Question : 18.6   Managed Floating and Sterilized Intervention 1) Imperfect asset substitutability assumes A) : 1303650

18.6   Managed Floating and Sterilized Intervention

1) Imperfect asset substitutability assumes

A) the returns on foreign and domestic currency bonds are identical.

B) the returns on foreign and domestic currency are unrelated.

C) the risks of holding foreign and domestic currency are identical.

D) the risks of holding foreign and domestic currency are unrelated to returns.

E) the returns on foreign and domestic currency differ and are influenced by risk.

2) The global financial crisis of 2007-2008 resulted in a(n) ________ of the Swiss franc as foreign currency flowed ________ the country. As result, Swiss products became ________ competitive in world markets.

A) depreciation; out of; more

B) depreciation; into; more

C) appreciation; out of; less

D) depreciation; out of; less

E) appreciation; into; less

3) The global financial crisis of 2007-2008 resulted in a(n) ________ of the Swiss franc. In 2011, the Swiss central bank intervened in order to cause a(n) ________ of the franc.

A) appreciation; appreciation

B) depreciation; depreciation

C) appreciation; revaluation

D) depreciation; appreciation

E) appreciation; depreciation

4) Perfect asset substitutability is the assumption that

A) the foreign exchange market is in equilibrium only when expected returns on domestic assets are greater than returns on foreign currency bonds.

B) the foreign exchange market is in equilibrium only when expected returns on foreign currency bonds are greater than returns on domestic assets.

C) the foreign exchange market is in equilibrium only when expected returns on all assets are negative.

D) the foreign exchange market is in equilibrium only when expected returns on domestic assets are equal to returns on foreign currency bonds.

E) the foreign exchange market is in equilibrium only when domestic assets are risk-free.

5) Imperfect asset substitutability exists

A) when it is possible for the expected returns on two assets to be different.

B) when the expected returns on two assets are the same.

C) only when one asset is foreign and the other is domestic.

D) when there is risk in the foreign exchange market.

E) when assets are liquid.

6) The interest parity condition can be written as

A) R = R – (Ee – E)/E.

B) R = R + (Ee – E)/E.

C) R = R2 – (Ee – E)/E.

D) R = R/(Ee – E).

E) R = R + (Ee + E)/E.

7) When domestic and foreign currency bonds are imperfect substitutes, the domestic interest rate (R) can be written as

A) R = R – (Ee – E)/E + ρ.

B) R = R – (Ee – E)/E.

C) R = R + (Ee – E)/E + ρ.

D) R = R – (Ee + E)/E + ρ.

E) R = R – (Ee – E)ρ.

8) In the interest rate parity condition with imperfect substitutes and a risk premium of ρ

A) an increased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds.

B) a decreased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds.

C) an increased stock of domestic government debt will reduce the difference between the expected returns on domestic and foreign currency bonds.

D) an increased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds.

E) a decreased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds.

9) The signaling effect of foreign exchange intervention

A) never has any effect on exchange rates.

B) can alter the market’s view of exchange rates independent from the stance of monetary and fiscal policies.

C) cannot cause an immediate exchange rate change when bonds denominated in different currencies are perfect substitutes.

D) never leads to actual changes in monetary or fiscal policy.

E) can alter the market’s view of future monetary policies and cause an immediate exchange rate change.