Advocates of Flexible Exchange Rates Claim That Under Flexible Exchange

question 41

Multiple Choice

Advocates of flexible exchange rates claim that under flexible exchange rates, the central bank of

• A) an overheated economy could cool down activity by increasing the money supply without worrying that undesired reserve inflow would undermine its stabilization effort.
• B) a cooled economy could cool down activity by contracting the money supply without worrying that undesired reserve inflow would undermine its stabilization effort.
• C) an overheated economy could cool down activity by contracting the money supply without worrying that undesired reserve inflow would undermine its stabilization effort.
• D) an overheated economy could cool down activity by contracting the money supply without worrying that undesired reserve outflow would undermine its stabilization effort.
• E) an overheated economy could cool down activity by decreasing employment and increasing output without worrying that this would undermine its stabilization effort.

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Definitions:

Time Deposits

Money deposited in a financial institution that cannot be withdrawn for a certain term or period of time without incurring penalties.

Large Banks

Financial institutions with a significant amount of total assets, offering a wide range of financial services.

Small Banks

Financial institutions with a smaller asset base and local focus providing banking services to individuals and businesses in their communities.

Primary Reserves

Funds that financial institutions must hold in physical form, such as cash in vaults or deposits with central banks, as a measure of liquidity and financial stability.