Question 1

Consider an economy that is greatly dependent on the U.S.economy for consumer goods and durables.Inflation will increase in the economy if ________.

Accepted Answer

The answer of Consider an economy that is greatly dependent...

Question 2

Announcing a target exchange rate is sufficient to fix the exchange rate at its pegged value.

Accepted Answer

Announcing a target exchange rate is not sufficient to fix the exchange rate at its pegged value. It also requires appropriate monetary policy tools and interventions by the central bank to ensure that the exchange rate remains at its pegged value. Factors such as changes in supply and demand for the currency, economic conditions, and external shocks can affect the exchange rate, so continuous monitoring and intervention may be necessary to maintain the exchange rate at its target level.

Question 3

If the Mexican government wants to keep the peso overvalued against the dollar,it will need to ________ in the foreign exchange market.

Accepted Answer

To keep the peso overvalued against the dollar, the Mexican government would need to buy pesos in exchange for dollars, thereby increasing the demand for pesos and reducing the supply of dollars in the market, which would help maintain the peso's higher value.

Question 4

Differentiate between the process of defending an undervalued currency and an overvalued currency.

Accepted Answer

The answer of Differentiate between the process of defending an...

Question 5

Scenario: Suppose India borrows $10,000 from the United States at the beginning of 2016. The flexible exchange rate is 50 Indian rupees per dollar.
-Refer to the scenario above.If the government of India wants to repay a lower sum of money to the United States,it should ________ in the foreign exchange market.

Accepted Answer

To repay a lower sum of money, India needs to buy fewer dollars from the United States. This can be done by buying dollars in exchange for rupees in the foreign exchange market. By buying more dollars, India reduces the amount of rupees needed to repay the debt.

Question 6

Why did the Chinese central bank increase its holdings of foreign reserves between 1990 and 2014?

Accepted Answer

The answer of Why did the Chinese central bank increase...

Question 7

Scenario: Suppose India borrows $10,000 from the United States at the beginning of 2016. The flexible exchange rate is 50 Indian rupees per dollar.
-Refer to the scenario above.If India pegs the exchange rate at 70 rupees per dollar,it will require ________ rupees to repay the loan in dollars.

Accepted Answer

If India pegs the exchange rate at 70 rupees per dollar, to repay a $10,000 loan, it would require 10,000 dollars * 70 rupees/dollar = 700,000 rupees.

Question 8

Explain why a target exchange rate announcement has little effect on the exchange rate in the foreign exchange market

Accepted Answer

The answer of Explain why a target exchange rate announcement...

Question 9

A depreciating domestic currency is often perceived to be a sign of a(n)________.

Accepted Answer

When a domestic currency depreciates, it means the value of the currency has decreased in relation to other currencies. This can be caused by factors such as high inflation, high trade deficits, or political instability. Therefore, a depreciating currency is often perceived as a sign of a weak government.

Question 10

If the government of a country is maintaining an overvalued currency against the dollar,then the quantity of ________ in the foreign exchange market.

Accepted Answer

When a government maintains an overvalued currency against the dollar, it means the domestic currency's value is artificially kept higher than its market value. This makes the domestic currency more expensive for foreign buyers, reducing their demand for it in exchange for dollars. Consequently, the quantity of dollars supplied (by those wanting to exchange dollars for the overvalued currency) will exceed the quantity of dollars demanded (by those wanting to exchange the overvalued currency for dollars), as fewer people will find it attractive to buy the overvalued currency with dollars.

Question 11

It is possible for an economy to keep its currency overvalued against the dollar if it ________.

Accepted Answer

An economy can keep its currency overvalued against the dollar by using its substantial dollar reserves to buy its own currency in the foreign exchange market, thereby supporting its value.

Question 12

Historically,the exchange rate chosen by the Chinese authorities made the yuan ________.

Accepted Answer

Historically, the Chinese authorities have intentionally set the exchange rate of the yuan at a lower value compared to the US dollar. This made the yuan undervalued relative to the dollar, which made Chinese exports more competitive in international markets. This undervaluation has been a point of contention in global trade discussions and has led to accusations of currency manipulation.

Question 13

An overvalued domestic currency ________.

