Question

You are a foreign exchange student studying in Switzerland. You are from Australia and currently have Australian dollars and some euros to use, so you decide to travel to Great Britain to sightsee on holiday break. In order to have pounds sterling to travel in Great Britain, you are a __________ in the foreign exchange market. Select one: a. seller of pounds and buyer of Australian dollars b. seller of pounds and buyer of Australian dollars and euros c. seller of pounds, Australian dollars, and euros d. buyer of pounds and seller of Australian dollars and euros

If you work for a company that __________, you do not want the home currency to __________.   ?

Select one:

a.

?depends on sales in foreign markets; depreciate

b.

?faces a lot of foreign competition in the local market; appreciate

c.

makes most of its income from exports; depreciate

d.

?imports a lot of goods; appreciate

Graeham has moved abroad to pursue his career after college. Unfortunately, the country where he is now living is experiencing a period of very high inflation. Graeham can expect the currency of his newly adopted country to

a.

?decrease in value due to a decrease in demand as potential investors are no longer interested in investing in an inflationary economy.

b.

?increase in value due to a decrease in demand as potential investors are no longer interested in investing in an inflationary economy.

c.

?increase in value due to an increase in supply as investors who hold the country's currency rush to sell the currency as inflation fears grow.

d.

?be stable because inflation is a very stabilizing influence on an economy in general.

Answer 1

d. buyer of pounds and seller of Australian dollars and euros

Since, you have Australian Dollars and some Euros, you will likely give that to a dealer and get pounds in return. So you are paying AUD and EURO to buy POUND. Hence, the answer.

b. faces a lot of foreign competition in the local market; appreciate

In this case let us first eliminate the wrong options. For option a and c, if it depends on sales in foreign market or have income from exports, it is good gor them to have the home currency depreciating. This is because they will be generating higher income when they change it to local currency. Say, you are a Canadian company exporting to US. Current exchange rate is 1 USD = 1 CAD. You sell products worth USD 100. When you bring it back to Canada, it becomes 1 CAD. Now, assume CAD depreciates and nex exchange rate is 1 USD = 1.5 CAD. This implies when product worth USD 100 is sold now, you will get 150 CAD when you get that back to Canada. So higher income. For option d, it is incorrect, because for importers, it is good that the home currency appreciates. He will be able to buy the goods at a lower home currency price (Apply same example as for Option a and c).

Option b is correct. When there is lot of foreign competition in market, if home currency appreciates, they take back higher income to their base country and hence show higher profitability. (higher profits means better capability to reduce prices)

a. decrease in value due to a decrease in demand as potential investors are no longer interested in investing in an inflationary economy.

Very high inflation leads to depreciation in home currency. Basically very high inflation would reduce the country's competitiveness in international market, since the prices of goods produced in that market increases. This would lead to a decline in demand for ther goods and hence their currency, leading to a decline in value of currency.