bigredhockey55

Six months ago, a country’s currency was quoted at 1,128.0 units to the U.S. dollar. Today, the currency is trading at 1,234.0 units to the U.S. Dollar. Which of the following factors is the least likely cause of this currency movement? The country’s:

A) inflation rate increased (relative to the United State's inflation rate).

B) government recently undertook an unanticipated restrictive monetary policy action.

C) economy grew at a faster rate than the U.S. economy.

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From the given exchange rates, we determine that the foreign currency (FC) has depreciated against the U.S. Dollar (it now takes more units of FC to buy one dollar). 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 are true. The following factors will cause a nation’s currency to depreciate:

• High income growth (relative to trading partners) causes imports (and the demand for foreign currency) to exceed exports (and the demand for domestic currency).
• Higher rate of inflation than trading partners (domestic citizens increase their demand for foreign goods and thus foreign currency).
• Lower domestic real interest rates (than those abroad). The country’s assets are less attractive to foreigners.

bigredhockey55

An economy is in long-run equilibrium and the values of its imports and exports are equal. If the growth rate of the money supply is unexpectedly decreased, what are the most likely effects on real GDP? Real GDP will:

A) increase.

B) stay the same.

C) decrease.

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Real GDP is likely to decrease as higher real interest rates (resulting from slower money supply growth) reduce business investment and consumers’ purchases of durable goods.

bigredhockey55

One year ago, the Canadian Dollar (CAD) was quoted at Australian Dollar (AUD) 0.79800. Today, the CAD is trading at AUD 0.82400. Assume that Canada and Australia are trading partners. Which of the following statements is most accurate? Over the past year, the Canadian:

A) real interest rate decreased (relative to Australia's real interest rate).

B) economy grew at a faster rate than the Australian economy.

C) government recently undertook an unanticipated expansionary fiscal policy action.

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From the given exchange rates, we determine that the Canadian Dollar has appreciated against the Australian Dollar (the CAD now buys more units of AUD). An unanticipated shift to a more expansionary fiscal policy will, in the short run, lead to appreciation. The increased aggregate demand results in higher economic growth and higher inflation. These two factors normally result in currency depreciation. However, the third impact of the policy, increased budget deficits and government borrowing, increases real interest rates, resulting in currency appreciation. This last effect dominates in the short run. Both remaining statements are incorrect.

bigredhockey55

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

A) country runs a current account deficit.

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

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

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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.

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anshultongia

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.

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An unanticipated expansionary monetary policy will not lead to 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.

anshultongia

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

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

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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.

anshultongia

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

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

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

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

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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.

anshultongia

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 the statements made by Hendricks regarding monetary policy, foreign exchange, and fiscal policy CORRECT?With respect to these statements:

A) only statement 1 is correct.

B) both are correct.

C) only statement 2 is correct.

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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).

anshultongia

An exchange rate system that involves a country's commitment to use fiscal and monetary policy to maintain the country's exchange rate within a narrow band is a:

A) floating exchange rate system

B) fixed rate, unified currency system.

C) pegged exchange rate system.

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An exchange rate system that involves a country's commitment to use fiscal and monetary policy to maintain the country’s exchange rate within a narrow band is a pegged exchange rate system.

anshultongia

In a pegged exchange rate system the:

A) currency is backed by actual holdings of another currency, such as the U.S. dollar.

B) exchange rate is fixed by governmental fiat and not allowed to float freely.

C) monetary authority maintains the exchange rate within a narrow band relative to other currencies.

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This type of system requires a country to use its monetary policy to maintain the desired exchange rate within a narrow range relative to other currencies.