One of the oldest debates in economics is whether a currency should have a fixed or floating exchange rate. There is no single solution that fits all economies. The choice of an exchange rate system depends on many factors, including the openness to international trade, maturity of the financial system, inflation, labor market flexibility, and credibility of policy makers. Consider two countries, Opland and Lovenia. Opland has a central bank with a weak reputation. Lovenia has a strong central bank but much higher inflation than its trading partners. Indicate the exchange rate system that would be more beneficial for each country in the following table. Country Pegged (Fixed) Exchange Rates Flexible Exchange Rates Opland Lovenia

One of the oldest debates in economics is whether a currency should have a fixed or floating exchange rate. There is no single solution that fits all economies. The choice of an exchange rate system depends on many factors, including the openness to international trade, maturity of the financial system, inflation, labor market flexibility, and credibility of policy makers. Consider two countries, Opland and Lovenia. Opland has a central bank with a weak reputation. Lovenia has a strong central bank but much higher inflation than its trading partners. Indicate the exchange rate system that would be more beneficial for each country in the following table. Country Pegged (Fixed) Exchange Rates Flexible Exchange Rates Opland Lovenia

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Q (B) Which of the following statements about central bank objectives are true? A. Central banks can have several objectives, but their actions need to provide a “nominal anchor” for the economy B. All statements are true C. A strict inflation target is a way to provide a “nominal anchor” for the economy D. In principle, one of the goals of a central bank could be to slow down climate change
From your course of study, you can see that the U.S. dollar and the Euro are the largest functional currencies in the world. What is another popular functional currency? Where is the currency popular? How many firms worldwide use the currency as their functional currency?
1.Assume that the yen is selling at a forward discount in the forward-exchange market. Then, most likely a . interest rates are declining in Japan. b . this currency is gaining strength in relation to the dollar. c . interest rates are higher in Japan than in the United States. d . this currency has low exchangerate risk.
Assume that a country, due to speculation in the foreign exchange market, faces a sudden capital outflow (see figure below). If the country has high levels of foreign denominated debt and inadequate foreign reserves answer the following questions, [Questions 17,18,19] e-Exchange Rate Short Run NX NCO, NY, A shift in the NCD curve dae to a sudden capital outflow NCO before NCO her Long Ran NX NX, NCO Question 17: In a free float foreign exchange rate regime the country will experience immediately. a. an increase in NX due to currency devaluation at NX b. business bankruptcies due to currency devaluation e a devaluation of its currency from e to e d. a devaluation of its currency from esto es with no change in NX e all of the above
Which of the following is not an argument for central bank intervention? Exchange rates are highly volatile. Exchange rate fluctuations have an adverse effect on the macroeconomy. The market knows better than economic policy makers what the appropriate level of the exchange rate is. Central bank intervention can smooth out fluctuations in exchange rates.
Explain why the following statement is true or false: “The smaller and less liquid markets and currency markets frequently demonstrate behaviors that follow the principles outlined by the different schools of thought on exchange rate determination (parity conditions, balance of payments approach, and asset approach) relatively well in the medium to long term.”
Which of the following are reasons why an MNC might issue bonds in a particular foreign market? Check all that apply. There is stronger demand for bonds issued by the MNC in a foreign market as opposed to the domestic market. The currency in that foreign market is expected to appreciate against the MNC's home currency. There is a lower interest rate in that foreign country. The MNC intends to finance a project in a specific country and in a specific currency. If there is for a bond, a bondholder may not be able to sell a bond at the desired time or may have to decrease the price of their bonds in order to sell them. The risk of this occurrence is known as risk.
If a country’s par exchange rate is overvalued, what kind of intervention would that country’s central bank be forced to undertake, and what kind of effect would it have on its international reserves? What must happen if this country’s central bank decides not to intervene anymore?
The functions of the World Bank evolved in response to... the increase in protectionism. the creation of the Marshall Plan. O the shift to floating exchange rates. O the competitive devaluation of currencies.
A US manufacturing firm that produces cars in Mexico to sell in the US and the Eurozone would like to reduce the effect of currency fluctuations on its profits. Describe in words the hedging strategy that the company should take. Remember that a possible answer is that the company should not be hedging at all.
Why the single currency eliminates exchange rate fluctuation and why is better for the countries to use the a common currency?
Because capital flows were an important element in the currency crises, it has been advocated that emerging markets countries avoid the financial instability by restricting capital mobility. Assess the extent to which you agree with this statement.

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