Exchange Rate Systems
42 questions· page 1 of 5
Which policy would not lead to an increase in the value of a country’s currency?
Options
A an increase in domestic inflation
B an increase in domestic interest rates
C an increase in incomes abroad
D an increase in tourists visiting the country
The diagram shows the impact of a revaluation of a country’s exchange rate on the current account of the balance of payments.
The table gives the price elasticity of demand for imports, PEDM, and the price elasticity of demand for exports, PEDX, in both the short run and the long run.
Which combination of short run and long run elasticities will give the shape shown in the diagram?
Options
| short run | long run | |||
|---|---|---|---|---|
| PEDM | PEDX | PEDM | PEDX | |
| A | 0.2 | 0.2 | 0.4 | 0.4 |
| B | 0.4 | 0.4 | 0.8 | 0.8 |
| C | 0.8 | 0.8 | 1.2 | 1.2 |
| D | 1.2 | 1.2 | 1.6 | 1.6 |
A government sets a target for the annual rate of inflation to be no more than 3%.
Which circumstances would make it difficult to achieve the target?
Options
A if devaluation of the currency leads to a trade surplus
B if interest rates are increased to control effective demand
C if the government increases its tax revenue
D if wage increases are kept in line with productivity
The value of the currency of an open economy with a fixed exchange rate is significantly below its purchasing power parity value.
If the economy decides to adopt a floating exchange rate, which of its macroeconomic policy aims is most likely to benefit?
Options
A low inflation
B low unemployment
C reduced deficit on the current account of the balance of payments
D steady economic growth
An economy imports a large proportion of its raw materials. Its exchange rate depreciates.
What is the impact on the external and internal value of money?
Options
| external value of money | internal value of money | |
|---|---|---|
| A | rises | rises |
| B | rises | falls |
| C | falls | rises |
| D | falls | falls |
The diagram shows the impact of a revaluation of a country's exchange rate on the current account of the balance of payments.
The table gives the price elasticity of demand for imports, PEDM, and the price elasticity of demand for exports, PEDX, in both the short run and the long run.
Which combination of short run and long run elasticities will give the shape shown in the diagram?
Options
| short run | long run | |||
|---|---|---|---|---|
| PEDM | PEDX | PEDM | PEDX | |
| A | 0.2 | 0.2 | 0.4 | 0.4 |
| B | 0.4 | 0.4 | 0.8 | 0.8 |
| C | 0.8 | 0.8 | 1.2 | 1.2 |
| D | 1.2 | 1.2 | 1.6 | 1.6 |
When will a balance of payments deficit create the most demand-pull inflationary pressure in an economy with a floating exchange rate?
Options
| price elasticity of demand for exports | unemployment rate | |
|---|---|---|
| A | elastic | high |
| B | elastic | low |
| C | inelastic | high |
| D | inelastic | low |
The table gives the values for an economy’s short-run and long-run elasticities of demand for exports and imports.
In which circumstance does depreciation lead to a J curve where the current account of the balance of payments worsens in the short run and improves in the long run?
Options
| short-run elasticity of demand for exports | short-run elasticity of demand for imports | long-run elasticity of demand for exports | long-run elasticity of demand for imports | |
|---|---|---|---|---|
| A | 0.5 | 0.2 | 0.6 | 0.6 |
| B | 0.5 | 0.6 | 1.2 | 1.0 |
| C | 0.6 | 0.6 | 0.5 | 0.2 |
| D | 1.2 | 1.0 | 0.5 | 0.6 |
How would a depreciation of the currency of a low-income economy be most likely to affect its macroeconomic policy objectives?
Options
| increasing the rate of growth | reducing the current account deficit | reducing the rate of unemployment | |
|---|---|---|---|
| A | yes | no | yes |
| B | yes | yes | yes |
| C | yes | yes | no |
| D | no | yes | yes |
A country’s trade balance has worsened. The country has a fixed exchange rate.
Which additional changes for unemployment and price level are likely to follow?
Options
| the level of unemployment | the price level | |
|---|---|---|
| A | decreases | decreases |
| B | decreases | increases |
| C | increases | decreases |
| D | increases | increases |