Question

TRUE OR FALSE WITH REASONS

1. A sudden stop will be easier to navigate if the country borrows internationally in foreign
currencies and lend locally in its domestic currency.
Answer:
Reason:
2. Capital inflows are desirable because they increase investment in a country.
Answer:
Reason:
3. All financial account transactions are linked to current account transactions, since the current
and financial accounts are mirror images of each other.
Answer:
Reason:
4. When an economy is closely tied to another, larger economy, floating exchange rates are
usually desirable.
Answer:
Reason:
5. Exchange rate pegs are popular with developing countries because they increase credibility.
Answer:
Reason:

6. If a currency has a fixed exchange rate, it is not subject to the forces of supply and demand.
Answer:
Reason:
7. Contractionary fiscal policy can lead to a depreciation of the nation's currency.
Answer:
Reason:
8. An increase in interest rates causes that nation to experience an outflow of financial capital
and causes its currency to depreciate.
Answer:
Reason:
9. A depreciation of the currency can switch spending away from foreign goods and reduce the
effect of rising incomes on the current account.
Answer:
Reason:
10. It is more certain how expansionary monetary policy will affect the current account than how
expansionary fiscal policy will affect it.
Answer:
Reason:

Answer 1

1)The answer of this question is false beacuse while issuing foreign debt may protect against inflation,borrowing in a foreign currency exposes governments to exchange rate risks.

2)This is true because if the sign is positive it indicates that the regulatory factor makes inflows less dependent on global volatility. The dependent variable is quarterly loans and deposit flows in percent of GDP.

3)Floating exchange rates better reflect the true value of a currency based on supply and demand.On the flipside, this makes currencies potentially more volatile when market and other conditions change unpredictably.

5) Pegging its currency,a country can gain comparative trading advantages while protecting its own economic interests. A pegged rate, or fixed exchange rate, can keep a country's exchange rate low, helping with exports. Conversely, pegged rates can sometimes lead to higher long-term inflation. This answer is true.

6)True 7) FALse 8)ture 9)true 10)true