exchange rate

If Mexico pegs the peso to the U.S. dollar and the Fed pursues contractionary policy, how must Mexico maintain the peg?

Mexico must raise interest rates or sell dollar reserves to keep the peso fixed. This limits its ability to address domestic problems while maintaining the peg.

If expected inflation rises in Europe (interest rates rise), what happens to the U.S. dollar?

Dollar depreciates (capital flows to Europe).

If a strike in France reduces French exports, what happens to the U.S. dollar?

Dollar appreciates (less demand for euros).

“If a country wants to keep its exchange rate from changing, it must give up some control over monetary policy.” True or false?

True. Fixed exchange rates require aligning domestic policy with foreign conditions.

How can irresponsible fiscal policy trigger a speculative attack on a fixed currency?

Large deficits undermine confidence, investors sell the currency, forcing devaluation.

Will the U.S. dollar strengthen or weaken in coming months?

Strengthen if U.S. interest rates rise or global uncertainty increases; weaken if U.S. growth slows or deficits expand.

If inflation rises in Europe (interest rates up), what happens to the U.S. dollar?

Dollar depreciates.

If the Fed pursues contractionary policy, what happens to the U.S. dollar?

Dollar appreciates (higher U.S. interest rates attract capital

If U.S. exports to Mexico are subsidized, what happens to the peso?

Peso depreciates relative to the dollar (higher demand for U.S. goods

Why was Switzerland concerned about euro demand falling (CHF appreciating)?

A stronger franc hurts Swiss exports and growth.

What did the SNB do in 2011 to maintain a minimum exchange rate of 1.20 CHF/euro?

Intervened by buying euros (selling francs). This created a surplus of francs.

What policy options did the SNB have to maintain the peg?

Buy foreign currency, expand reserves, or impose capital controls. Costs: inflation risk, balance sheet expansion.

What happened when the SNB ended the peg in 2015?

Franc appreciated sharply, hurting exports and tourism, slowing growth.

What does the “Impossible Trinity” state?

A country cannot simultaneously have free capital flows, fixed exchange rates, and independent monetary policy.

If Brazil faces a surge of foreign investment under a fixed exchange rate, what must the central bank do?

Buy dollars/sell reals to maintain the peg; risks overheating and inflation.

If investors fear inflation in Brazil, what happens?

Capital outflows → real depreciates. Central bank must sell reserves to defend the peg. Risk: reserve depletion.

From 2009–2011, how did euro/CHF and euro/AUD exchange rates change?

Euro depreciated vs. CHF and AUD (safe-haven flows to Switzerland and Australia).

If expected inflation drops in Europe (interest rates fall), what happens to the U.S. dollar?

Dollar appreciates.

If the ECB pursues expansionary policy, what happens to the U.S. dollar?

Dollar appreciates (capital flows to U.S.).

If the U.S. places a tax on Mexican imports, what happens to the peso?

Peso depreciates relative to the dollar (lower demand for Mexican goods).