THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 580

548 PA R T V I International Finance and Monetary Policy *16 What are the key advantages of exchange-rate targeting as a monetary policy strategy? policy? Can the foreign exchange market also perform this role? 17 Why did the exchange-rate peg lead to difficulties for the countries in the ERM when German reunification occurred? 21 When is exchange-rate targeting likely to be a sensible strategy for industrialized countries? When is exchange-rate targeting likely to be a sensible strategy for emerging-market countries? *18 How can exchange-rate targets lead to a speculative attack on a currency? 19 Why may the disadvantage of exchange-rate targeting of not having an independent monetary policy be less of an issue for emerging-market countries than for industrialized countries? *20 How can the long-term bond market help reduce the time-inconsistency problem for monetary *22 What are the advantages and disadvantages of a currency board over a monetary policy that just uses an exchange-rate target? 23 What are the key advantages and disadvantages of dollarization over other forms of exchange-rate targeting? Q U A N T I TAT I V E P R O B L E M S *1 The Bank of Canada purchases $1 million of foreign assets for $1 million Show the effect of this open market operation on the Bank s T-account The Bank of Canada purchases $1 million of foreign assets by selling $1 million in T-bills Show the effect of this open market operation on the Bank s T-account *3 The Bank of Canada sells $1 million of foreign assets for $1 million Show the effect of this open market operation on the Bank s T-account If the balance in the current account increases by $1 billion while the capital account is off by $2 billion, what is the impact on governmental international reserves? CANSIM Question Visit the website of the Bank of Canada, at www.bankofcanada.ca Click on Rates and Statistics and then Exchange Rates a What is the Canadian-dollar effective exchange rate index (CERI)? b How many foreign countries are included in the index? c What are the weights of the included countries? Which country has the highest weight? Which has the lowest? d Get the daily CANSIM data from January 1, 1982, to November 10, 2009, for the Canadian-dollar effective exchange rate index (series V41589522) from the Textbook Resources area of the MyEconLab Present a time series plot of the (daily) observations Did the Canadian dollar appreciate or depreciate in 2008? By how much? WEB EXERCISES The U.S Federal Reserve publishes information online that explains the workings of the foreign exchange market One such publication can be found at www.newyorkfed.org/education/addpub/usfxm/ Review the table of contents and open Chapter 10, Evolution of the International Monetary System Read this chapter and write a one-page summary that discusses why each monetary standard was dropped in favour of the succeeding one The International Monetary Fund stands ready to help nations facing monetary crises Go to www.imf.org Click on the tab labelled About the IMF What is the stated purpose of the IMF? How many nations participate and when was it established? Be sure to visit the MyEconLab website at www.myeconlab.com.This online homework and tutorial system puts you in control of your own learning with study and practice tools directly correlated to this chapter content On the MyEconLab website you will find the following appendix for this chapter: Appendix 20.1:The Canadian Balance of Payments