Question 1

If a country finds its fixed rate currency falling:

Accepted Answer

If a country's fixed rate currency is falling, it can use foreign exchange reserves to purchase some of its currency. This will increase demand for the currency and help to stabilise its value. Selling some of its currency to add to its foreign exchange reserves (option B) is not the best choice as it will further decrease the value of the currency. Option C is incorrect as the country can use monetary policy such as changing interest rates to influence the value of its currency. Allowing the currency to devaluate (option D) may have negative consequences such as inflation and increased borrowing costs.

Question 2

Countries that follow floating exchange rate regimes:

Accepted Answer

The answer of Countries that follow floating exchange rate regimes:
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Question 3

A country with a fixed exchange rate regime:

Accepted Answer

A fixed exchange rate regime typically reduces a country's bias toward inflationary policies, as it limits the flexibility of using monetary policies to stimulate growth. The commitment to maintaining a fixed exchange rate requires a government to prioritize price stability and may necessitate significant adjustments to interest rates and other policies. This can help to anchor inflation expectations and mitigate the risk of hyperinflation or other destabilizing economic conditions. Option A is incorrect because a fixed exchange rate regime tends to reduce uncertainty about the value of the currency, as it is pegged to another currency or commodity. Option B is incorrect because a fixed exchange rate regime may limit a country's ability to use both fiscal and monetary policies, as monetary policies may be constrained by the need to maintain the exchange rate. Option D is incorrect because a fixed exchange rate regime may require a country to hold large amounts of foreign currency to support the exchange rate, depending on market conditions.

Question 4

A government can target its exchange rate only if it:

Accepted Answer

For a government to target its exchange rate, it would have to give up using monetary policy to stabilize its economy. This is because targeting the exchange rate would require the government to intervene in the foreign exchange market by buying and selling its own currency. This kind of intervention would require the government to either increase the supply of money or decrease it, which would disrupt the economy's stability. Therefore, a government cannot use monetary policy to stabilize its economy while also targeting the exchange rate.

Question 5

A revaluation of a currency, holding everything else constant:

Accepted Answer

When a currency is revalued, it becomes more expensive relative to other currencies. This makes foreign goods relatively cheaper, and therefore more attractive, in the domestic economy. This can lead to increased imports and a shift in consumption patterns towards foreign goods.

Question 6

A country with a recessionary gap and a fixed exchange rate will be helped most by a(n):

Accepted Answer

A recessionary gap indicates that the country is producing below its potential, which means there is a surplus of goods and services in the economy. A devaluation of the currency will make exports cheaper and more attractive to foreign buyers, which can help boost demand for domestic goods and services and increase production in the economy. Expansionary monetary policy could also be effective, but if the exchange rate is fixed, the central bank may be limited in its ability to use this policy tool. A revaluation of the currency could actually worsen the recessionary gap by making exports more expensive and reducing demand for domestic goods and services. Therefore, the best option is a devaluation of the currency.

Quiz 31: Open-Economy Macroeconomics

If a country finds its fixed rate currency falling:

Countries that follow floating exchange rate regimes:

A country with a fixed exchange rate regime:

A government can target its exchange rate only if it:

A revaluation of a currency, holding everything else constant:

A country with a recessionary gap and a fixed exchange rate will be helped most by a(n) :