Review Questions
fluctuations can happen through the banking system,” if banks borrow from abroad to lend domestically. Why is this less likely to be a problem for the U.S. banking system? 6 . A booming economy can attract inflows, which promote further growth. However, capital can just as easily flow out of the country, leading to economic . Is a country whose economy is booming because it decided to stimulate consumer spending more or less likely to experience capital flight than an economy whose boom is caused by economic investment expenditure? 7 . How would a affect the , net , aggregate , and aggregate supply? 8 . A can allow its currency to fall indefinitely, but it cannot allow its currency to rise indefinitely. Why not? 9 . Is a country for which and comprise a large fraction of the GDP more likely to adopt a flexible or a fixed () ?
Review Questions
10 . What is the ? 11 . Describe some buyers and some sellers in the for U.S. dollars. 12 . What is the difference between foreign direct investment and ? 13 . What does it mean to a financial transaction? 14 . What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker? 15 . Does an expectation of a stronger in the future affect the in the present? If so, how? 16 . Does a higher rate of return in a nation’s economy, all other things being equal, affect the of its currency? If so, how? 17 . Does a higher rate in an economy, other things being equal, affect the of its currency? If so, how? 18 . What is the purchasing power parity ? 19 . What are some of the reasons a is likely to care, at least to some extent, about the ? 20 . How can an unexpected fall in exchange rates injure the financial health of a nation’s banks? 21 . What is the difference between a floating exchange rate, a soft peg, a hard peg, and dollarization? 22 . List some advantages and disadvantages of the different exchange rate policies.
Critical Thinking Questions
23 . Why would a nation “”—that is, adopt another country’s currency instead of having its own? 24 . Can you think of any major disadvantages to dollarization? How would a work in a country that has dollarized? 25 . If a country’s currency is expected to appreciate in value, what would you think will be the impact of expected exchange rates on yields (e.g., the paid on government bonds) in that country? Hint: Think about how expected changes and interest rates affect a currency's and supply. 26 . Do you think that a country experiencing is more or less likely to have an
Text from Principles of Macroeconomics 3e, OpenStax, licensed CC BY-NC-SA 4.0. Access for free at openstax.org.
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