Q&A Hero

Q: If a country has a flexible exchange rate, will high rates of inflation, though generally harmful, price this country's goods off world markets? Explain.

Q: Suppose you take out a home equity loan of $100,000 for 5 years at an annual interest rate of 5 percent, with payments to be made monthly. What will the approximate monthly payments be? The relevant formula is: a. $1,320.71b. $1,887.12c. $1,924.79d. $5,282.82

Q: What is the relationship between a nation's monetary and fiscal policy and its exchange rate?

Q: Suppose you take out a car loan of $10,000 for 3 years at an annual interest rate of 8 percent, with payments to be made monthly. What will be the approximate monthly payments? The relevant formula is: a. $313.36.b. $323.36.c. $853.45.d. $3,880.34.

Q: Is the European Monetary Union a form of dollarization? Explain.

Q: A rise in the annual interest rates will cause a. the principal amount of a bond to increase. b. the principal amount of a bond to decrease. c. the present value of a bond to decrease.d. the present value of a bond to increase.

Q: What are the main costs to a country that adopts dollarization?

Q: Your favorite magazine, Fun with Present Value, offers you four different subscription deals for the next four years. It has guaranteed its current and future subscription rates, as shown below. Which will you take, if your annual rate of discount is 6 percent and you want to get the magazine for four years?a. A one-year subscription for $24, followed by a one-year renewal each year for $24 each year.b. A two-year subscription for $45, followed by a two-year renewal for $48.c. A three-year subscription for $72, followed by a one-year renewal for $24.d. A four-year subscription for $89.

Q: What are the pros and cons of a currency board?

Q: According to the theory underlying the present-value formula, would a rational individual prefer to receive (a) $75 one year from now, (b) $85 two years from now, or (c) $90 three years from now, or would he be indifferent between all three choices? Assume that the relevant annual market interest rate is 20 percent and will remain at 20 percent for the next three years?a. He will prefer $75 one year from now. b. He will prefer $85 two years from now. c. He will prefer $90 three years from now.d. He will be indifferent between all three choices.

Q: What were the reasons for selecting the U.S. dollar as the currency to which the other 43 countries agreed to peg their currencies as part of the Bretton Woods System?

Q: According to the theory underlying the present-value formula, would a rational individual prefer to receive (a) $75 one year from now, (b) $85 two years from now, or (c) $90 three years from now, or would he be indifferent between all three choices? Assume that the relevant annual market interest rate is 10 percent and will remain at 10 percent for the next three years?a. He will prefer $75 one year from now.b. He will prefer $85 two years from now.c. He will prefer $90 three years from now.d. He will be indifferent between all three choices.

Q: How did the gold standard contribute to the spreading of the Great Depression of the 1930s?

Q: Consider the returns on four investment options: A, B, C, and D. All four investment options require the same principal amount, and the returns on the investments are considered over the same time frame. The present value of the return on investment A is greater than the present value of the return on investment B, which is greater than the present value of the return on investment C. The present value of the return on investment D is the lowest. A rational investor will choose to invest in:a. option A. b. option B. c. option C. d. option D.

Q: What are the general conditions under which a fixed exchange rate makes sense for a country?

Q: If the annual rate of interest in a market is 12%, the monthly rate of discount will equal a. 1%.b. 12%. c. 24%. d. 144%.

Q: How can irresponsible fiscal policy contribute to a speculative attack on a country's currency that is fixed in value to another currency?

Q: Consider a two-year coupon bond that has a present value of $10,000. If the annual rate of discount is 3 percent, and the payment made at the end of each year is $250, the principal amount to be repaid at the end of two years isa. $10,101.50. b. $10,300.00. c. $13,333.33. d. $13,583.33.

Q: What makes countries with fixed exchange rates prone to speculative attacks? Why don't the central banks of these countries stop these attacks?

Q: Consider a one-year coupon bond that has a present value of $2,000. If the annual rate of discount is 5 percent, and the payment made at the end of each year is $140, the principal amount to be repaid at the end of one year isa. $1,234.65. b. $1,363.32. c. $1,960.00. d. $2,000.00.

Q: Describe the automatic stabilizers that are lost to a country that fixes its exchange rate to another currency.

