the ppt of this chapter is in attachment Chapter 17 End of Chapter Quiz 1.      Suppose that firms in Boversia gain confidence in the economy, so domestic investment rises for any given interest rate. For now, assume that net capital outflows don’t change. What happens to output and the real exchange rate when the Boversian central bank holds the real interest rate constant? (Hint: Stick to the assumptions made in chapter 17.) A.     Output increases and the real exchange rate increases. B.     Output increases and the real exchange rate decreases. C.     Output increases and the real exchange rate stays constant. D.     None of the given answers are correct 2.      Suppose again that investment rises in Boversia. In this case, assume that higher confidence in the economy also causes a decrease in net capital outflows. What happens to output and the real exchange rate when the Boversian central bank holds the real interest constant. (Hint: Stick to the assumptions made in chapter 17.) A.     Output increases and the real exchange rate increases. B.     Output increases and the real exchange rate decreases. C.     Output increases and the real exchange rate stays constant. D.     None of the given answers are correct. 3.      Consider the scenario in Figure 17.4: a rise in confidence causes a fall in net capital outflows, and the central bank adjusts the interest rate to keep the exchange rate constant. For this case, what happens to consumption and investment. A.     C increases, I increases. B.     C increases, I is constant. C.     C is constant, I decreases. D.     C is constant, I is constant. 4.      Suppose government spending rises in Boversia, shifting the AE curve outward. The central bank would like to keep both output and the real exchange rate constant. How can policymakers accomplish these goals through a combination of an interest-rate adjustment and capital controls. A.     The central bank has to increase the real interest rate and prevent capital outflows. B.     The central bank has to increase the real interest rate and prevent capital inflows. C.     The central bank has to decrease the real interest rate and prevent capital outflows. D.     The central bank cannot achieve the two goals simultaneously. 5.      Compare two statements about exchange rates by former Treasury Secretary Henry Paulson, both from 2007: (1) “A strong dollar is in our nation’s interest.” (2) “The currency [China’s yuan] needs to appreciate, and it needs to appreciate faster.” Are the two statements consistent with one another? A.     The two statements are consistent because both imply a yuan appreciation. B.     The two statements are consistent because both imply a dollar depreciation. C.     The two statements are not consistent. D.     There is not enough information to judge the consistency of the two statements. 6.      What is the difference between an appreciation and a revaluation of a currency? A.     Appreciation implies th.

1. the ppt of this chapter is in attachment
Chapter 17 End of Chapter Quiz
1. Suppose that firms in Boversia gain confidence in the
economy, so domestic investment rises for any given interest
rate. For now, assume that net capital outflows don’t change.
What happens to output and the real exchange rate when the
Boversian central bank holds the real interest rate constant?
(Hint: Stick to the assumptions made in chapter 17.)
A. Output increases and the real exchange rate increases.
B. Output increases and the real exchange rate decreases.
C. Output increases and the real exchange rate stays constant.
D. None of the given answers are correct
2. Suppose again that investment rises in Boversia. In this
case, assume that higher confidence in the economy also causes
a decrease in net capital outflows. What happens to output and
the real exchange rate when the Boversian central bank holds
the real interest constant. (Hint: Stick to the assumptions made
in chapter 17.)
A. Output increases and the real exchange rate increases.
B. Output increases and the real exchange rate decreases.
C. Output increases and the real exchange rate stays constant.
D. None of the given answers are correct.
3. Consider the scenario in Figure 17.4: a rise in confidence
causes a fall in net capital outflows, and the central bank
adjusts the interest rate to keep the exchange rate constant. For
this case, what happens to consumption and investment.
A. C increases, I increases.

2. B. C increases, I is constant.
C. C is constant, I decreases.
D. C is constant, I is constant.
4. Suppose government spending rises in Boversia, shifting
the AE curve outward. The central bank would like to keep both
output and the real exchange rate constant. How can
policymakers accomplish these goals through a combination of
an interest-rate adjustment and capital controls.
A. The central bank has to increase the real interest rate and
prevent capital outflows.
B. The central bank has to increase the real interest rate and
prevent capital inflows.
C. The central bank has to decrease the real interest rate and
prevent capital outflows.
D. The central bank cannot achieve the two goals
simultaneously.
5. Compare two statements about exchange rates by former
Treasury Secretary Henry Paulson, both from 2007: (1) “A
strong dollar is in our nation’s interest.” (2) “The currency
[China’s yuan] needs to appreciate, and it needs to appreciate
faster.” Are the two statements consistent with one another?
A. The two statements are consistent because both imply a
yuan appreciation.
B. The two statements are consistent because both imply a
dollar depreciation.
C. The two statements are not consistent.
D. There is not enough information to judge the consistency
of the two statements.
6. What is the difference between an appreciation and a
revaluation of a currency?

3. A. Appreciation implies that a currency becomes more
valuable as measured in units of foreign currency while a
revaluation implies that the currency becomes less valuable as
measured in units of foreign currency.
B. Appreciation and revaluation both imply that a currency
becomes more valuable as measured in units of foreign currency
but onlyappreciation requires government or central bank
action.
C. Appreciation and revaluation both imply that a currency
becomes more valuable as measured in units of foreign
currency, but onlyrevaluation requires government or central
bank action.
D. Appreciation happens in response to speculative attacks
while revaluation happens in response to controlling inflation.
7. In 2020, Boversia fixes its exchange rate at 0.5 dollars per
bover. From 2020 to 2025, Boversia experiences inflation of 5
percent per year, while U.S. inflation is 2 percent per year. By
how much does Boversia’s real exchange rate change from 2020
to 2025? Assume an initial price level of 1 in both countries.
A. approximately 2%
B. approximately 3%
C. approximately 10%
D. approximately 15%
8. Some countries have a “crawling peg” for their nominal
exchange rate: they adjust it by a fixed percentage every year.
For example, Boversia might reduce its exchange rate against
the dollar by 3 percent per year. Why might a country adopt a
crawling peg?
A. To avoid extreme fluctuations in the nominal exchange
rate.
B. To keep the real exchange rate constant.

