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 effect on international reserves, the money supply and the exchange rate?
If the Federal Reserve buys dollars in the foreign exchange market but does not sterilize the intervention, what will be the effect on the international reserves, the money supply and the exchange rate?
For each of the following identify in which part of the balance-of-payments account it appears (current account, capital account or net change in international reserves) and whether it is a receipt or a payment:
A British subject’s purchase of a share of Johnson & Johnson stock
An American’s purchase of an airline ticket from Air France
The Swiss government’s purchase of US Treasury bills
A Japanese’s purchase of California Oranges
$50 million of foreign aid to Honduras
A loan by an American bank to Mexico
An American bank’s borrowing of Eurodollars
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 or the Netherlands?
Under fixed exchange rates, if Britain becomes more productive relative to the United States, what foreign exchange intervention is necessary to maintain the fixed exchange rate between dollars and pounds? Which country undertakes this intervention?
What is the exchange rate between dollars and Swiss francs if one dollar is convertible into 1/20 ounce of gold and one Swiss franc is convertible into 1/40 ounce of gold?
If a country’s par exchange rate was undervalued during the Bretton Woods fixed exchange rates regime, what kind of intervention would that country’s central bank be forced to undertake, and what effect would it have on its international reserves and the money supply?
How can a large balance-of-payments surplus contribute to the country’s inflation rate?
“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.
Why can balance-of-payments deficits force some countries to implement a contractionary monetary policy?
“Balance-of-payments deficits always cause a country to lose international reserves.” Is this statement true, false or uncertain? Explain your answer.
How can persistent U.S. balance-of-payments deficits stimulate world inflation?
Why did the exchange rate peg lead to difficulties for the countries in the ERM when German reunification occurred?
Why is it that in a pure flexible exchange rate system, the foreign exchange market has no direct effects on the monetary base and money supply? Does this mean that the foreign exchange market has no effect on monetary policy?
“The abandonment of fixed exchange rates after 1973 has meant that countries have pursued more independent monetary policies.” Is this statement true, false or uncertain? Explain your answer.
Are controls on capital outflows a good idea? Why or Why not?
Discuss the pros and cons of controls on capital inflows.
Why might central banks in emerging-market countries find that engaging in a lender-of-last-resort operation might be counterproductive? Does this provide a rationale for having an international lender of last resort like the IMF?
Has the IMF done a good job in performing the role of the international lender of last resort?
What steps should an international lender of last resort take to limit moral hazard?
Chapter 16 – Quantitative Problems
The Federal Reserve purchase $1m of foreign assets for $1m. Show the effect of this open market operation using T-Accounts.
Again, the Federal Reserve purchases $1m of foreign assets. However, to raise the funds, the trading desk sells $1m of T-bills. Show the effect of this open market operation using T-accounts.
If the interest rate is 4% on euro deposits and 2% on dollar deposits, while the euro is trading at $1.3 per euro, what does the market expect the exchange rate to be 1-year from now?
If the dollars begins trading at $1.3 per euro, with the same interest rates given in problem 3, and the ECB raises interest rates so that the rate on euro deposits rises by 1%, what will happen to the exchange rate (assuming that the expected future exchange rate is unchanged)?
If the balance in the current account increases by $2bn while the capital account falls by $3.5bn, what is the effect on governmental international reserves?
Chapter 16 – Additional Questions
Identify three criteria necessary for a currency to join the euro. Why were these criteria seen as important to the success of the euro?
The following is a graph of the Greek trade deficit before and after Greece joined the euro. Why might one have seen a significant increase in imports after joining the Euro?
A German Bank lends 1,000 EUR to a Greek Bank that then lends 1,000 EUR to a Greek customer. The Greek customer then buys goods from a German company for 1,000 EUR The German company then deposits the 1,000 EUR into its bank account at the German Bank.
Draw T-accounts for the German and Greek Bank.
The German Bank then withdraws the loan from the Greek Bank. The Greek Bank then borrows the money from the Greek central bank. Draw new T-accounts for the German Bank, The Greek Bank and the Greek Central Bank.