Q: Consider a coupon bond that pays $150 every year and repays its principal amount of $1,500 at the end of five years.If the annual rate of discount is 7 percent, the present value of the bond is approximatelya. $214.29.b. $808.39.c. $1,684.50.d. $1,742.52.

Q: What are the risks to a country of fixing its exchange rate to that of another country?

Q: Consider a coupon bond that pays $100 every year and repays its principal amount of $1,000 at the end of four years. If the annual rate of discount is 8 percent, the present value of the bond isa. $671.01. b. $1,066.24 c. $1,134.20. d. $1,250.00.

Q: You are an American resident but have invested in a German bond (paying face value) that matures in two years, pays a 5 percent interest rate and is denominated in euros. What could cause your rate of return to fall below 5 percent even though the bond pays off at maturity?

Q: Consider a two-year coupon bond that has a present value of $10,000. If the rate of discount is 3 percent, and the payment made at the end of each year is $300, the principal amount to be repaid at the end of two years isa. $10,000.00. b. $10,300.00. c. $33,333.33. d. $333,333.33.

Q: A sterilized intervention is actually a combination of two transactions. What are they and what is the effect on the monetary base?

Q: Consider a three-year coupon bond that has a present value of $2,000. If the annual rate of discount is 7 percent, and the payment made at the end of each year is $140, the principal amount to be repaid at the end of three years isa. $1,860.00. b. $2,000.00. c. $2,140.00. d. $2,156.40.

Q: What separates a sterilized foreign exchange market intervention from an unsterilized intervention?

Q: Consider a coupon bond that pays $105 every year and repays its principal amount of $1,500 at the end of 3 years. If the annual rate of discount is 7 percent, the present value of the bond is approximatelya. $735.35. b. $765.00.c. $1,395.00. d. $1,500.00.

Q: What should be the impact on the U.S. interest rates if the Fed undertakes a sterilized foreign exchange intervention? Be sure to explain your answer.

Q: Consider a coupon bond that pays $100 every year and repays its principal amount of $1,000 at the end of 10 years.If the annual rate of discount is 10 percent, the present value of the bond is approximately a. $909.09.b. $990.00.c. $1,000.00. d. $1,100.00.

Q: How would the impact on the exchange rate differ if the Fed were to sell U.S. Treasury securities instead of selling an equal amount (in $ terms) of euros?

Q: The amount repaid by a coupon bond at maturity is called its_____ value.a. presentb. futurec. faced. coupon

Q: Are foreign exchange market interventions the only tool available to a central bank to change the exchange rate? Explain.

Q: Consider a five-year fixed-payment security that has a present value of $1,500. If the annual rate of discount is 2 percent, the payment made at the end of each year isa. $231.77. b. $288.24. c. $300.00. d. $310.00.

Q: Using demand and supply analysis, explain why the euro/dollar exchange rate rises (the dollar appreciates) if the Fed intervenes in the foreign exchange market and sells euros.

Q: Consider a fixed­payment security that pays $100 at the end of every year for five years. If the annual rate ofdiscount is 7 percent, the present value of the security is a. $142.64.b. $410.02. c. $789.34. d. $999.63.

Q: Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would be the impact on the interest rate in the U.S. if the euro started to appreciate in value and why?

Q: Consider a three-year fixed-payment security that has a present value of $1,000. If the annual rate of discount is 7 percent, the payment made at the end of each year isa. $70.00. b. $107.00. c. $142.86. d. $381.05.

Q: Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would be the impact on the money supply in the U.S. if the euro started to decline in value and why?

Q: A bond that makes a regular interest payment until maturity, at which time the face value is repaid is referred to as a a. coupon bond.b. fixed-payment security. c. discount bond.d. perpetuity.

Q: What are the cost and benefits to a country instituting capital controls?

Q: Consider a fixed-payment security that pays $100 at the end of every year for three years. If the annual rate of discount is 10 percent, the present value of the security isa. $24.87. b. $248.69. c. $294.10.d. $1,000.00.

Q: Could a country be open to international capital flows, control its domestic interest rate and fix its exchange rate? Explain.

Q: The present value of a security isa. directly related to the discount rate.b. inversely related to the time until maturity. c. directly related to the principal amount.d. is not related to the discount rate.

