Question

QUESTION 5

1. A weaker currency tends to cause a larger trade deficit.

True

False

QUESTION 6

1. To guard against the risk of the currency strength fluctuating, a business could sign a contract now that sets a specified exchange rate that will be used for a future payment.

True

False

QUESTION 7

1. Suppose that goods in a foreign country are expensive from a domestic country perspective. This means that,

	a.	the domestic currency is relatively weak and real exchange rate for the domestic currency is less than 1
	b.	the domestic currency is relatively weak and real exchange rate for the domestic currency is greater than 1
	c.	the domestic currency is relatively strong and real exchange rate for the domestic currency is less than 1
	d.	the domestic currency is relatively strong and real exchange rate for the domestic currency is greater than 1

QUESTION 8

1. According to absolute purchasing power parity, the nominal exchange rate equals the ratio of the two countries' prices.  

True

False

Answer 1

Question 5) Option B - False

A weaker currency tends to a smaller trade deficit because when a country has a weaker currency relative to the other countries' currencies, imports become costly and exports of goods and services of that country becomes lucrative to other countries since it becomes relatively cheap to other countries whose currency is stronger. Hence, a weaker currency leads to more exports than imports and with it there tends to be a smaller trade deficit.

Question 6) Option B - True

To guard against the risk of the currency strength fluctuating, a business could sign a contract now that sets a specified exchange rate that will be used for a future payment. This statement is true because both parties can sign foreign exchange contracts which can protect both the parties from fluctuations in the currency market.

Question 7) Option A - The domestic currency is relatively weak and real exchange rate for the domestic currency is less than 1.

When the goods in a foreign country are expensive than the home country, it is because the domestic currency is relatively weak than the foreign country and the real exchange rate which is equal to domestic price divided by the foreign price is less than 1 since the foreign price is greater than the domestic price.

Question 8) Option A - True

According to absolute purchasing power parity, the nominal exchange rate equals the ratio of the two countries' prices. This statement is true. The nominal exchange rate is the rate at which one country's currency trades for another country's currency so it is equal to the ratio of the two countries' prices.