IF CH6

Assume that Belgium, one of the European countries that uses the euro as its currency, would prefer that its currency depreciate against the dollar.  Can it apply central bank intervention to achieve this objective? 

• It can not apply intervention on its own because the European Central Bank (ECB) controls the money supply of euros.

• Yes, Belgium can directly intervene through its own central bank to devalue the euro against the dollar.

• No, because the euro is fixed against the dollar, and central bank intervention would not affect the exchange rate.

• no correct answer

How can a central bank use direct intervention to change the value of its currency?

• By setting interest rates to influence inflation

• By buying or selling its own currency in the foreign exchange market

• By influencing government fiscal policy

• By increasing taxes to reduce the money supply

If most countries in Europe experience a recession, how might the European Central Bank (ECB) use direct intervention to stimulate economic growth?

• The ECB can increase interest rates to reduce inflation and encourage savings

• The ECB can buy euros in the foreign exchange market to strengthen the currency and increase exports

• The ECB can sell euros and buy foreign currencies to weaken the euro, making European exports more competitive

• The ECB can restrict the money supply to prevent currency depreciation

To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:

• Sell U.S. dollars and buy British pounds in the foreign exchange market.

• Buy U.S. dollars and sell British pounds in the foreign exchange market.

• Increase U.S. interest rates to attract foreign investment

• Lower U.S. interest rates to reduce the demand for dollars.

Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market but does not adjust for the resulting change in the money supply. This is an example of:

• Sterilized intervention

• Unsterilized intervention

• Monetary tightening

• Fiscal policy intervention

Countries that have adopted the euro tend to have very similar:

• Fiscal policies

• Economic growth rates

• Monetary policies

• Tax structures

To strengthen the dollar using sterilized intervention, the Federal Reserve would ____ dollars and simultaneously ____ Treasury securities.

• Sell; buy

• Buy; sell

• Buy; buy

• Sell; sell

Which of the following is a disadvantage of a fixed exchange rate system?

• It provides stability and predictability in exchange rates.

• It allows a country to maintain independent monetary policy.

• It limits a country’s ability to respond to economic shocks and adjust to market conditions.

• It encourages competitive devaluations among countries.