Question

6 Which of the following will probably NOT result in an improved current account balance (assuming everything else remains constant)? 

a. a decrease in a country's national income level b. a decrease in a country's rate of inflation c. an increase in government restrictions in the form of tariffs or quotas d. an appreciation of a country's currency 2 points

7 Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major foreign countries. 

a. weakening; increase b. weakening; decrease c. strengthening; decrease d. strengthening; increase 2 points

8 Which of the following is an example of direct intervention in foreign exchange markets? 

a. increasing the inflation rate b. imposing barriers on international trade c. lowering interest rates d. exchanging dollars for foreign currency

Answer 1

6. The current account measures:

· The balance of trade in goods

· The balance of trade in services.

· Net current income e.g. profit from overseas investment.

· Transfer payments

The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.

If there is an increase in national income, people will tend to have more disposable income to consume goods. If domestic producers cannot meet the domestic demand, consumers will import goods from abroad which result in current account deficit. Therefore, a decrease in a country's national income level will decrease the imports and improve current account balance.

A period of consumer-led economic growth will cause deterioration in the current account. Higher consumer spending will lead to higher spending on imports. This led to a widening deficit on the current account. Hence, a decrease in a country's rate of inflation will improve current account balance.

There can be restrictions on imports, such as tariffs or quotas which will improve current account balance.

An appreciation means an increase in the value of a currency against other foreign currency. An appreciation makes exports more expensive and imports cheaper. Hence, an appreciation of a country's currency will NOT improve current account balance.

Hence Answer is (d) i.e. an appreciation of a country's currency

7. Managed float regime is the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries' exchange rates by buying and selling currencies to maintain a certain range.

Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by weakening the dollar. Such an adjustment in the dollar's value should decrease the U.S. demand for products produced by major foreign countries.

Hence Answer is (b) i.e. Weakening, decrease

8. Direct intervention in foreign exchange markets: The most common and direct way for central banks to intervene and affect the exchange rate is to enter the Forex market directly by buying or selling domestic currency.

Hence Answer is (d) i.e. exchanging dollars for foreign currency