Self-Check Questions


How will a stronger euro affect the following economic agents?

  1. a British exporter to Germany
  2. a Dutch tourist visiting Chile
  3. a Greek bank investing in a Canadian government bond
  4. a French exporter to Germany

Suppose that the political unrest in Egypt leads financial markets to anticipate a depreciation in the Egyptian pound. How will that affect the demand for pounds, supply of pounds, and exchange rate for pounds compared to, say, U.S. dollars?


Suppose U.S. interest rates decline compared to the rest of the world. What would be the likely impact on the demand for dollars, supply of dollars, and exchange rate for dollars compared to, say, euros?


Suppose Argentina gets inflation under control and the Argentine inflation rate decreases substantially. What would likely happen to the demand for Argentine pesos, the supply of Argentine pesos, and the peso/U.S. dollar exchange rate?


This chapter has explained that “one of the most economically destructive effects of exchange rate fluctuations can happen through the banking system” if banks borrow from abroad to lend domestically. Why is this less likely to be a problem for the U.S. banking system?


A booming economy can attract financial capital inflows, which promote further growth. But capital can just as easily flow out of the country, leading to an economic recession. Is a country whose economy is booming because it decided to stimulate consumer spending more or less likely to experience capital flight than an economy whose boom is caused by economic investment expenditure?


How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?


A central bank can allow its currency to fall indefinitely, but it cannot allow its currency to rise indefinitely. Why not?


Is a country for which imports and exports make up a large fraction of the GDP more likely to adopt a flexible exchange rate or a fixed (hard peg) exchange rate?