Reading 17: The Exchange Rate and Balance of Payments - LO

investment, following, country, report, black

Q1. Pauline Zeiss, CFA, is preparing a report on the investment climate in the country of Andalmosa. She has assembled the following data:

The Andalmosan central bank’s actions have an indirect effect on exchange rates.
Andalmosan currency is likely to depreciate.
Andalmosan interest rates are low.

Given the information presented above, what conclusions can Zeiss draw about the Andalmosan government’s policies regarding currency supplies and exchange rates?

Currency supply Exchange rate policy

A) Too low Crawling peg

B) Too high Crawling peg

C) Too high Flexible

Q2. For most goods and services, supply and demand are independent. For currencies on the foreign exchange market, however, supply and demand are affected by the same factors. This is most likely to cause:

A) greater volatility in exchange rates.

B) greater volatility in the quantity of currencies traded.

C) imbalances that require central banks to intervene in the foreign exchange market.

Q3. Which of the following would increase the demand for U.S. dollars in the foreign exchange market?

A) The purchase of Japanese electronics by American consumers.

B) The purchase of a Chinese company by a U.S. investor.

C) The sale of U.S. computers to Belgian consumers.

Q4. Analyst Bradley Lindge has collected information about the economy of the Grakh Republic. He has assessed the demand for exports from the country, the interest rates in the country, and estimates regarding future exchange rates. Lindge is most likely attempting to determine the:

A) demand for Grakh Republic currency.

B) supply of Grakh Republic currency.

C) expected change in Grakh Republic interest rates relative to those of foreign countries.