Accepted Answer

An overvalued domestic currency means that the currency has a higher value compared to foreign currencies. This makes foreign goods and services cheaper for domestic consumers, thereby making imports less expensive.

Question 14

Scenario: Suppose India borrows $10,000 from the United States at the beginning of 2016. The flexible exchange rate is 50 Indian rupees per dollar.
-Refer to the scenario above.If India wants to repay a lower sum of money to the United States,it should ________.

Accepted Answer

If India pegs the exchange rate below 50 rupees per dollar, it will make the dollar more expensive in India. This will make it more expensive for India to repay the loan, as it will have to buy more dollars to do so.

Question 15

An undervalued domestic currency ________.

Accepted Answer

An undervalued domestic currency makes the cost of purchasing foreign goods and services more expensive for domestic consumers, as they need more of their own currency to buy the same amount of foreign goods or services.

Question 16

Which of the following statements is true?

Accepted Answer

An overvalued currency makes imports cheaper and exports more expensive for foreign buyers, which can lead to a trade deficit. A country can maintain an overvalued currency relative to the dollar as long as it has sufficient dollar reserves to support its currency in the foreign exchange market. This involves selling its dollar reserves to buy its own currency, thereby increasing the demand and value of its currency. However, this is not sustainable in the long term without adequate reserves.

Question 17

Which of the following statements is true?

Accepted Answer

Defending an undervalued currency is easier because a country can print more of its own currency to buy foreign currency, increasing its reserves and supporting the value of its domestic currency. This is not as easily done with an overvalued currency, where the challenge is to buy back the domestic currency using limited foreign reserves.

Question 18

Scenario: Suppose India borrows $10,000 from the United States at the beginning of 2016. The flexible exchange rate is 50 Indian rupees per dollar.
-Refer to the scenario above.The amount of the loan in rupees is ________.

Accepted Answer

The amount of the loan in rupees is calculated by converting the loan amount from dollars to rupees using the given exchange rate. Since the exchange rate is 50 Indian rupees per dollar, a $10,000 loan would be 10,000 * 50 = 500,000 rupees.

Question 19

Countries that borrow large amounts of money from foreign lenders prefer to ________.

Accepted Answer

The answer of Countries that borrow large amounts of money...

Question 20

Which of the following statements is true?

Accepted Answer

Defending an undervalued currency typically involves using foreign exchange reserves to buy the domestic currency, which is generally more sustainable in the short term than the long term due to limited reserves.

Quiz 15: Open Economy Macroeconomics

Consider an economy that is greatly dependent on the U.S.economy for consumer goods and durables.Inflation will increase in the economy if ________.

Announcing a target exchange rate is sufficient to fix the exchange rate at its pegged value.

If the Mexican government wants to keep the peso overvalued against the dollar,it will need to ________ in the foreign exchange market.

Differentiate between the process of defending an undervalued currency and an overvalued currency.

Why did the Chinese central bank increase its holdings of foreign reserves between 1990 and 2014?

Scenario: Suppose India borrows $10,000 from the United States at the beginning of 2016. The flexible exchange rate is 50 Indian rupees per dollar. -Refer to the scenario above.If India pegs the exchange rate at 70 rupees per dollar,it will require ________ rupees to repay the loan in dollars.

Explain why a target exchange rate announcement has little effect on the exchange rate in the foreign exchange market

A depreciating domestic currency is often perceived to be a sign of a(n) ________.

If the government of a country is maintaining an overvalued currency against the dollar,then the quantity of ________ in the foreign exchange market.

It is possible for an economy to keep its currency overvalued against the dollar if it ________.

Historically,the exchange rate chosen by the Chinese authorities made the yuan ________.

An overvalued domestic currency ________.

Scenario: Suppose India borrows $10,000 from the United States at the beginning of 2016. The flexible exchange rate is 50 Indian rupees per dollar. -Refer to the scenario above.If India wants to repay a lower sum of money to the United States,it should ________.

An undervalued domestic currency ________.

Which of the following statements is true?

Which of the following statements is true?

Scenario: Suppose India borrows $10,000 from the United States at the beginning of 2016. The flexible exchange rate is 50 Indian rupees per dollar. -Refer to the scenario above.The amount of the loan in rupees is ________.

Countries that borrow large amounts of money from foreign lenders prefer to ________.

Which of the following statements is true?