Question

Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially ¥90/$. According to purchasing-power parity, if the price of traded goods rises by 5 percent in the United States and by 15 percent in Japan, what will be the expected exchange rate?

		¥99/$
		¥72/$
		¥81/$
		¥90/$
		¥108/$

If Mexico dollarizes its currency, it essentially

		Ensures that Mexico's business cycle is identical to that of the U.S.
		Allows the U.S. Federal Reserve Bank to be Mexico's lender of last resort
		Accepts the monetary policy of the U.S. Federal Reserve Bank
		Wants the U.S. Treasury be in charge of its tax collections
		Abandons its ability to run governmental balanced budgets

__________ is a currency basket, defined by the International Monetary Fund, to which some nations peg their currencies

		Primary Reserve Assets
		Bread Basket
		Special Drawing Rights
		Swap facility
		IMF tranche

If Japan has floating rate, a depreciation in the value of Japanese yen over time will result in Japanese

		Both exports and imports rising
		Both exports and imports falling
		Exports rising, imports falling
		Imports rising, exports falling
		Both Japanese imports and exports will remain unchanged

Answer 1

Answer (1) : Correct option is: 99 yen per dollar.

Explanation:- Given, 1 Dollar = 90 Yen

Rise in 5% price in US has negative effect on US Dollar, wheras Rise in 15% price in Japan has positive effect on US Dollar.

Net Effect = -5+15 = +10.

So, it effect positively (+10%) to US economy.

Now, Exected exchange rate = 90 + (90×10)/100

= 90+9 = 99

Answer (2) : Correct option is option: Accepts the monetary policy of the US Federal Reserve Bank.

Explanation: When a country (other than USA), uses US Dollar as it's Currency, then it is termed as Dollarize.

So, Expected Exchange Rate comes out to be 99 yen per dollar. For effectively dollar idea it's currency, it is required that it accepts the monetary policy of the US Federal Reserve Bank. That's why second option looks more appropriate than other options. So, " Accepts the monetary policy of the U.S. Federal Reserve Bank" should be the right answer.

Answer (3): Correct option is: Special Drawing Rights.

Explanation: A currency basket consists of mixed of several currency of different values. To maintain its currency at a fixed exchange rate, countries peg their currency. Special Drawing Rights which is defined by IMF, is a currency basket to which some nations peg their currency. So, " Special Drawing Rights " is the only right answer.

Answer (4) : Correct option is: Exports rising; imports falling.

Explanation: Depriciation means fall in currency value, In the context of Japan which has a floating rate, the Japanese Yen value during depriciation, decreases in comparison to other currency value which may affect trade deficit resulting into increase in net aggregate demand which forces Japan to import less & export more products. So, " Export rising, important falling" is the right option & rest options are now proved to be incorrect.