Q: If the exchange rate between the Canadian dollar and the American dollar was fixed at 1.30 Canadian dollars per U.S. dollar and investors perceived Canadian bonds to be equal in value and risk to U.S. bonds, if the U.S. bonds are selling for $1,000 and have a 5 percent interest rate, assuming capital flows freely between the two countries what will be the price and the interest rate of the Canadian bonds?

Q: Which of the following statements is true?a. Everything else remaining unchanged, higher the future value of an investment, higher will be the present value.b. Everything else remaining unchanged, higher the rate of discount on an investment, higher will be the present value.c. The future value of an investment is unrelated to the principal amount invested.d. The future value of an investment is unrelated to the ongoing rate of interest.

Q: Capital flows freely between two countries and the countries have fixed exchange rates. The treasury bonds of each country have similar maturities but different expected returns. What can you deduce from this information?

Q: Discounting is the process of dividing a future value by the to obtain the value. a. discount factor; pastb. discount factor; present c. rate of discount; pastd. rate of discount; present

Q: Assuming the free flow of capital, explain why the central bank of a country that has fixed its exchange rate would not find discussions of inflation on the agenda of its policy meetings.

Q: In the one-period present-value equation, P=F/(1 + i), the term iis known as a. future value.b. present value.c. the rate of discount. d. the discount factor.

Q: Consider the current peso/dollar exchange rate is 100 pesos per dollar and the current inflation rate in Mexico and the U.S. is 3 percent in each country. Assuming purchasing power parity, what will the exchange rate be if the inflation rate increases to 5 percent in Mexico and falls to 2 percent in the U.S.?

Q: In the one-period present-value equation, P=F/(1 + i), the term 1 + i is referred to as a. future value.b. present value.c. the rate of discount. d. the discount factor.

Q: Imagine the exchange rate between the British pound (£) and the U.S. dollar ($) is fixed at $1.40/£ and capital flows freely between Great Britain and the U.S. Explain what the price of shares of stock in XYZ Inc. would be selling for in London if they are $80 per share in the U.S. and why.

Q: Earning interest on the interest that was earned in prior years is referred to as a. discounting.b. compounding.c. present valuing. d. bonding.

Q: While it is true that central banks of many countries intervene in the foreign exchange market, why wouldn't it be correct to say that central banks of these countries fix the exchange rates?

Q: If the interest accumulated on a principal amount of $5,000 at the end of a year is $400, the annual rate of interest must bea. 4%.b. 6%.c. 8%.d. 20%.

Q: Monetary union, in comparison to dollarization, means that: A. countries forgo revenues from seignorage.B. countries share in monetary policy decisions.C. the central bank no longer has the ability to be the lender of last resort.D. all of the answers given are correct.

Q: a.You buy a government bond that pays interest twice a year. The interest payment is $300 each six months. The bond matures in six years. The face value of the bond is $10,000. The annual market interest rate is 6 percent. What is the present value of the bond? Show yourwork.A formula that may be useful to you is: .b.After six months go by, you receive the first interest payment of $300. The annual market b. interest rate has declined to 5 percent and you decide to sell the bond. What is the bond's present value when you sell it? Show your work.c. What is your total return from owning the bond for six months (expressed at an annual rate, in percentage points, with two decimals)? Show your work.

Q: Dollarization is associated with each of the following, except: A. slower integration into world markets.B. adopting the monetary policy of the country whose currency is being used.C. the central bank no longer has the ability to be the lender of last resort.D. the loss of revenue from printing currency.

Q: a.You are negotiating a book deal for your newest novel in which an economist single-handedly saves the world. The publisher offers to pay you an advance of $1 million today plus $500,000 at the end of each of the next three years. What is the present value of these payments, given the annual rate of discount is 5percent?Show your work.b.You counter the publisher's offer with a counteroffer that will pay you $1.5 million today plus $5 per book sold in each of the next three years. You think you will sell 80,000 books each year in the next three years, but the publisher thinks you will only sell 40,000 books each year.Explain why both you and the publisher like this counteroffer better than the deal in part a. Show your work.

Q: The benefits to a country from dollarization include each of the following, except: A. a lower risk premium since inflationary finance is no longer a possibility.B. greater and faster integration into world markets, increasing trade and investment.C. no risk of an exchange rate crisis.D. increased revenue from seignorage.

