swiss franc is convertible into $1 / 25$ ounce of gold?

Pragya Ahuja

Numerade Educator

Problem 9

"Inflation is not possible under the gold standard." Is this statement true, false, or uncertain? Explain your
answer.

Pragya Ahuja

Numerade Educator

Problem 10

What are some of the disadvantages of China's pegging the yuan to the dollar?

Pragya Ahuja

Numerade Educator

Problem 11

If a country's par exchange rate was undervalued during the Bretton Woods fixed exchange rate regime, what kind of intervention would that country's central bank be forced to undertake, and what effect would the intervention have on the country's international reserves and money supply?

Pragya Ahuja

Numerade Educator

Problem 12

"The abandonment of fixed exchange rates after 1973 has led countries to pursue more independent monetary policies." Is this statement true, false, or uncertain? Explain your answer.

Pragya Ahuja

Numerade Educator

Problem 13

"If a country wants to keep its exchange rate from changing, it must give up some control over its money supply." Is this statement true, false, or uncertain? Explain your answer.

Pragya Ahuja

Numerade Educator

Problem 14

Why is it that in a pure, flexible exchange rate system, the foreign exchange market has no direct effect on the money supply? Does this mean that the foreign exchange market has no effect on monetary policy?

Pragya Ahuja

Numerade Educator

Problem 15

Why did the exchange-rate peg lead to difficulties for the countries in the ERM after the German reunification?

Pragya Ahuja

Numerade Educator

Problem 16

How can exchange-rate targets lead to a speculative attack on a currency?

Pragya Ahuja

Numerade Educator

Problem 17

What are the advantages and disadvantages of having the IMF as an international lender of last resort?

Pragya Ahuja

Numerade Educator

Problem 18

How can the long-term bond market help reduce the time-inconsistency problem for monetary policy? Can the foreign exchange market also perform this role?

Pragya Ahuja

Numerade Educator

Problem 19

"Balance-of-payments deficits always cause a country to lose international reserves." Is this statement true, false, or uncertain? Explain your answer.

Pragya Ahuja

Numerade Educator

Problem 20

How can persistent U.S. balance-of-payments deficits stimulate world inflation?

Pragya Ahuja

Numerade Educator

Problem 21

What are the key advantages of exchange-rate targeting as a monetary policy strategy?

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Numerade Educator

Problem 22

When is exchange-rate targeting likely to be a sensible strategy for industrialized countries? When is exchange-rate targeting likely to be a sensible strategy for emerging market countries?

Pragya Ahuja

Numerade Educator

Problem 23

What are the advantages and disadvantages of currency boards and dollarization over a monetary policy that uses only an exchange-rate target?

Pragya Ahuja

Numerade Educator

Problem 24

Suppose the Federal Reserve purchases $\$ 1,000,000$ worth of foreign assets.
a. If the Federal Reserve purchases the foreign assets with $\$ 1,000,000$ in currency, show the effect of this open market operation, using T-accounts. What happens to the monetary base?
b. If the Federal Reserve purchases the foreign assets by selling $\$ 1,000,000$ in $\mathrm{T}$ -bills, show the effect of this open market operation, using T-accounts. What happens to the monetary base?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 25

Suppose the Mexican central bank chooses to peg the peso to the U.S. dollar and commits to a fixed peso/dollar exchange rate. Use a graph of the market for peso assets (foreign exchange) to show and explain how the peg must be maintained if a shock in the U.S. economy forces the Fed to pursue contractionary monetary policy. What does this say about the ability of central banks to address domestic economic problems while maintaining a pegged exchange rate?

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator