Question

In a freely floating exchange rate system, if the capital account surplus for the U.S. rises, what will most likely happen to the real value of the dollar?

Select one:

a. The IMF will step in to adjust rising exchange rates.

b. The value of other trading currencies will rise.

c. It will decline.

d. There is no impact on the dollar.

e. It will rise.

High inflation undermines the role of money as a medium of exchange by acting as

Select one:

a. a tax on cash holdings

b. a reducing agent of price

c. a complementary to the government

d. a non-impacting factor

e. an improvement to purchasing power

Answer 1

Q-1)

In a freely floating economy, if the capital account surplus for US rises then the value of dollar rises because with the capital account surplus means US economy exports are more than imports so the demand for the dollar will rise and so will the value of dollar will rise

Hence the correct answer is

e) It will rise.

In a freely floating IMF will not interfere for any country, Value of other trading currencies might fall rather than rise. Capital account surplus does have impact on the exchange rate.

Q-2) With the rise in inflation the medium of exchange is undermined because the price of the asset reduces and the same amount of money can not be used as a medium of exchange so it reduces its value, hence the correct answer is

b. a reducing agent of price

Tax on cash holding would be similar to undermining the money as a medium of sore value and inflation is a worry for the government. High inflation does not improve the purchasing power