Reading 19: Foreign Exchange Parity Relations-LOS f 习题精选 exchange, maintain, commitment, face, 2011

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Session 4: Economics for Valuation
Reading 19: Foreign Exchange Parity Relations

LOS f: Describe a fixed exchange rate and a pegged exchange rate system.

 

 

An exchange rate system that involves a country's commitment to use fiscal and monetary policy to maintain the country's exchange rate within a narrow band is a:

A) floating exchange rate system

B) pegged exchange rate system.

C) fixed rate, unified currency system.

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An exchange rate system that involves a country's commitment to use fiscal and monetary policy to maintain the country’s exchange rate within a narrow band is a pegged exchange rate system.

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In a pegged exchange rate system the:

A) monetary authority maintains the exchange rate within a narrow band relative to other currencies.

B) currency is backed by actual holdings of another currency, such as the U.S. dollar.

C) exchange rate is fixed by governmental fiat and not allowed to float freely.

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This type of system requires a country to use its monetary policy to maintain the desired exchange rate within a narrow range relative to other currencies.

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A country that uses a fixed exchange rate system is least likely to:

A) run a current account surplus in consecutive years.

B) employ discretionary fiscal policy.

C) use discretionary monetary policy to keep the exchange rate within a narrow band around the target rate.

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Under a fixed exchange rate system, the country gives up discretion about monetary policy and creates domestic currency only up to its holdings of the foreign currency into which it promises to convert the domestic currency. A pegged exchange rate system uses monetary policy to keep the currency’s foreign exchange value within a band relative to a target. A country with a fixed exchange rate remains free to use discretionary fiscal policy. The state of its current and capital accounts will depend on its trade and investment flows.