EIFM Seminar 7 – week commencing Nov 22^nd 2021

Question 1: If the Federal Reserve buys dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange rate?

Question 2: If the Federal Reserve buys dollars in the foreign exchange market but does not sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange rate?

Question 3: For each of the following, identify in which part of the balance-of-payments account the transaction is recorded (current account or capital account) and whether it is a receipt or a payment.

a. A British subject’s purchase of a share of Johnson & Johnson stock

b. An American citizen’s purchase of an airline ticket from Air France

c. A Japanese citizen’s purchase of California oranges

d. $50 million of foreign aid to Honduras

e. A loan by an American bank to Mexico

f. An American bank’s borrowing of Eurodollars

Question 4: Under the gold standard, if Britain became more productive relative to the United States, what would happen to the money supply in the two countries? Why would the changes in the money supply help preserve a fixed exchange rate between the United States and Britain?

Question 5: How can exchange-rate targets lead to a speculative attack on a currency?

Question 6: Suppose the Mexican central bank chooses to peg the peso to the U.S. dollar and commits to a fixed peso/dollar exchange rate. Use a graph of the market for peso assets (foreign exchange) to show and explain how the peg must be maintained if a shock in the U.S. economy forces the Fed to pursue contractionary monetary policy. What does this say about the ability of central banks to address domestic economic problems while maintaining a pegged exchange rate?