Question

Question 26 1. Which of the following tends to cause financial markets to expect that a currency will depreciate in the future?

a. the expectation that the country will have a stronger economy in the future (and other things equal)

b. the expectation that the country will have less inflation in the future (and other things equal)

c. the expectation that the country will have less risk in the future (and other things equal)

d. the expectation that the country will have lower interest rates in the future (and other things equal)

Question 27 1. The Current Account in the Balance of Payments includes,

a. direct investment money flows b. domestic purchasing of foreign securities

c. foreign purchasing of domestic securities

d. trade money flows

Question 28 1. A strong exchange rate for the domestic currency,

a. tends to cause a larger trade surplus

b. tends to help domestic producers facing foreign competition (we'll assume the domestic producers don't use imported inputs)

c. tends to help domestic buyers

d. tends to cause higher inflation

Question 29 1. Suppose a market basket of products costs 2 million pesos in Mexico and 100,000 dollars in the U.S. Also suppose the nominal exchange rate is 16 pesos per 1 dollar. Other things equal, this situation tends to cause,

a. products to flow from the U.S. to Mexico and the dollar to get stronger against the peso

b. products to flow from the U.S. to Mexico and the dollar to get weaker against the peso

c. products to flow from Mexico to the U.S. and the dollar to get stronger against the peso

d. products to flow from Mexico to the U.S. and the dollar to get weaker against the peso

Question 30 1. Which is true regarding the Capital and Financial account?

a. an outflow can be thought of as domestic investment in a foreign economy

.b. an inflow can be thought of as foreign investment the domestic economy

c. an outflow can be thought of as foreign investment in the domestic economy

d. both A and B

Answer 1

Question 26 1. Which of the following tends to cause financial markets to expect that a currency will depreciate in the future?

a. the expectation that the country will have a stronger economy in the future (and other things equal): This will make currency stronger.

b. the expectation that the country will have less inflation in the future (and other things equal): This will make currency stronger as exports will be more competitive.

c. the expectation that the country will have less risk in the future (and other things equal): This will make currency stronger.

Correct answer: d. the expectation that the country will have lower interest rates in the future (and other things equal): Money will start going out of an economy as people will expect less returns and hence currency will depreciate as supply of domestic currency will increase and demand will decrease.

Question 27 1. The Current Account in the Balance of Payments includes,

a. direct investment money flows : Part of financial account

b. domestic purchasing of foreign securities: Part of financial account

c. foreign purchasing of domestic securities: Part of financial account

Correct answer : d. trade money flows:

Question 28 1. A strong exchange rate for the domestic currency,

a. tends to cause a larger trade surplus: Exports are expensive and hence exports will decrease and hence trade surplus may not be possible.

b. tends to help domestic producers facing foreign competition (we'll assume the domestic producers don't use imported inputs): Exports will be expensive and hence exports will go down.

Correct answer: c. tends to help domestic buyers: Imports will be cheaper and hence helps domestic buyers.

d. tends to cause higher inflation:imports are cheaper and hence less inflation.

Question 29 1. Suppose a market basket of products costs 2 million pesos in Mexico and 100,000 dollars in the U.S. Also suppose the nominal exchange rate is 16 pesos per 1 dollar. Other things equal, this situation tends to cause,

1$= 16 pesos, means 1 peso = 0.0625 dollars. Hence, cost of 2 million pesos means that 125000 $. In US cost of production is less and hence,

a. products to flow from the U.S. to Mexico and the dollar to get stronger against the peso

Question 30 1. Which is true regarding the Capital and Financial account?

a. an outflow can be thought of as domestic investment in a foreign economy

.b. an inflow can be thought of as foreign investment the domestic economy

c. an outflow can be thought of as foreign investment in the domestic economy: incorrect and hence

correct answer is : d. both A and B