Reading 19: Foreign Exchange Parity Relations - LOS e ～

答案和详解如下：

1．David Hendricks, an economist with Economic Weekly (a major magazine publication in South Africa), was discussing monetary policy, foreign exchange, and fiscal policy at a forum in Durban. During the forum he made the following two statements:

Statement 1: If the South African government pursues an expansionary monetary policy that is unanticipated, the likely effects include a decrease in its financial account component of the balance of payments and lead to a decrease in the foreign exchange value of the South African rand (ZAR).

Statement 2: If the South African government pursues a restrictive fiscal policy, this will tend to move the current account towards surplus and the financial account towards a deficit.

Are statements 1 and 2 as made by Hendricks regarding monetary policy, foreign exchange, and fiscal policy correct?

A)                                        Incorrect       Correct

B)                                        Correct  Correct

C)                                        Correct  Incorrect

D)                                        Incorrect       Incorrect

The correct answer was B)

Both statements are correct. An unanticipated increase in the growth rate of the money supply can be expected to drive down both real interest rates and the foreign exchange value of the rand. The decrease in real interest rates will make foreign investment relatively more attractive, leading to a decrease in the financial account (move it toward deficit). A more restrictive fiscal policy will likely decrease economic growth and real interest rates, leading to less import demand (current account moves toward surplus) and greater demand for investment outside the country (financial account moves toward deficit).

2．An unanticipated shift to a federal government surplus would cause the financial account to move to:

A)   deficit and the current account to move to surplus.

B)   surplus and the current account to move to deficit.

C)   deficit and the current account to move to deficit.

D)   surplus and the current account to move to surplus.

The correct answer was A)

An unexpected shift to a larger budget surplus would cause a decrease in aggregate demand and a reduction in domestic interest rates. This reduced demand discourages imports, which moves the current account toward surplus. The real lower interest rates will encourage investment in the foreign country and discourage foreign investors form investing in the domestic currency. The financial account will move toward deficit.

3．An unexpected increase in the growth rate of the money supply would:

A)   cause real interest rates to rise, causing an appreciation of the country's currency.

B)   cause real interest rates and aggregate employment to increase.

C)   have no effect on exchange rates in the short run.

D)   cause real interest rates to fall, causing a depreciation of the country's currency.

The correct answer was D)

Unanticipated shifts to an expansionary monetary policy would lead to a more rapid economic growth, an unexpected increase in inflation, and lower real interest rates. The more rapid economic growth would lead to an increase in demand for imports. The higher rate of inflation makes domestic goods more expensive, reducing exports. Lower real interest rates reduce investment by foreigners. These factors increase the demand for foreign currencies and reduce the demand for the country's domestic currency, causing it to depreciate.

4．An unanticipated shift to an expansionary monetary policy will NOT lead to?

A)   more rapid economic growth, an accelerated inflation rate, and lower real interest rates.

B)   more expensive domestic products, which reduces exports.

C)   an appreciating domestic currency.

D)   reduced foreign investment.

The correct answer was C)

An unanticipated expansionary monetary policy will lead to all of the others except an appreciating domestic currency. Higher inflation will increase prices of domestic products and make them unattractive to foreigners. As a result, foreigners will reduce their demand for domestic products and will not demand the domestic currency as much as before. Coupled with declining foreign investment, which will also lead to reduced demand for the domestic currency, the domestic currency value will fall relative to other currencies.

5．A nation’s currency is least likely to depreciate on the foreign exchange market because the:

A)   country removes a high tariff on a major imported good.

B)   country runs a current account deficit.

C)   country's inflation rate increased.

D)   government recently undertook an unanticipated contractionary monetary policy action.

The correct answer was D)

An unanticipated shift to contractionary monetary policy would lead to currency appreciation. The contractionary policy leads to lower economic growth, a lower inflation rate, and higher real interest rates. Domestic products are less expensive, foreign investment is encouraged, and exports increase.

The other statements would result in currency depreciation by increasing the demand for foreign goods and the currency needed to purchase them. Removing a high tariff on a major imported good would increase the demand for imports and thus for foreign currency. A current account deficit means that a country imports more than it exports. As a result, there is increased demand for foreign currency. If the inflation rate in the U.S. is increasing faster than that in the Euro zone, U.S. citizens will demand Euro goods because they are now cheaper.