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Students Zone - Revision Questions

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Chapter 8

Question 1

Describe what is meant by a foreign exchange risk premium and what difference does it make if the pound is regarded as more risky that dollars? What are the factors that may generate a currency risk premium?

Question 2

Examine the possible impact of (a) a monetary expansion and (b) a fiscal expansion using the portfolio balance model on both the exchange rate and the domestic interest rate.

Question 3

Examine using a diagram the differing impacts of (a) an open market operation (b) a non sterilized foreign exchange operation and (c) a sterilized foreign exchange operation. All of which are designed to lead to a depreciation of the domestic currency on both the domestic interest rate and the exchange rate.

Question 4

In what sense is the portfolio balance model different than the monetary models and what different policy implications does it have?