Why might a country raise interest rates in the face of an exchange rate crisis?
What will be an ideal response?
If the value of a country's currency is depreciating rapidly, the country's government can purchase the country's currency in foreign exchange markets in an attempt to boost the value of the currency. However, continuing to purchase currency requires reserves of other currencies (like the dollar), and those reserves are not inexhaustible. The result is that a country has to rely on other sources of increase in value for the currency. By raising interest rates, the country makes investment more attractive to foreigners, increasing the demand for currency, and increasing the equilibrium exchange rate.
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The key official definition of the money supply is
A) only coins and paper currency in circulation. B) M2. C) only transactions deposits at banks. D) MZM.
An increase in the currency drain ratio
A) decreases the monetary base. B) increases the quantity of money. C) increases bank reserves. D) does not change the amount of the monetary base. E) does not change the quantity of money.
Commitment devices are:
A. methods to increase the price of your vices. B. methods to lower the price of your virtues. C. successful whether weak or strong, depending on the situation. D. All of these statements are true.
Idiosyncratic risk:
A. can not be eliminated through diversification. B. is unique to a particular company or asset. C. is not generally absent from index funds. D. All of these are true.