1. During the financial crisis of 2007-2008, financial safe havens like Switzerl

Question

1. During the financial crisis of 2007-2008, financial safe havens like Switzerland experienced a large ---- of foreign currency deposits. This made Swiss exports ---- competitive on world markets. The Swiss central bank tried to intervene by ---- foreign assets

a. outflow, more, selling
b.outflow,less, buying
c. inflow,more,buying
d.inflow, less,buying

2. Germany and Greece both use the euro, but in recent years U.S. investors have demanded much higher interest rates on Greek bonds than German bonds. Is this a violation of interest parity?

a.Yes, because Greek and German bonds are highly substitutable.

b. No, because Greek bonds have much higher default risk.

c. No, because Greek bonds have much higher exchange rate risk.

Explanation / Answer

1. The right option is option d. inflow, less, buying

Explanation: During the financial crisis, Switzerland saw a huge inflow of capital as investors were looking for a safe haven for their money to avoid global turmoil. Because of the huge inflow of capital, the value of Swiss currency appreciated by nearly 20%. This made Swiss goods costlier and less competitive in the world. In order to check the appreciation in currency, the Swiss government started buying foreign assets to increase the supply of Swiss currency in the world market so that swiss currency depreciated.  

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