Question

true or false ?

1)When a currency is devalued, the immediate

impact may be an increase in a country's trade deficit. However, this situation tends to correct itself in 2 to 5 weeks.

2)The immediate impact of a devaluation of the domestic currency is to decrease the value of the spot exchange rate S$/fc.

3)One of the motivations for capital controls is to insulate an economy from foreign political risks

Multiple choice questions (only one answer is correct).

1)The balance of payments:

A) determines the eligibility of countries for IMF aid.

b)adds up the value of all assets and liabilities of a country on a specific date. C) records all international transactions for a country over a period of time. D) all of the above

2) A German tourist purchases a leather jacket while in Italy. Which of the following statements is true?

A) The leather purchase would be considered an import for the German BOP.

B) This transaction would be properly accounted for in the Current Account of the German BOP. C) The leather purchase is considered an import of a good, and thus, considered part of the German balance of trade as well.

D) All of these statements are true.

Answer 1

Answer 1)

FALSE.

Trade deficit is the surplus of imports over exports. When local currecy is devalued, imports become more expensive and exports become cheaper. As a result , the trade deficit declines rather than increases.

Answer 2)

False

Devaluation of currency is the practice to cause a deliberate reduction of the value of domestic currency relative to foreign currency or group of currencies.

Hence the spot exchange rate of $/Foreign currency will require more units of $ to buy foreign currency causing an upward movement in spot exchange rate.

Answer 3)

TRUE

Capital control represents contols and measures taken by regulatory body in a country to limit the flow of capital inward and out of the domestic economy. Examples: taxes, tariffs,etc.

Capital Controls can insulate an economy from foreign political risks due to greater control by domestic authorities. example: capital contols can reduce the linkage of foreign investors with domestic economy.

Answer 4)

Option C) Records all international transactions for a country over a period of time.

The balance of payments account of a nation records the difference between all money and capital flowing into the country in a particular period of time and the cash outflow to the rest of the world. Hence it records all international transactions.

Option a) is incorrect because BOP is not a clear determinant or indicator of IMF aid need.

Option b) is incorrect because it does not add values of assets and liabilities.

Option d) is incorrect because optiona) and b) are incorrect.

Answer 5)

Option D) All statements are true.

Statement A) is correct because the leather purchase will be considered as an import as it is being bought from Italian market by German tourist.. Statement B) is correct because it will be recorded in current account of BOP as current account of BOP records all trade in goods for a nation. Statement C) is correct because Balance of Trade represents the difference between exports and imports and this purchase will be considered an import.