4. C. To avoid falling net exports over time.
D. All of the given answers are correct.
9. Boversia has a fixed exchange rate against the dollar.
Taxes rise in the United States, reducing U.S. aggregate
expenditure. The Federal Reserve adjusts the U.S. interest rate
to keep output constant, and Boversia’s central bank adjusts its
interest rate to keep the exchange rate constant. What happens
to Boversia’s output and interest rate?
A. Output increases, the interest rate increases.
B. Output increases, the interest rate decreases.
C. Output decreases, the interest rate increases.
D. Output decreases, the interest rate decreases.
10. Under the Maastricht Treaty, a country may adopt the euro
only if its government budget deficit is less than 3 percent of its
GDP. What is the rationale for this requirement? (Hint: See
Section 14.2.)
A. This requirement will reduce speculative attacks.
B. This requirement reduces government’s ability to generate
seigniorage revenue.
C. This requirement reduces variation in the inflation rates of
the euro countries.
D. B and C only.
11. Suppose the U.S. dollar is abolished. To replace it, each of
the 12 Federal Reserve Banks issues a currency for its region.
The Boston Fed issues the New England dollar, the Richmond
Fed issues the Mid-Atlantic dollar, and so on. What are the
benefits of this change?
A. This change will make it easier for goods and services to

5. move across the United States.
B. This change will make it easier for technology to spread.
C. This change will make it easier to conduct independent
monetary policy that is appropriate for the region.
D. This change will make it easier to control inflation in the
United States.
12. A currency board issues money backed by a foreign
currency (review Section 2.2). Like a currency union, a
currency board is an extreme version of a fixed exchange rate.
Are speculative attacks a danger with a currency board?
A. Currency boards can never run out of foreign reserves
therefore speculative attacks are not a danger.
B. Currency boards can never run out of foreign reserves, but
speculative attacks are still possible.
C. Currency boards can run out of foreign reserves and
speculative attacks are still possible.
D. None of the given answers accurately answer the question.
13. A loss of confidence by savers that increases net capital
outflows from a country
A. increases the real exchange rate, reducing net exports,
output and inflation.
B. increases the real exchange rate, increasing net exports,
output and inflation.
C. reduces the real exchange rate, increasing net exports,
output and inflation.
D. reduces the real exchange rate, reducing net exports,

6. output and inflation.
14. If a central bank wants to increase the real exchange rate
A. it buys foreign currency, increasing net capital outflows.
B. it buys foreign currency, reducing net capital outflows.
C. it sells foreign currency, increasing net capital outflows.
D. it sells foreign currency, reducing net capital outflows.
15. Central banks attempt to stabilize exchange rates using
foreign–exchange interventions because
A. interest–rate adjustments may have undesirable effects on
output.
B. interest–rate adjustments have questionable effectiveness
for stabilizing exchange rates.
C. interest–rate adjustments stop international capital flows.
D. interest–rate adjustments only work when coordinated
with other countries.
16. A limitation of foreign–exchange interventions is that
A. foreign–exchange interventions may destabilize output.
B. foreign–exchange interventions have questionable
effectiveness.
C. foreign–exchange interventions impede the efficient flow
of savings.
D. foreign–exchange interventions require coordination
among countries that are unlikely to agree.
17. An agreement between several countries to work together

7. to change the value of an exchange rate is best described as
A. an interest–rate adjustment.
B. policy coordination.
C. capital controls.
D. a currency union.
18. Fixed exchange rates
A. allow a country to have an independent monetary policy.
B. are immune from speculative attacks.
C. discourage trade and capital flows.
D. help control inflation.
19. When a country with a fixed exchange rate runs out of
international reserves
A. it must lower interest rates, impose capital controls, or
depreciate its exchange rate.
B. it must raise interest rates, impose capital controls, or
depreciate its exchange rate.
C. it must lower interest rates, impose capital controls, or
appreciate its exchange rate.
D. it must raise interest rates, impose capital controls, or
appreciate its exchange rate.
20. If a country with a fixed exchange has higher inflation
than other fixed exchange rate countries
A. its nominal exchange rate appreciates, requiring
devaluation to offset the recessionary effects of nominal
appreciation.
B. its real exchange rate appreciates, requiring devaluation to
offset the recessionary effects of real appreciation.
C. its nominal exchange rate depreciates, requiring
devaluation to offset the inflationary effects of nominal

8. appreciation.
D. its real exchange rate depreciates, requiring devaluation to
offset the inflationary effects of real appreciation.
21. If a small country fixes its exchange rate against a large
country’s currency, and the small country initially has a higher
inflation rate than the large country, the two inflation rates will
be equalized because
A. the higher inflation in the small country appreciates
its real exchange rate, reducing net exports and output, and
reducing the inflation rate to the same rate as in the large
country.
B. the higher inflation in the small country depreciates its
real exchange rate, reducing net exports and output, and
reducing the inflation rate to the same rate as in the large
country.
C. the higher inflation in the small country appreciates its
real exchange rate, increasing net exports and output, and
increasing the inflation rate to the same rate as in the large
country.
D. the higher inflation in the small country depreciates its
real exchange rate, reducing net exports and output, and
increasing the inflation rate to the same rate as in the large
country.
22. The strategy of a speculative attack is to
A. hedge against exchange–rate risk.
B. appreciate a floating exchange rate.
C. force a revaluation of a fixed exchange rate.
D. force a devaluation of a fixed exchange rate.