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Question 31 1. Other things equal, capital flowing into a domestic country tends to, a. cause...

Question 31 1. Other things equal, capital flowing into a domestic country tends to,

a. cause the domestic currency to get weaker and causes greater difficulty for domestic borrowers in repaying debt denominated in a foreign currency

b. cause the domestic currency to get weaker and causes less difficulty for domestic borrowers in repaying debt denominated in a foreign currency

c. cause the domestic currency to get stronger and causes greater difficulty for domestic borrowers in repaying debt denominated in a foreign currency

d. cause the domestic currency to get stronger and causes less difficulty for domestic borrowers in repaying debt denominated in a foreign currency
Question 32 1. A weak exchange rate for the domestic currency,

a. tends to cause a larger trade deficit

b. tends to hurt the domestic tourist industry

c. tends to help domestic buyers

d. tends to cause higher inflation

Question 33 1. Suppose -- for a long enough period -- a country fixes an exchange rate for its currency stronger than the market exchange rate. Eventually currency traders will expect that,

a. the country will run out of the domestic currency to use in buying foreign currencies and the domestic currency will strengthen

b. the country will run out of the domestic currency to use in buying foreign currencies and the domestic currency will weaken

c. the country will run out of foreign currency to use in buying the domestic currency and the domestic currency will strengthen

d. the country will run out of foreign currency to use in buying the domestic currency and the domestic currency will weaken

Question 34 1. Suppose there are two countries that are otherwise the same (including their inflation and risk), except that the domestic country has a lower interest rate than the foreign country. In this case,

a. financial capital will flow into the domestic country and its currency will strengthen

b. financial capital will flow into the domestic country and its currency will weaken

c. financial capital will flow out of the domestic country and its currency will strengthen

d. financial capital will flow out of the domestic country and its currency will weaken

Question 35 1. Consider the gold exchange standard during the Great Depression.

a. the gold exchange standard enabled the U.S. central bank to lower interest rates to help stimulate the economy

b. the depression caused countries to leave the gold exchange standard of the period

c. both A and B

d. neither A nor B

Solutions

Expert Solution

Question 31 1. Other things equal, capital flowing into a domestic country tends to,

d. cause the domestic currency to get stronger and causes less difficulty for domestic borrowers in repaying debt denominated in a foreign currency

Incoming foreign exchange will create demand for domestic currency and it will appreciate.

Question 32 1. A weak exchange rate for the domestic currency,

d. tends to cause higher inflation, imported goods will become expensive and this may spiral in average prces in country going up.

Question 33 1. Suppose -- for a long enough period -- a country fixes an exchange rate for its currency stronger than the market exchange rate. Eventually currency traders will expect that,

b. the country will run out of the domestic currency to use in buying foreign currencies and the domestic currency will weaken

To maintain high exchange rates, country needs to constantly sell foreign exchange and eventualy it will run out of foreign currency and its domestic currency will weaken.

d. financial capital will flow out of the domestic country and its currency will weaken

People invest more where they get higher returns may be in the form of interest rates. If domestic rates are low then investment will go out.

Rahul Sunny answered 1 year ago

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