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What is one of the measures included in an austerity package to cure a financial crisis?
What is one of the measures included in an austerity package to cure a financial crisis?
What does contagion in financial terms refer to?
What does contagion in financial terms refer to?
What consequence did the depreciation of the Thai Baht have during the Asian Flu?
What consequence did the depreciation of the Thai Baht have during the Asian Flu?
What was one of the initial actions taken in Brazil's Real Plan?
What was one of the initial actions taken in Brazil's Real Plan?
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Which event is credited with causing a lack of confidence in the cruzeiro in Brazil?
Which event is credited with causing a lack of confidence in the cruzeiro in Brazil?
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Why is there a need for international financial support during a contagion?
Why is there a need for international financial support during a contagion?
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What percentage of inflation did Brazil experience in the early 1990s?
What percentage of inflation did Brazil experience in the early 1990s?
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What was a significant feature of the Real Plan established in Brazil?
What was a significant feature of the Real Plan established in Brazil?
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What happens to nominal variables in the long run according to the classical dichotomy?
What happens to nominal variables in the long run according to the classical dichotomy?
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What happens to expectations when the money supply increases permanently?
What happens to expectations when the money supply increases permanently?
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In the short run, which interest rate is affected by monetary policy changes?
In the short run, which interest rate is affected by monetary policy changes?
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In the asset approach, what is the initial effect of an increase in the money supply on real returns?
In the asset approach, what is the initial effect of an increase in the money supply on real returns?
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Which of the following is true about nominal exchange rates after a monetary shock?
Which of the following is true about nominal exchange rates after a monetary shock?
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What is meant by the term 'overshooting' in the context of exchange rates?
What is meant by the term 'overshooting' in the context of exchange rates?
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What is the effect of a sterilization policy by a central bank?
What is the effect of a sterilization policy by a central bank?
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Which model does not exhibit overshooting due to its backward nature?
Which model does not exhibit overshooting due to its backward nature?
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In the context of the Euro area, what type of policy is the ECB likely to implement during economic slowdown?
In the context of the Euro area, what type of policy is the ECB likely to implement during economic slowdown?
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After a permanent increase in the money supply, what happens to nominal interest rates?
After a permanent increase in the money supply, what happens to nominal interest rates?
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What is the immediate result on the money supply when the monetary policy shifts to the right on the IS-MP graph?
What is the immediate result on the money supply when the monetary policy shifts to the right on the IS-MP graph?
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Which statement regarding capital flows under fixed exchange rates is accurate?
Which statement regarding capital flows under fixed exchange rates is accurate?
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What indicates that exchange rates are very volatile according to the discussion?
What indicates that exchange rates are very volatile according to the discussion?
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What is the expected change in interest rates when the ECB adopts an expansionary monetary policy?
What is the expected change in interest rates when the ECB adopts an expansionary monetary policy?
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What happens to the price level as a result of a permanent increase in the money supply?
What happens to the price level as a result of a permanent increase in the money supply?
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What is the consequence of an increase in the nominal money supply on the exchange rate?
What is the consequence of an increase in the nominal money supply on the exchange rate?
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What happens to the nominal interest rate after an increase in the level of the money supply in the long run?
What happens to the nominal interest rate after an increase in the level of the money supply in the long run?
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How does the aggregate price level respond to an increase in the money supply in the long run?
How does the aggregate price level respond to an increase in the money supply in the long run?
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What is the result of differences in adjustment processes in different markets regarding the exchange rate?
What is the result of differences in adjustment processes in different markets regarding the exchange rate?
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Why is it difficult to forecast the exchange rate after a change in economic policy?
Why is it difficult to forecast the exchange rate after a change in economic policy?
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What occurs under a fixed exchange rate when the overshooting effect is translated through changes in reserve?
What occurs under a fixed exchange rate when the overshooting effect is translated through changes in reserve?
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What does the 'impossible trinity' concept imply?
What does the 'impossible trinity' concept imply?
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How do monetary restriction policies fare under flexible versus fixed exchange rates?
How do monetary restriction policies fare under flexible versus fixed exchange rates?
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Does a monetary expansion impact the real and nominal exchange rates in the long run?
Does a monetary expansion impact the real and nominal exchange rates in the long run?
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What is the expected outcome of an increase in the domestic money supply in the short run?
What is the expected outcome of an increase in the domestic money supply in the short run?
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According to the Fisher's rule, how are the domestic inflation rate and foreign inflation rate related to domestic and foreign interest rates?
According to the Fisher's rule, how are the domestic inflation rate and foreign inflation rate related to domestic and foreign interest rates?
