Question

Question 5 1. Other things equal, a lending country tends to have, a.

a weak currency and a trade surplus

b. a weak currency and a trade deficit

c. a strong currency and a trade surplus

d. a strong currency and a trade deficit

Question 6 1. Suppose a country decreases its saving rate. Then the country,

a. could fund more private sector borrowing (while holding other things equal)

b. could fund a larger government budget deficit (while holding other things equal)

c. would have a larger trade deficit (while holding other things equal)

d. both B and C

Question 7 1. Suppose a country has a fixed exchange rate for its currency that is stronger than the market exchange rate. And further suppose the country nears a point where it will run out of foreign currency reserves. The country might respond to this situation by,

a. using gold to buy foreign currencies

b. borrowing foreign currencies from foreign central banks

c. weakening the strength of its currency

d. all of the above are possible responses that might take

Question 8 1. A significant increase in inflation in a domestic country causes,

a. investors to buy domestic assets and foreign exchange market pressure to appreciate the domestic currency

b. investors to buy domestic assets and foreign exchange market pressure to depreciate the domestic currency

c. investors to sell domestic assets and foreign exchange market pressure to appreciate the domestic currency

d. investors to sell domestic assets and foreign exchange market pressure to depreciate the domestic currency

Answer 1

uestion 5 1.

Answer: c. a strong currency and a trade surplus

Country lending most probably would have larger share of foreign exchange that can be earned when country has trade surplus.

Question 6 1.

Answer: c. would have a larger trade deficit (while holding other things equal)

Fall in saving will lead to rise consumption and that might cause trade deficit when import rises.

Question 7 1

Answer: d. all of the above are possible responses that might take

First and foremost step is depreciation of currency and other measures also can taken by the government.

Question 8 1. A significant increase in inflation in a domestic country causes,

Answer: d. investors to sell domestic assets and foreign exchange market pressure to depreciate the domestic currency

Excessive rise in inflation renders the assets valueless, this it is better to sell assets. Further, it make export less competitive. So trade deficit rises and there is fall in value of currency.