土豆妮

A country’s real interest rate has declined relative to its major trading partners. What will most likely be the effects on the demand for the country’s currency and on aggregate demand, respectively?

A) Only one will increase.

B) Both will decrease.

C) Both will increase.

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A decrease in a country’s domestic interest rates relative to those of other countries will cause demand for its currency to decrease because investments denominated in that currency become relatively less attractive. The resulting decrease in the value of its currency will lead to greater demand for its exports and less imports, so net exports, and therefore aggregate demand, will increase.

土豆妮

If a German electronics manufacturer builds an electronics plant in Mexico, this action will create which of the following with regards to the demand and supply of the euro and the peso in the foreign exchange market? This action creates a:

A) demand for both pesos and euros in the foreign exchange market.

B) demand for pesos and a supply of euros in the foreign exchange market.

C) supply of pesos and demand for euros in the foreign exchange market.

土豆妮

If a German electronics manufacturer builds an electronics plant in Mexico, this action will create which of the following with regards to the demand and supply of the euro and the peso in the foreign exchange market? This action creates a:

A) demand for both pesos and euros in the foreign exchange market.

B) demand for pesos and a supply of euros in the foreign exchange market.

C) supply of pesos and demand for euros in the foreign exchange market.

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Building an electronics plant in Mexico will require the German electronics manufacturer to pay for expenses (construction fees, salaries, administrative expenses, etc.) associated with the project in pesos. Therefore, the manufacturer will need to convert euros to pesos thereby increasing the supply of euros in the foreign exchange market and increasing the demand for pesos.

土豆妮

The Japanese government has decided that it wants to maintain a constant exchange rate with the U.S. dollar at a time when supply and demand conditions in the foreign exchange market are causing the Japanese yen to appreciate. Which of the following actions would most likely achieve their objective?

A) A shift to a more expansionary monetary policy.

B) Reduce taxes and create a budget deficit in order to increase domestic interest rates.

C) A shift to a more restrictive monetary policy.