Question

9) Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true?

A) Fixed rates provide stability in international prices for the conduct of trade.

B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate.

C) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies.

D) Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses.

10) According to the terminology associated with changes in currency values, which of the following choices is the case when a currency's value relative to other currencies is changed by a government?

A) depreciation and revaluation

B) devaluation and appreciation

C) devaluation and revaluation

D) depreciation and appreciation

11) The "Impossible Trinity" is defined as the inability to achieve simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve?

A) monetary independence and exchange rate stability

B) exchange rate stability and full financial integration

C) full financial integration and monetary independence

D) A country cannot attain any of the exchange rate goals with a pure float exchange rate regime.

12) What is the single most important mandate of the European Central Bank?

A) Promote international trade for countries within the European Union.

B) Price, in euros, all products for sale in the European Union.

C) Promote price stability within the European Union.

D) Establish an EMU trade surplus with the United States.

Answer 1

Answer 9:

C) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies is correct.

Explanation:-

The statement C is not true because Fixed rates are inherently inflationary in that they require the country to follow restrictive monetary and fiscal policies.This restriction can be a burden to a country who wanted to continue the policies that causes high unemployment and slow economic growth. Statement A, B and D are true.

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Answer 10:

C) devaluation and revaluation is correct.

Explanation:-

Devaluation and revaluation are the official change in the value of currency of a country relative to other currencies under a fixed exchange rate system whereas in floating exchange rate system the market forces cause the change in the value of the currency that is known as appreciation or depreciation. Therefore, Option A, B and D are correct.

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Answer 11:

C) full financial integration and monetary independence is correct.

Explanation:-

The Impossible Trinity also known as Policy Trilemma has three goals and a country can accomplish only two out of three goals i.e.

- Financial Integration with global capital market

-Exchange rate stability and

-Monetary Interdependence

In pure float regime, a country can achieve only full financial integration and monetary independence. Therefore, Option A, B and D are incorrect.

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Answer 12:

C) Promote price stability within the European Union is correct.

Explanation:-

The main aim of European Central bank is to keep the prices stable and hence that supports economic growth and creation of jobs. The European central Bank manages the euro and implements the economic and monetary policy. Therefore, option A, B and D are incorrect.