1. If Malaysia wants to maintain a fixed exchange rate of two ringgit per euro,

Question

1. If Malaysia wants to maintain a fixed exchange rate of two ringgit per euro, it should ____(sell/buy) euros in the foreign exchange market. To be successful, this policy would have to ______(increase the supply of/ decrease the supply of/ increased the demand for/ decrease the demand for) euros by ___ billion euros at any given exchange rate.
2. In this type of situation, a speculative attack may occur if investors believe which of the following statements? A. Malaysian assets are soon going to increase in value B. The demand for Malaysian goods is going to dramatically increase C. Malaysia is running out of euro reserves
3. True or false: in the event of a successful speculative attack, Malaysian businesses will benefit because their foreign debt will now cost less to repay.
4. Suppose you are considering whether to invest in country A or country B. You know that country A has a fixed exchange rate and country B does not, but that country A's macroeconomic policies are not always consistent with maintaining the fixed rate. Based on this information alone, country ___(A or B) appears to be a less risky place in which to invest.
5. True or false: a country with a fixed exchange rate is more at risk for crisi if its stock of international reserves has been relatively constant than if it has been falling. 1. If Malaysia wants to maintain a fixed exchange rate of two ringgit per euro, it should ____(sell/buy) euros in the foreign exchange market. To be successful, this policy would have to ______(increase the supply of/ decrease the supply of/ increased the demand for/ decrease the demand for) euros by ___ billion euros at any given exchange rate.
2. In this type of situation, a speculative attack may occur if investors believe which of the following statements? A. Malaysian assets are soon going to increase in value B. The demand for Malaysian goods is going to dramatically increase C. Malaysia is running out of euro reserves
3. True or false: in the event of a successful speculative attack, Malaysian businesses will benefit because their foreign debt will now cost less to repay. 1. If Malaysia wants to maintain a fixed exchange rate of two ringgit per euro, it should ____(sell/buy) euros in the foreign exchange market. To be successful, this policy would have to ______(increase the supply of/ decrease the supply of/ increased the demand for/ decrease the demand for) euros by ___ billion euros at any given exchange rate.
2. In this type of situation, a speculative attack may occur if investors believe which of the following statements? A. Malaysian assets are soon going to increase in value B. The demand for Malaysian goods is going to dramatically increase C. Malaysia is running out of euro reserves
3. True or false: in the event of a successful speculative attack, Malaysian businesses will benefit because their foreign debt will now cost less to repay.
4. Suppose you are considering whether to invest in country A or country B. You know that country A has a fixed exchange rate and country B does not, but that country A's macroeconomic policies are not always consistent with maintaining the fixed rate. Based on this information alone, country ___(A or B) appears to be a less risky place in which to invest.
5. True or false: a country with a fixed exchange rate is more at risk for crisi if its stock of international reserves has been relatively constant than if it has been falling. EXCHANGE RATE IRinggit per eurol 4.0 3.5 3.0 2.5 S1 2.0-X 1.5 1.0 0.5 0.0 0 2 4 6 8 10 12 14 16 QUANTITY OF EUROS (Billions]

Explanation / Answer

1.

It should sell Euros in forex market.

This policy would have to Increase the supply of Euros by 4 Billion Euros.

2.

Correct Answer:

C. Malaysia is running out of euro reserves

Explanation:

If investors believe that the government is running out of euro reserves, then will start buying these euros and store it. Once, the euro reserves will be finished, the value of local currency w.r.t. the Euro will come down and then investors can earn more on Euros.

3.

Correct Answer:

False

Explanation:

Due to weakening of local currency, they have to pay more to pay their foreign debts.

4.

Country B appears to be less risky place for investment.

Explanation:

A fixed exchange rate system without a sound macro economic policy in place can cause economy to collapse and it is a big risk for investment in a country A. The floating rate is market driven and it is relatively easier to assess and timely respond to risk in Country B. Thus, Country B is a less risky proposition for investment.

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