Question

1-If two countries choose to fix the exchange rates among their currencies, then Select one: A. the country with a current account surplus can decrease its money supply to delay the need for intervention. B. the country with a lower rate of inflation will eventually have large current account surpluses. C. both countries will have an inflation rate of zero. D. there usually is more pressure on the government whose country has an overall payments surplus than on the government whose country has an overall payments deficit.

2-The strongest argument in favor of fixed exchange rates is Select one: A. that floating exchange rates are often very volatile, disrupting international trade. B. that a fixed exchange rate allows unrestricted flow of financial capital from and into a country. C. the ease of defending fixed exchange rates during speculative attacks. D. the country's ability to use independent monetary policy to pursue internal balance.

3-Monetary policy is most effective in influencing aggregate demand Select one: A. when there is low capital mobility. B. under a freely floating exchange-rate system. C. under a fixed exchange-rate system without sterilization. D. under a fixed exchange-rate system with sterilization.

4-Fiscal policy is most effective in influencing aggregate demand Select one: A. under a floating exchange-rate system with a low degree of capital mobility. B. under a fixed exchange-rate system without sterilization. C. under a fixed exchange-rate system with sterilization. D. under a floating exchange-rate system with a high degree of capital mobility.

5-A domestic monetary shock is least disruptive Select one: A. under both fixed and floating exchange rates. B. under a floating exchange-rate system. C. under a fixed exchange-rate system without sterilization. D. under a fixed exchange-rate system with sterilization.

6-A domestic spending shock is likely to be least disruptive under a Select one: A. floating exchange-rate system when there is low capital mobility. B. fixed exchange-rate system without sterilization. C. floating exchange-rate system when there is high capital mobility. D. fixed exchange-rate system when there is high capital mobility.

Answer 1

ANSWER:1

The country with low rate of inflation will have large current account surplus because when exchange rate is fixed, the items in current account like trade account rises due to low inflation. People tend to buy more products.

ANSWER:2

The floating exchange rates are often volatile disrupting international trade. This is because fixed exchange rates do not change with change in any other variable. Therefore they lack volatility.

ANSWER:3

Monetory policy is effective in freely floating exchange rate woth low capital mobility because changes in exchange rate leads to rise in capital or investments leading to rise in GNP.

ANSWER:4

Fiscal policy is effective in fixed exchange rate without sterlisation because sterlisation is a part of monetory policy and expansionary and contractionary fiscal policy helps to increase and decrease aggregate demand.

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