2.3 Fixed versus Flexible exchange rates

Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true?

• Fixed rates provide stability in international prices for the conduct of trade
• Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate.
• Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies
• Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses

Which of the following is NOT an attribute of the "ideal" currency?

• monetary independence
• full financial integration
• exchange rate stability
• All are attributes of an ideal currency

The authors discuss the concept of the "Impossible Trinity" or the inability to achieve simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve?

• monetary independence and exchange rate stability
• exchange rate stability and full financial integration
• full financial integration and monetary independence
• country cannot attain any of the exchange rate goals with a pure float exchange rate regime

China today is a clear example of a nation that has chosen the following policies EXCEPT

• control and manage the value of its currency
• conduct an independent monetary policy
• full financial integration in an attempt to stimulate its domestic economy
• restrict the flow of capital into and out of the country

According to the terminology associated with changes in currency values, which of the following choices is the case when a currency's value relative to other currencies is changed by a government?

• depreciation and revaluation
• devaluation and appreciation
• devaluation and revaluation
• depreciation and appreciation

Based on the premise that, other things equal, countries would prefer a fixed exchange rate: Variable rates provide stability in international prices for the conduct of trade

• True
• False

If exchange rates were fixed, investors and traders would be relatively certain about the current and near future exchange value of each currency.

• True
• False

According to the terminology associated with changes in currency values, depreciation is a case when a currency's value relative to other currencies is changed by a government

• True
• False

By and large, high capital mobility is forcing emerging market nations to choose between the two extremes of a free floating exchange rate or a hard peg regime.

• True
• False