Monetaries Policy and Exchange Rate

Question 1

Rising Confidence in Boversia (graph)(imaginary country)

Answer 1

Question 2

what relationship capture the Phillips curve?

Answer 2

• output affect inflation

Question 3

Rising Confidence and Output Stabilization (graph)

Answer 3

Question 4

Effects on Components of Spending (graph)

Answer 4

Question 5

Exchange Rate Policies and Their Pitfalls (graph)

Answer 5

Question 6

A Domestic Shock and Output Stabilization (graph)

Answer 6

Question 7

Definition of Foreign exchange interventions by the central bank:

Answer 7

• purchases and sales of foreign currencies by central banks

Question 8

Definition of International reserves by the central bank:

Answer 8

• liquid assets held by central banks that are denominated in foreign currencies

Question 9

Foreign Exchange Interventions and International Reserves (order)(graph)

Answer 9

Question 10

Interventions and the Exchange Rate (graph)

Answer 10

Question 11

Why the central bank intervene in the exchange rate?

Answer 11

The motive for foreign exchange interventions is to escape this dilemma. Interventions allow policymakers to stabilize output and the exchange rate at the same time.

Question 12

Do exchange rate intervation work ? (againts it)

Answer 12

• Yes, but little and/or unreliable
• The size of interventions suggests that the shifts are slight and the effects on exchange rates are small.
• Interventions can’t offset major shocks such as capital flight, as we’ve assumed up to now.

Question 13

Do exchange rate intervation work ? (in favor)

Answer 13

• Yet not all economists dismiss interventions.
• Some suggest that interventions can change exchange rates even if they are small
• Interventions signal central banks’ desire to adjust exchange rates (Expectations of future exchange rate movements affect current rates.)
• trigger self-fulfilling expectations
• Fatum and Hutchinson (University of California) concluded that interventions do influence exchange rates.

Question 14

Definitions of Capital controls:

Answer 14

• Regulations that restrict capital inflows or outflows

Question 15

Capital Controls and the Exchange Rate (graph)(effects)

Answer 15

Question 16

what are the Effects on Exchange Rates of capital control?

Answer 16

• Avoid capital flight
• Countries use capital controls for the same reason that they use foreign exchange interventions: to ease the trade-off between output and exchange rate stability.
• This stabilizes the exchange rate without an interest rate adjustment that would destabilize output.

Question 17

what critique have the Capital Controls system?

Answer 17

• Restrictions on capital inflows make it harder for a country’s firms to finance investment.
• Restrictions on outflows prevent savers from earning high returns on foreign assets. In general, capital controls impede the flow of savings to the countries where savings are most productive.
• Critics argue that controls hurt the economy in the long run by reducing foreign investment.

Foreigners won’t put money in a country if the government might prevent them from taking it back out.

Question 18

with what policies china had to controlled its exchange rate?

Answer 18

• restrictions on capital inflows
• foreign exchange interventions

Question 19

Definition of Floating exchange rate:

Answer 19

• A policy that allows the exchange rate to fluctuate in response to economic shocks

Question 20

Definition of Fixed exchange rate

Answer 20

• A policy that holds the exchange rate at a constant level

Question 21

A Fixed Exchange Rate: Pros and Cons (graph)

Answer 21

Question 22

Definition of Devaluation:

Answer 22

• resetting of a fixed exchange rate at a lower level
• When a country has a fixed exchange rate,

Question 23

Definition of Revaluation:

Answer 23

• resetting of a fixed exchange rate at a higher level

Question 24

Fixed Exchange Rates and Inflation (graph)

Answer 24

Question 25

The Instability of Fixed Exchange Rates (graph)

Answer 25

Question 26

Definition of **Speculative attack:** (Currency speculators)

Answer 26

* strategy of selling a currency with a fixed exchange rate to force and to profit from a devaluation

Question 27

what was the The Bretton Woods System?

Answer 27

* Under this system, all currencies were **fixed against the dollar.** * Fixed rates were maintained through a combination of **interest rate adjustments, capital controls**, and **interventions.**

Question 28

what Compared advantage have a common currency system compare to a traditional fixed-rate system ?

Answer 28

* A currency union creates **_absolute fixity_** of exchange rates * A currency union **eliminates the costs** of changing currencies * A common currency helps people **compare prices** across different countries.

Question 29

what undesirable charateristic have the **One-Size-Fits-All Policy?**

Answer 29

* The _main drawback_ of a currency union is the basic problem with fixed exchange rates: **_the loss of national monetary policy._**