CEA International Trade and Finance 4

Question 1

Which exchange rate regime gives a central bank the least discretion to conduct independent monetary policy?

Accepted Answer

Currency union (dollarization)

Answer

Under full dollarization or a currency union, the country adopts another currency and entirely surrenders monetary policy independence.

Question 2

The Balassa-Samuelson effect predicts that countries with higher productivity growth in tradables will have:

Accepted Answer

Higher price levels and appreciation of the real exchange rate

Answer

The Balassa-Samuelson effect explains why fast-growing economies tend to have higher price levels, as rising tradable-sector wages pull up non-tradable sector prices.

Question 3

An optimal currency area (OCA) theory, developed by Robert Mundell, suggests that a common currency is beneficial when member regions have:

Accepted Answer

High factor mobility and synchronized business cycles

Answer

OCA theory holds that a currency union works best when regions face symmetric shocks and factors can move freely to facilitate adjustment without exchange rate tools.

Question 4

A 'sudden stop' in international finance refers to:

Accepted Answer

An abrupt reversal of capital inflows to an emerging market

Answer

A sudden stop occurs when foreign capital inflows to a country abruptly cease or reverse, often triggering a balance of payments and currency crisis.

Question 5

Under the Mundell-Fleming model with a fixed exchange rate and perfect capital mobility, fiscal policy is:

Accepted Answer

Highly effective because monetary policy accommodates it

Answer

With a fixed exchange rate and perfect capital mobility, fiscal expansion raises income and the central bank must expand money supply to defend the peg, making fiscal policy highly effective.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA International Trade and Finance 4