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Question
You live in a small country that suffers constantly from high and variable rates of inflation. You are quite sure it has something to do with the fact that the head of the central bank is the President's brother. A rival presidential candidate is advocating fixing the exchange rate between your country's currency and the dollar. What are the advantages to this proposal and how do you think the current head of the central bank will respond?Answer
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Related questions
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The strong appreciation of the dollar for the last part of the 1990s: A. was a benefit to all U.S. residents but costly to most foreign producers.B. was a benefit to U.S. exporters, but put a severe strain on U.S. Importers.C. was welcomed by all U.S. manufacturers.D. played a key role in keeping inflation in check even though the economy was growing rapidly.
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There was a lot of pressure on U.S. policymakers in late 1999 and into the early 2000's to decrease the value of the dollar. This pressure was coming mainly from: A. importers.B. foreign manufacturers.C. U.S. manufacturers.D. foreign central banks.
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An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market: A. the demand for dollars will decrease.B. the supply of dollars will increase.C. the dollar will depreciate relative to foreign currencies.D. the demand for dollars will increase.
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Differences in inflation rates between two countries can explain: A. short-run changes in the exchange rate but not long-run changes.B. changes in the real exchange rate over the long run, but not changes in the nominal exchange rate.C. long-run changes in the exchange rate but not short-run changes.D. changes in the exchange rate in both the short run and the long run.
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The empirical evidence on purchasing power parity seems to point out that: A. purchasing power parity can explain long run movements in exchange rates but does not hold up to scrutiny for short-run changes.B. purchasing power parity does a good job of explaining short-run movements in exchange rates, but does not hold up to scrutiny over the long run.C. purchasing power parity is a good theory for international trade, but is of little use in explaining exchange rate movements.D. inflation and a country's rate of currency appreciation are positively correlated.
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