Question

Question 21 (1 point)

If a firm in country B borrows from a bank in country A, and the loan is denominated in country B's currency, which party(ies) would stand to lose (in the loan transaction) from an unexpected devaluation of currency B (relative to currency A)? Assume the loan will be repaid at face value.

Question 21 options:

	A-bank
	B-firm
	both in roughly equal measure
	neither Question 22 (1 point) In the early 2000s, as a source of foreign savings for developing countries, official foreign savings was on average _____ private foreign savings. Question 22 options: larger than approximately equal to (less than 10% difference) smaller than none of the above (no single relationship) Question 24 (1 point) All else equal, paying lower-than-market wages, rather than market wages, for some government positions in developing countries could be expected to lead to Question 24 options: an increase in government savings. a decrease in government corruption. both of the above. none of the above. Question 25 (1 point) As countries grow to higher income levels, production tends to shift toward ____. Question 25 options: rural areas non-agricultural sectors home production none of the above

Answer 1

Qn number 21. option B ( firm suffers )

to better under stand the concept let me take you through an example , a numerical one.

if the firm in country B  take a loan from a bank in country A with amount denominated in country B's currency. which means the loanee ( the firm ) have to repay  the face value / the amount denominated in the currency of country A by exchanging country B's currency.

lets assume , V a= 25 Vb ( meaning 25 units of country B's currency are required to buy a unit of country A's currency.) Va and Vb are values of respective currencies.

now bank in country A loans out 100 units of its currency to firm in country B. when converted into country B's currency its value will be 2500 units ( 100*25 ) .

when country B's currency unexpectedly devaluated ( decline in the value of currency ) after some time in future , the exchange rate , say Va = 50 Vb ( meaning 50 units of country B's currency are required to buy a unit of country A's currency , since currency of country B devaluated )

now , look how much the loan amount changed

the repay amount is 5000 units ( 100 * 50 ) of Country B. thus the firm in country suffers a loss of 2500 units of their currency .