Q: Costs of trading are referred to as ............ costs. a. tradingb. menuc. shoe-leather d. transactions

Q: Which of the following best defines dollarization? A. A country uses the U.S. dollar as well as its currency for all transactions.B. A country adopts a foreign currency for all transactions basically eliminating its own monetary policy.C. A country eliminates its own currency for international transactions and requires that all international transactions be conducted in U.S. dollars.D. The central bank of a country agrees to exchange its own currency for U.S. dollars at a fixed exchange rate.

Q: Describe the coin shortage of 1999 and 2000 and describe why it occurred. What ended the shortage?

Q: A problem with currency boards is that the central bank loses: A. control over the government budget.B. a flexible exchange rate is always preferred to a pegged exchange rate.C. influence over interest rates.D. the ability to supervise banks.

Q: Currently in the United States, money in checking accounts is a. commodity money.b. outside money. c. inside money. d. illegal tender.

Q: A lesson that policymakers should learn from the Argentinean experience with currency boards is: A. poor fiscal policies can undermine any monetary policy regime.B. a flexible exchange rate is always preferred to a pegged exchange rate.C. the only fixed exchange rate that works is the gold standard.D. they never work

Q: A mechanism by which a short-term loan is made, allowing a shopper to purchase goods or services today and pay for it at a later date, is known as a card.a. debitb. commodity c. creditd. fiat

Q: The failure of the Argentinean currency board can be attributed to many factors, including the: A. failure right from the start to lower inflation.B. pegging of the Argentine peso to the euro.C. pegging of the Argentine peso to the U.S. dollar, even though the countries' economies were not that highly integrated.D. prices of goods Argentine exported dropped significantly in the late 1990s hurting their economy.

Q: Which of the following statements correctly identifies an advantage of checking accounts over cash?a. Checks are more convenient to use for day to day transactions.b. Checks are accepted by almost all sellers while cash may not be accepted.c. Checks are more liquid than cash.d. Lost or stolen checks cannot be used unless they have the account holder's signature.

Q: In April 1991, Argentina adopted a currency board primarily to address the problem of: A. slow growth.B. high interest rates.C. large trade surpluses.D. triple-digit inflation.

Q: Which of the following statements correctly identifies a difference between inside money and outside money?a. Inside money has value because the government decrees that it has value for payment of taxes, while outside money has value because it is made using expensive metals.b. Inside money consists of wages and salaries earned by employees in the private sector, while outside money consists of wages and salaries earned by employees of the government sector.c. Inside money cannot be used for making purchases from foreign sellers, while outside money can be used for making purchases from foreign sellers.d. Inside money is created in the private sector, while outside money is created by the government or by nature.

Q: When a country operates with a currency board, the central bank's sole objective is to: A. focus on domestic monetary policy.B. maintain the domestic interest rate.C. maintain the exchange rate.D. maintain the target inflation rate.

Q: An example of inside money is a. Fedwire.b. silver.c. a traveler's check. d. $100 bills.

Q: In Hong Kong, the monetary authority can only increase the monetary base if they accumulate more U.S. dollars because: A. the currency of Hong Kong is the U.S. dollar.B. the monetary authority in Hong Kong operates a currency board where its sole objective is to fix the exchange rate between its currency and the U.S. dollar.C. the IMF required Hong Kong to peg its currency to the U.S. dollar in order to obtain a loan.D. Hong Kong has received substantial funding from the U.S. Treasury and the loans were conditional on maintaining the value of the Hong Kong currency.

Q: Money that is created in the private sector, such as checking accounts at banks, is referred to as:a. representative money. b. commodity money.c. outside money. d. inside money.

Q: Only two exchange rate regimes can be considered hard pegs. These are: A. currency boards and dollarization.B. dollarization and managed floating.C. flexible exchange rates and currency boards.D. the gold standard and inflation targeting.

Q: Which of the following statements correctly differentiates between commodity money and fiat money?a. Commodity money is created by the government while fiat money is created in the private sector. b. Fiat money is created by the government while commodity money is created by the government.c. Commodity money can be used for transactions in the international market, while fiat money cannot be used for transactions in the international market.d. Fiat money has value decreed by the government, while commodity money is valued because of the material it is made of.