1. The government _______ foreign currency for dollars if it wants to peg the exchange rate at a higher rate than would normally prevail in the market.
2. If there is an excess supply of a country s currency at the fixed exchange rate, there is a balance of payments_______.
3. The Bretton Woods agreement broke down during the decade of the _______.
4. When European countries joined together to create the euro, they no longer were able to conduct independent fiscal policy. _______ (True/False)
5. Expectations of Depreciation and Investing. Individuals wishing to invest in Turkey in 2006 had two choices. They could invest in bonds that would pay returns in 2007 in Turkish lira and earn 14.7 percent, or they could invest in Turkish bonds that would pay returns in U.S. dollars but earn only 5.2 percent. From this data, what do you think the market believes is the expected rate of depreciation of the Turkish lira against the U.S. dollar? Explain.
6. Dollarization. Some countries have simply decided to let the U.S. dollar or another foreign currency serve as their local currency. This is called dollarization. Why would a country decide to abandon its own currency and use a foreign currency?
7. Uncovering U.S. Exchange Rate Policy. Suppose the United States reported that the U.S. Treasury had increased its holdings of foreign currencies from last year. What does this tell you about the foreign exchange policies of the United States during the last year?
8. Contagion. When investors decided that Greek debt was too risky and Greece could potentially default on its obligations, interest rates on Greek securities rose substantially. At the same time, Spain and Portugal also saw their interest rates rise. Countries outside the Euro-zone were less affected. Can you explain this pattern?