The Money View: The Illusion of Control

The video discusses the relationship between inflation rates and exchange rates, explaining how higher inflation in one country can lead to currency depreciation against another. It contrasts 19th-century central bank policies, which focused on pegging exchange rates to gold, with modern policies that target domestic inflation through interest rate manipulation. These modern policies aim for long-term exchange rate stabilization but can cause short-term fluctuations. The video also introduces concepts like covered and uncovered interest parity.

What happens to the exchange rate between the US dollar and the euro if the US has a higher inflation rate than Europe?

• The dollar appreciates against the euro.

• The dollar depreciates against the euro.

• The exchange rate remains unchanged.

• The euro depreciates against the dollar.

In the 19th century, what was the primary goal of central banks regarding exchange rates?

• To stabilize domestic inflation rates.

• To allow exchange rates to fluctuate freely.

• To keep exchange rates pegged to gold.

• To manipulate interest rates for economic growth.

How did pegging exchange rates to gold affect inflation in the 19th century?

• It caused inflation to rise significantly.

• It had no effect on inflation.

• It indirectly stabilized inflation relative to other countries.

• It led to deflation in most countries.

What is the focus of central bank policies in the 21st century?

• Increasing foreign exchange reserves.

• Maintaining gold reserves.

• Targeting domestic inflation rates.

• Stabilizing exchange rates through gold pegging.

Which concepts are relevant for understanding short-run exchange rate movements in the 21st century?

• Bilateral exchange rate parity.

• Gold standard parity.

• Covered and uncovered interest parity.

• Purchasing power parity.