Question

116. An increase in a country’s trade barriers will cause the _____ for its currency to shift to the _____.

a. demand, left

b. demand, right

c. supply, left

d. supply, right

e. supply and demand, left

119. The advantage of having a weak currency is it:

a. stimulates the demand for exports.

b. make imports more expensive.

c. makes currency trading more profitable.

d. All of the above.

e. None of the above.

120. If the foreign interest rate is 15%, the current exchange rate is 10 and the expected future exchange rate is 11, what is the domestic interest rate according to the interest parity condition?

a. 25%

b. 14%

c. 11%

d. 10%

e. 5%

121. If the foreign interest rate is 5%, the current exchange rate is 4 and the domestic interest rate is 10%, what is the expected future exchange rate according to the interest parity condition?

a. 4.0

b. 4.2

c. 4.4

d. 4.6

e. 5.0

Answer 1

116. An increase in a country's trade barriers will cause the demand for it currency to shift to the right. Because increasing a country's trade barriers such as tariffs and quotas results in demand for its currency to appreciate . The imposition of trade barriers in a country reduces imports of goods and services. The need for domestic goods increases, leading to currency appreciation. The demand for domestic currency shifts to the right. Hence,option(B) is correct.

119.The advantage of having a weak currency is it stimulates the demand for exports. Hence, option(A) is correct.

120. Foreign exchange rate as per the interest rate parity condition, F = S(1+d)/(1+f)

d : domestic interest rate

S : Current exchange rate = 10

F : Expected future exchange rate = 11

f : Foreign interest rate = 15%

F= S(1+d)/(1+f)

d = F(1+f)/S - 1

d = 11(1+ 15%)/10 -1

=11 (1.15)/10 - 1

= 12.65/10 - 1

= 0.265

d = 26.5%

Hence, the domestic interest rate = 26.5%.

121. F= S(1+d)/(1+f)

= 4(1+0.10)/(1+0.0.5)

= 4(1.10)/1.05 = 4.10/1.05

F = 4.2%

Hence, the expected future exchange rate = 4.2% .

Hence, option(B) is correct.