Question

1. If a central bank makes an unsterilized purchase of foreign reserve assets, what happens to its monetary base? ___________

2. How does a sterilized sale of foreign reserve assets affect the domestic interest rate? _________________

3. If a country has a current account surplus, will it have capital inflows or outflows? _____________

4. If a country with a fixed exchange rate has a balance of payments deficit, would it buy or sell reserve assets to maintain the par value of its exchange rate? _______________________

5. If a county with a fixed exchange rate is expected to devalue its exchange rate, what might force devaluation? ___________ ___________

6. What must a country control to have a fixed exchange rate and an independent monetary policy? __________ ___________

7. When a group of countries adopt a common currency, this is known as a _______ ________?

8. What are countries that borrow from the IMF required to do?   _________ _________ ____________________

9. How does the creation of a currency board constrain a country’s monetary policy? _____________________

10. Panama uses the U.S. dollar as its currency. This is known as ______________?

Answer 1

1. If a central bank makes an unsterilized purchase of foreign reserve assets, what happens to its monetary base? Increases
   Explanation: When forex is purchased by central bank, supply of own currency increases.

2. How does a sterilized sale of foreign reserve assets affect the domestic interest rate? No affect on interest rate as there is no change in money supply.

3. If a country has a current account surplus, will it have capital inflows or outflows? Current account surplus means it must have capital account deficit. So capital will flow out.

4. If a country with a fixed exchange rate has a balance of payments deficit, would it buy or sell reserve assets to maintain the par value of its exchange rate?

Balance of payments deficit means that there is shortage of forex. So it would sell reserve assets.

1. If a country with a fixed exchange rate has a balance of payments deficit, would it buy or sell reserve assets to maintain the par value of its exchange rate? _______________________