1. If China is going to maintain its peg with the dollar despite its trade surplus, what must the Bank of China do if it has no Sovereign Wealth Fund?
a. Short sell dollars in exchange markets
b. Reduce its vast holdings of dollars
c. Increase its holdings of dollars
d. Raise the value of its currency to discourage export surpluses
e. Create a new currency
Pick the two answers to the following: What would be the immediate effect on M1 of a bank customer withdrawing $100 from his checking account and keeping it as cash? _________. What is the longer term effect on the money supply of the action described in the preceding question? ___________
a. M1 will decrease/money supply will decrease
b. M1 will decrease/money supply will increase
c. M1 will decrease/money supply will not change
d. M1 will increase/money supply will decrease
e. M1 will increase/money supply will increase
f. M1 will increase/money supply will not change
g. M1 will not change/money supply will decrease
h. M1 will not change/money supply will increase
i. M1 will not change/money supply will not change
1) Option C
Increase its holdings of dollars
China will acquire and hold more dollars using the surplus thus increasing the holdings of dollars.
2) Option H
M1 will not change/money supply will increase
M1 includes cash as well as checking accounts, demand deposits. The long term effect is that this will increase the money supply by the amount which the bank may have kept as reserves if the money is not withdrawn from checking accounts.
3) Option D
Countries usually abandon gold convertibility when it is needed most
The biggest weakness is when the Gold standard is most needed to correct trade imbalances countries would go off the gold standard.Hence it was never there in cases where it is needed most.
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