THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 580

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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.
2. 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.
4. 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
5. 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
1. 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.

2. 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