ECON6008 S1 2023 Tutorial 6
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ECON6008 S1 2023
Tutorial 6
1. How does fiscal contraction affect the current account under a fixed exchange rate?
A. Current account is unaffected by the fiscal contraction.
B. Current account improves as a result of a fiscal contraction.
C. Current account worsens as a result of a fiscal contraction.
D. The answer depends on whether the fiscal contraction is permanent or temporary.
2. Suppose the economy is hit by an adverse aggregate demand shock. In response to this shock, the central bank reacts to maintain a fixed exchange rate.
As a result of these changes,
A. both AA and DD will shift.
B. DD will shift.
C. neither AA nor DD will shift.
D. AA will shift.
The graph on the right depicts the initial equilibrium in the economy with the fixed exchange rate.
In the graph, add new AA and DD lines
corresponding to an adverse aggregate demand shock, and label them "AA2" and "DD2 ."
We can see that an adverse aggregate demand shock will lead to a (1) in output.
In order to maintain a fixed exchange rate, the money supply
will (2) .
(1) 
fall rise
(2) 
fall rise
3. We will analyze the effect of expansionary fiscal policy in an economy with fixed exchange rates.
The graph on the right depicts an initial equilibrium in the economy with the fixed exchange rate. Note: 'E' = E$ / e .
Add new AA and DD curves,
corresponding to expansionary fiscal policy, and label them "AA2" and "DD2 ." Draw two lines here.
We can see that expansionary fiscal policy will lead to a
(1) in output.
In order to maintain a fixed exchange rate, the money supply will (2) .
|
(1) |
|
rise fall |
(2) |
|
rise fall |
4. When a central bank devalues after a balance of payments crisis, what is likely to happen to its foreign reserves?
A. The central bank's foreign reserves are likely to remain the same.
B. The central bank is likely to gain foreign reserves as a result of devaluation.
C. The central bank is likely to lose foreign reserves as a result of devaluation.
D. The answer depends on the size of devaluation.
Would your answer change if the market believed another devaluation was to occur in the near future?
A. No, the answer will still be the same.
B. Yes, in further devaluation is expected, the answer will be different.
C. The answer depends on what market believed before devaluation.
5. United States foreign exchange intervention is sometimes done by an Exchange Stabilization Fund or ESF (a branch of the Treasury Department) that manages a portfolio of U.S. government and foreign currency bonds.
Consider an ESF intervention to support the yen, which would take the form of a portfolio shift out of dollar and into yen assets.
Such interventions
A. will leave the U.S. money supply unchanged.
B. will increase the U.S. money supply.
C. will lower the U.S. money supply.
D. The answer depends on whether sterilization operations are conducted in addition to an ESF intervention.
How would the above ESF intervention affect the foreign exchange risk premium?
A. The risk premium on dollar-denominated assets will remain the same.
B. The risk premium on dollar-denominated assets will rise.
C. The risk premium on dollar-denominated assets will fall.
2023-06-01