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What occurs in the long run after an increase in the money supply according to the classical dichotomy?
What occurs in the long run after an increase in the money supply according to the classical dichotomy?
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What assumption was made regarding exchange rate expectations in the discussion of overshooting?
What assumption was made regarding exchange rate expectations in the discussion of overshooting?
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What happens to interest rates immediately after an increase in the US money supply in the short run?
What happens to interest rates immediately after an increase in the US money supply in the short run?
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What effect does an informed investor expect when the money supply increases and they revise their expectations?
What effect does an informed investor expect when the money supply increases and they revise their expectations?
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If monetary policy is not efficient in the long run, what can be concluded about price adjustment?
If monetary policy is not efficient in the long run, what can be concluded about price adjustment?
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In the context of exchange rates, what does UIP stand for?
In the context of exchange rates, what does UIP stand for?
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What happens to the dollar ($) if the money supply in the US increases at the actual exchange rate?
What happens to the dollar ($) if the money supply in the US increases at the actual exchange rate?
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If the money supply in the Eurozone increases, what effect does it have on the dollar's value?
If the money supply in the Eurozone increases, what effect does it have on the dollar's value?
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In the context of the monetary approach of the balance of payments, how is the exchange rate determined?
In the context of the monetary approach of the balance of payments, how is the exchange rate determined?
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According to the monetary approach of exchange rates, what does the exchange rate equal when assuming Purchasing Power Parity (PPP) holds?
According to the monetary approach of exchange rates, what does the exchange rate equal when assuming Purchasing Power Parity (PPP) holds?
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What effect does tightening monetary policy have on the exchange rate in the short run when prices are fixed?
What effect does tightening monetary policy have on the exchange rate in the short run when prices are fixed?
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What is the relationship between money supply and money demand at equilibrium in the money market?
What is the relationship between money supply and money demand at equilibrium in the money market?
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What is the impact of monetary policy on the interest rate in the short run?
What is the impact of monetary policy on the interest rate in the short run?
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What happens to the effective exchange rate when monetary policy changes but expectations remain unchanged?
What happens to the effective exchange rate when monetary policy changes but expectations remain unchanged?
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Study Notes
Monetary Policy and Exchange Rates
- Monetary policy's impact on exchange rates is dynamic, not immediate.
- Changes in money supply affect interest rates, impacting the return on assets denominated in different currencies leading to currency appreciation or depreciation (UIP).
- Money market equilibrium is determined by money supply and demand. This gives an equilibrium interest rate which is related to exchange rates.
- Relative Purchasing Power Parity (PPP) and the Interest Rate Parity (IRP) are factors in how exchange rates are impacted. The exchange rate is linked to monetary policy through the money market.
- In the short run (fixed prices), a tighter monetary policy leads to currency appreciation.
- In the long run (adjusting prices), monetary policy has no effect on the exchange rate.
- Overshooting of exchange rates occurs when the initial reaction to a change in monetary policy exceeds the long-run equilibrium value due to expectations.
Overshooting of Exchange Rates
- Exchange rate changes are more volatile than other variables.
- Exchange rate overshooting is driven by expectations and the effect on prices.
- In the Dornbusch-Fisher model, expectations play a substantial role in the overshooting phenomenon.
- A change in monetary policy affects real variables, but in the long run, only nominal variables are impacted.
- The overshooting effect implies that short-run fluctuations in exchange rates are larger than long-run equilibrium adjustments.
- The long-run effects of monetary policy on exchange rates will primarily differ in adjustment in prices and not nominal variables.
Impossible Trinity
- Independent monetary policy, free capital movements, and fixed exchange rate cannot all be simultaneously maintained.
- Countries choosing fixed exchange rates must forgo either independent monetary policy or free capital movement.
Currency Crises
- Currency crises happen with high volatility as a result of pegged or fixed exchange rates.
- Currency crisis involves a devaluation or abandonment of the pegged rate.
- Currency crises can be precipitated by factors like unsustainable macroeconomic policies, speculative attacks, and contagion.
- Banking and financial crises often occur with currency crises.
- The global financial crisis of 2008 was a prime example of crises that affected both banking and financial markets.
- Policy actions used to respond to currency crises often involve stabilizing the currency, restoring investor confidence, and fixing underlying macroeconomic problems.
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Description
Explore the relationship between monetary policy and exchange rates in this quiz. Understand how factors like money supply and interest rates influence currency appreciation and depreciation. Learn about concepts such as Purchasing Power Parity and Interest Rate Parity and their effects on exchange rate dynamics.
