With a Flexible Exchange Rate System, to Gain Credibility with Investors

question 103

Multiple Choice

With a flexible exchange rate system, to gain credibility with investors or savers, a nation will often:

• A) adopt a nominal anchor to keep currency growth in line with a measurable indicator, such as exchange rates or inflation rates.
• B) limit the power of the central bank by having elected officials set monetary targets.
• C) give more power to the prime minister to stop inflation and lower unemployment.
• D) temporarily adopt a gold standard.

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Definitions:

CAPM

Capital Asset Pricing Model, a model that describes the relationship between systematic risk and expected return for assets, particularly stocks.

Beta

A measure of a stock's volatility in relation to the overall market; a beta above 1 indicates higher volatility than the market average.

Risk-Free Rate

The return expected from an investment that carries no risk of loss.

Expected Return

The mean value of the probability distribution of possible returns for a specific investment or portfolio.