Question

True or False?

a. According to the J-curve theory, a sudden depreciation in a nation's currency will cause a temporary decrease in the balance of trade.

b. Generally, there is an inverse relationship between a country's income and its demand for imports.

c. A depreciation in the value of a domestic country's currency will tend to increase in that country's balance of trade in the long run, all else being equal.

d. All else being equal, an increase in a country's inflation rate will tend to increase the demand for that country's currency in the foreign exchange market.

e. Since supply and demand for a currency are constant ( primarily due to government intervention), currency values seldom fluctuate.

f. The forward market deals with the exchange of foreign currency for future delivery.

Answer 1

Solution:

A) A sudden depreciation means the import will become costly and export cheaper. The impact on imports is higher than the exports and this is due to the fact that when a country imports then it would take time to find the substitute.

Hence this statement is True

B) When income is higher then the demand for quality goods will be high and hence the demand for imported goods will be high.

So there is a direct relationship between income and import.

Hence the statement is false.

C) As explained in part A in the short run import will be higher due to depreciation but in the long run the export will be higher as export becomes cheaper. The country will find the substitute for costly imports.

Hence, the statement is True

D) When the inflation rate increase then the domestic currency will depreciate and the demand for the domestic currency will decrease.

The statement is false

E) The statement is incorrect as the currency value fluactuates due to demand and supply and it can't be constant.

The statement is false.

F) Forward market deals with exchange of foreign currency for future delivery

The statement is True