Question 1

For given domestic and foreign price levels,an increase in the nominal exchange rate __________ the real exchange rate.

Accepted Answer

An increase in the nominal exchange rate, assuming domestic and foreign price levels remain constant, leads to an increase in the real exchange rate. This is because the real exchange rate is the nominal exchange rate adjusted for price levels, and a higher nominal rate makes domestic goods more expensive relative to foreign goods.

Question 2

For a given nominal exchange rate and foreign price level,an increase in the domestic price level __________ the real exchange rate.

Accepted Answer

An increase in the domestic price level decreases the real exchange rate because it makes domestic goods and services more expensive relative to foreign goods and services.

Question 3

When the real exchange rate of a country's currency is low,the home country will find it

Accepted Answer

When the real exchange rate of a country's currency is low, its goods become relatively cheaper for foreign consumers, making it easier to export. At the same time, domestic residents will find it relatively more expensive to buy imports, leading them to buy fewer imports.

Question 4

The economies most likely to benefit from a fixed exchange are those that are ___________,with a history of ___________ rates of inflation.

Accepted Answer

The answer of The economies most likely to benefit from...

Question 5

When the real exchange rate rises,

Accepted Answer

When the real exchange rate rises, it means that domestic currency has become stronger relative to foreign currency. As a result, domestic goods become more expensive relative to foreign goods because consumers need more domestic currency to purchase foreign goods.

Question 6

A flexible exchange rate ____________ the impact of monetary policy on aggregate demand.

Accepted Answer

A flexible exchange rate strengthens the impact of monetary policy on aggregate demand because changes in interest rates can lead to currency appreciation or depreciation, which in turn affects net exports and aggregate demand.

Question 7

A rise in the real exchange rate would typically result in all of the following EXCEPT

Accepted Answer

A rise in the real exchange rate would lead to an increase in the price of domestic goods relative to foreign goods, making domestic goods less competitive and reducing their demand abroad. This would result in a decrease in domestic exports (A) and a possible increase in domestic imports (B), leading to a decrease in net exports (D). However, an increase in the real exchange rate would make foreign goods relatively cheaper and more attractive to domestic consumers, increasing demand for them and likely leading to an increase in net exports (E).

Question 8

For a given nominal exchange rate and domestic price level,a decrease in the foreign price level __________ the real exchange rate.

Accepted Answer

A decrease in the foreign price level, with a constant nominal exchange rate and domestic price level, increases the real exchange rate because it makes foreign goods cheaper relative to domestic goods.

Question 9

A decrease in the real exchange rate will tend to _________ exports and ___________ imports.

Accepted Answer

A decrease in the real exchange rate makes domestic goods cheaper relative to foreign goods, which tends to increase exports and decrease imports.

Question 10

A fall in the real exchange rate would typically result in all of the following EXCEPT

Accepted Answer

A fall in the real exchange rate would make domestic goods relatively cheaper, leading to an increase in domestic exports (choice A), a decrease in domestic imports (choice B), and domestic goods becoming more competitive (choice C). However, a fall in the real exchange rate would actually lead to an increase in net exports (choice E), as the increase in exports would outweigh the decrease in imports. Therefore, the correct answer is D, as a fall in the real exchange rate would not lead to a decrease in net exports.

Question 11

For a given nominal exchange rate and foreign price level,a decrease in the domestic price level __________ the real exchange rate.

Accepted Answer

The answer of For a given nominal exchange rate and...

Question 12

A fixed exchange rate ____________ policymakers from using monetary policy to stabilize the economy,because they must instead use it to maintain the exchange rate's fundamental value at its _____________.

Accepted Answer

A fixed exchange rate regime requires the central bank to intervene in the foreign exchange market to maintain the official value of the currency. Therefore, the central bank cannot use monetary policy to stabilize the domestic economy as it must prioritize maintaining the fixed exchange rate. This is why a fixed exchange rate regime prevents policymakers from using monetary policy to stabilize the economy.

Question 13

A disposable camera cost $12 in Canada and 100 pesos in Mexico,during the summer of 2002.The exchange rate at that time was 5.5 pesos per dollar.The real exchange rate of the dollar (for disposable cameras)was

Accepted Answer

The answer of A disposable camera cost $12 in Canada...

Question 14

The price of the average domestic good or service relative to the price of the average foreign good or service,when prices are expressed in terms of a common currency,is called the _________ exchange rate.

Accepted Answer

The real exchange rate compares the prices of domestic and foreign goods and services adjusted for inflation, which gives a more accurate representation of the relative prices between two countries. The other options, such as flexible or fixed exchange rates, refer to the type of exchange rate regime rather than the comparison of prices between countries. Fundamental exchange rate refers to the long-term equilibrium exchange rate based on economic fundamentals, while nominal exchange rate refers to the exchange rate without adjustment for inflation.

Question 15

An increase in the real exchange rate will tend to _________ exports and ___________ imports.

Accepted Answer

An increase in the real exchange rate makes the domestic goods more expensive relative to the foreign goods. As a result, the demand for domestic goods decreases, while the demand for foreign goods increases. This leads to a decrease in exports and an increase in imports. Hence, the correct answer is D.

Question 16

Policy-makers are ___________ using monetary policy to stabilize the economy when there is a fixed exchange rate.

Accepted Answer

When there is a fixed exchange rate, the central bank cannot use monetary policy to stabilize the economy because changes in the money supply and interest rates may lead to changes in the exchange rate. As a result, policy-makers are prevented from using monetary policy to stabilize the economy.

Question 17

For given domestic and foreign price levels,a decrease in the nominal exchange rate __________ the real exchange rate.

Accepted Answer

A decrease in the nominal exchange rate means that it takes more domestic currency to purchase one unit of a foreign currency. This makes foreign goods relatively more expensive for domestic consumers, which makes imports less attractive and exports more attractive. As a result, the demand for domestic goods increases, while the demand for foreign goods decreases. This leads to an increase in the value of the domestic currency in terms of goods (the real exchange rate), which means that it takes fewer units of domestic currency to purchase a basket of goods. Therefore, a decrease in the nominal exchange rate leads to a decrease in the real exchange rate.

Question 18

Supporters of fixed exchange rates maintain that such a rate removes uncertainty about the future exchange rate,creating a better business environment for exporters and importers.However,a speculative attack on a currency with a fixed exchange rate may lead to __________ of the currency.

Accepted Answer

A speculative attack on a currency with a fixed exchange rate may lead to a sudden, unpredictable devaluation of the currency. This is because investors may sell off the currency in large volumes, causing its value to drop rapidly. This can create chaos in the market and make it difficult for importers and exporters to plan and conduct their business.

Question 19

The real exchange rate is the

Accepted Answer

The real exchange rate is the relative price of domestic goods and services to foreign goods and services when converted into a common currency. It is a measure of competitiveness and reflects the purchasing power of a currency.

Question 20

For a given nominal exchange rate and domestic price level,an increase in the foreign price level __________ the real exchange rate.

Accepted Answer

An increase in the foreign price level will result in a decrease in the real exchange rate. This is because as the foreign prices increase, the goods and services produced in that country become relatively more expensive compared to those produced domestically. As a result, this reduces the competitiveness of the foreign goods in the domestic market, leading to a decrease in demand for these goods, and a decrease in the demand for foreign currency needed to purchase them. This, in turn, leads to a decrease in the value of the foreign currency relative to the domestic currency, resulting in a decrease in the real exchange rate.

Quiz 13: Savings, Capital Formation and Comparative Economic Growth