Question

ANSWER TRUE OR FALSE

1) In an open economy an expansionary monetary policy leads to BOTH a decrease in interest rates and a depreciation of the exchange rate.

2) Under a flexible exchange rate regime, interest rate changes can lead to large changes in the exchange rate that can damage the economy.

3) Fixed exchange rate regimes are vulnerable to speculative attacks which can cause an exchange rate crisis.

4) Better inflation outcomes would occur if the Minister of Finance ran monetary policy.

5) The Taylor rule is a useful way to think about monetary policy and states that interest rates should respond to deviations of inflation from target AND deviations of unemployment from the natural rate of unemployment OR deviations of output from potential output.

Answer 1

1. TRUE in an open economy , expansionary monetary policy leads to increase in money supply in the economy which reduces the interest rate and the value of the currency is also reduced which results in the depreciation of the exchange rate.

2.TRUE : UNDER flexible exchange rate regime , a fall in the interest rate leads to the decrease in the exchange arte and a rise in the interest rate leads to the appreciation in the exchange rate , and any large change e in the exchange rate can damage the economy

3.TRUE: speculative attacks refer to the situation in the Forex market when speculators attack the foreign currency aiming to maintain the fixed or pegged exchange rate.

4.FALSE : IT is irrespective that who rans the monetary policy as long as the economic situations are stable

5.TRUE: Taylor rule attempts to explain the policy and steps that should be taken by the central bank i.e. how it should change interest rate to affect the inflation and unemployment and other variable in the economy.