What is the effect on its foreign reserve holding? On its money supply? Can it offset either of these effects through domestic open-market operations?
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Suppose central bank of a small country with a fixed exchange rate is faced by a rise in the world interest rate. What is the effect on its foreign reserve holding? On its money supply? Can it offset either of these effects through domestic open-market operations?
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- Describe what currency board entails and the advantages and disadvantages of adopting it has monetary policy managementAssess the validity of the following statement: A country that manages its currency by intervening on foreign exchange markets can use a counteracting open-market operation on bond markets to sterilize or prevent any change in its money supply.Which of the following is NOT a disadvantage of currency board or dollarization? Select one: a. Loss of independent monetary policy and flexibility in exchange rate policy. b. Increased exposure of the economy to shocks from the anchor country. c. Central bank unable to create money and act as lender of last resort. d. Greater economic openness and transparency
- Which of the following must remain stable if money is to successfully function as a store of value? a. The exchange rate b. The net of interest c. Prices d. EmploymentIn the case of incomplete capital movements in the flexible exchange rate system, explain the effectiveness of a "constricting" monetary policy by drawing, for the situation where the demand for money is more sensitive to interest than capital movements.Using a flow chart, illustrate the effects of contracting the money supply in a country with floating exchange rates
- If the Fed lowers the federal funds rate so that the exchange rate falls, then imports ________ and exports ________. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decreaseDescribe the economic logic behind the theory of interest rate parity.Suppose the Bank of Canada contracts the money supply in an effort to reduce aggregate demand by a particular amount, say $10 billion. If Canada was a closed economy, would the amount by which the Bank of Canada would need to reduce the supply of money to accomplish this goal be greater or smaller than the amount it would need to reduce the supply of money if Canada was a small open economy with a flexible exchange rate?
- What are the advantages and disadvantages of currencyboards and dollarization over a monetary policy thatuses only an exchange-rate target?What are the goals of monetary policy? What are the monetary policy targets? Which target is currently utilized by the Fed? Why doesn’t the Fed use the other one? If American demand for purchases of British goods has decreased, how would you expect the equilibrium exchange rate in the market for dollars to respond?Under a fixed exchange rate regime, how does increase in GDP effect the domestic money market equilibrium in the long run (explain in words and graphically)?