Question

Purchasing power parity refers to:
	the number of units of foreign currency a dollar will buy. the amount of foreign assets the United States is buying. the amount of U.S. assets a foreign country is buying. the nominal exchange rate for which a market basket would cost the same in each country.

12.

Scenario: Gizmovia The Republic of Gizmovia wants to maintain the exchange rate of its currency, the gizmo, at $0.50, but the current exchange rate for the gizmo is $0.40. Reference: Ref 19-10 (Scenario: Gizmovia) Look at the scenario Gizmovia. If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.50, it should _____ interest rates, which will _____ capital inflows of gizmos.

decrease; decrease decrease; increase increase; increase increase; decrease

13.	A floating exchange rate: I. leaves monetary policy available for domestic stabilization. II. is less expensive to maintain than a fixed exchange rate. III. adds uncertainty to international trade.
	I only II only III only I, II, and III

14.	If a government fixes the exchange rate so as to generate a surplus of the domestic currency, the exchange rate (U.S. dollars per unit of the other currency) will tend to _____. To maintain the fixed exchange rate, the government must _____ the domestic currency.
	fall; increase the international demand for rise; increase the international demand for fall; decrease the international demand for fall; increase the domestic supply of

15.	Why did China buy $450 billion in foreign exchange reserves in 2010?
	to encourage free trade between all nations to keep the yuan from depreciating to keep the yuan from appreciating to slow down the growth of the Chinese economy

16.	Under fixed exchange rates, a revaluation decreases aggregate demand by:
	increasing exports. reducing imports. causing a financial account deficit. decreasing exports.

17.	After a revaluation, all other things equal, a country's balance of payments on the current account will likely:
	increase. decrease. remain the same. fluctuate randomly.

18.	A depreciated dollar will cause aggregate demand to:
	increase. decrease. remain constant. fluctuate randomly.

Answer 1

Q11. Purchasing power parity refers to the number of units of foreign currency a doller will buy. Purchasing power parity is defined as the number of units of a country's currency required to buy the same amount of goods and services in the domestic market as one doller would buy in the US. The technique of purchasing power parity allow us to estimate what exchange rate between two currencies is needed to express the accurate purchasing power of the two currencies in the respective countries.

Q12. If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.50, it should increase interest rates , which will increase capital inflows of gizmos. When a country exchange rate falls or the monetary authority wants to increase the exchange rate of country currency, then monetary authority increase the domestic interest. Higher interest rates offer lenders in an economy a higher return relatives to other countries . Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise.

Q13. II. A floating exchange rate is less expensive to maintain than a fixed exchange rate. A floating exchange rate is a regime where the currency price is set by the forex market based on demand and supply compared with other currencies. This is in contrast to fixed exchange rate, in which the govt. entirely or predominantly determines the rate. In floating exchange rate system , central banks buy or sell their local currencies to adjust the exchange rate . Central banks can also intervene indirectly in the currency markets by raising or lowering interest rates to impact the flow of investor's funds into the country.

Q14.If a government fixes the exchanges rate so as to generate a surplus of the domestic currency , the exchange rate will tend to fall . To maintain the fixed exchanges rates, the govt. must increase the international demand for the domestic currency.