Question 1

Explain the forces that can cause an exchange rate to change.

Accepted Answer

The answer of Explain the forces that can cause an...

Question 2

State the case for and the case against currency bailouts.

Accepted Answer

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Question 3

In a floating exchange rate system,the capital account balance equals the negative of the current account balance.
This is because countries that run trade surpluses are able to use the surplus to purchase assets in other countries.

Accepted Answer

In a floating exchange rate system, the capital account balance and the current account balance are typically equal and opposite, as a surplus in the current account (trade surplus) is offset by a deficit in the capital account due to investment in foreign assets.

Question 4

The inflow of foreign investment into the U.S.economy reflects a level of confidence in the United States.
When foreigners wish to invest in the United States it is a vote of confidence by the market; this will also tend to increase the demand for the dollar and cause it to appreciate.

Accepted Answer

This statement is true. Foreign investment into the U.S. economy is often seen by the market as a vote of confidence, indicating that foreign investors believe the U.S. economy offers opportunities for profitable investment. This can increase demand for the dollar and cause its value to appreciate relative to other currencies.

Question 5

Explain what economists mean when they say that the United States is a net debtor nation.Identify a potential problem and a positive aspect associated with this status.

Accepted Answer

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Question 6

Under a fixed exchange rate regime,what will happen to the balance of payments for the United States and Mexico when the demand for Mexican goods rises? What is the only possible solution to this problem,given the fixed exchange rate?

Accepted Answer

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Question 7

Use a model of the dollar-euro foreign exchange market to illustrate how the value of the dollar is determined in terms of the euro.Identify two factors that would increase the value of the dollar in terms of the euro.

Accepted Answer

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Question 8

Industrial countries are not usually involved in currency bailouts since they are not likely to be affected by the devaluation of another country's currency.
An industrial country is likely to be affected by the devaluation of another country's currency through trade; a country that is bailed out may avoid disastrous disruptions to trade,thereby helping the industrial country.

Accepted Answer

Industrial countries can be affected by the devaluation of another country's currency due to interconnected global trade and financial systems, and they may participate in bailouts to stabilize the economy and protect their own economic interests.

Question 9

How can trade policy,fiscal policy,and monetary policy be used to support fixed exchange rates when there is a surplus of U.S.dollars?

Accepted Answer

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Question 10

Under a flexible exchange rate system,there is no need for foreign exchange reserves.
There is no need to use foreign exchange reserves to maintain the exchange rate because the market is performing this function.

Accepted Answer

Under a flexible exchange rate system, the market determines the exchange rate, so there is no need for foreign exchange reserves to maintain it.

Question 11

If there are no reserves,domestic adjustments to payment imbalances under fixed exchange rates require surplus countries to forsake full employment and deficit countries to forsake price stability.
If there are no reserves,domestic adjustments to payment imbalances under fixed exchange rates require surplus countries to forsake price stability and deficit countries to forsake full employment.

Accepted Answer

Under fixed exchange rates, surplus countries may need to forsake price stability to maintain their currency peg, while deficit countries may need to forsake full employment to correct imbalances without reserves.

Quiz 20: International Finance

Explain the forces that can cause an exchange rate to change.

State the case for and the case against currency bailouts.

In a floating exchange rate system,the capital account balance equals the negative of the current account balance. This is because countries that run trade surpluses are able to use the surplus to purchase assets in other countries.

The inflow of foreign investment into the U.S.economy reflects a level of confidence in the United States. When foreigners wish to invest in the United States it is a vote of confidence by the market; this will also tend to increase the demand for the dollar and cause it to appreciate.

Explain what economists mean when they say that the United States is a net debtor nation.Identify a potential problem and a positive aspect associated with this status.

Under a fixed exchange rate regime,what will happen to the balance of payments for the United States and Mexico when the demand for Mexican goods rises? What is the only possible solution to this problem,given the fixed exchange rate?

Use a model of the dollar-euro foreign exchange market to illustrate how the value of the dollar is determined in terms of the euro.Identify two factors that would increase the value of the dollar in terms of the euro.

How can trade policy,fiscal policy,and monetary policy be used to support fixed exchange rates when there is a surplus of U.S.dollars?

Under a flexible exchange rate system,there is no need for foreign exchange reserves. There is no need to use foreign exchange reserves to maintain the exchange rate because the market is performing this function.